When the Centre last month announced the rollout of the long-awaited four new labour codes — Code on Wages, 2019; Industrial Relations Code, 2020; Code on Social Security, 2020; and Occupational Safety, Health and Working Conditions (OSHWC) Code, 2020, many private sector employees believed a major shift in workplace benefits was finally underway. One announcement, in particular, caught attention — fixed-term employees are now eligible for gratuity after just one year of service, instead of the previous requirement of five years.
But weeks later, confusion has only deepened. Despite the Centre notifying the labour codes, most provisions are still not enforceable on the ground. The reason is that labour is a concurrent subject, which means states must separately notify and operationalise rules before companies can act on them. Until that happens, employers remain cautious, and employees are left waiting.
Gratuity reform: A big promise, but still on paper
Under the new Labour Codes, the Centre proposed a major reform to the gratuity framework. For the first time, fixed-term employees were promised gratuity benefits after completing one year of service, recognising the reality of India’s growing contractual workforce.
“Under Section 53 of the code, the Government has reduced the eligibility requirement for gratuity for Fixed Term Employees (FTEs) from five years to one year. In case the employee completes one year of continuous service, gratuity shall be applicable on a proportionate basis,” the labour ministry said.
Under the existing norms, gratuity eligibility kicks in only after five continuous years of service — a threshold many contract workers never cross.
However, while the Centre has notified the Code, states have not yet issued their own rules, making it difficult for companies to implement the new provision. As a result, most employers are continuing with the old five-year rule, fearing legal ambiguity and compliance risks.
For employees, this has created a gap between announcement and reality.
Why companies are holding back
HR and compliance teams across private sector companies are taking a wait-and-watch approach. Without state notifications, companies fear that early implementation could expose them to disputes, audits, or retrospective liabilities.
In simple terms, a central announcement alone is not enough. States need to spell out: Eligibility conditions, calculation methods, applicability to existing contracts, and compliance and reporting requirements.
Until this framework is clarified, most organisations are reluctant to issue internal guidelines or modify employment contracts.
Not just gratuity — several reforms stuck midway
The gratuity provision is only one example of how partial implementation of labour codes has created uncertainty. The four labour codes were meant to consolidate 29 old labour laws into a simpler, modern framework covering wages, industrial relations, social security, and occupational safety and health.
However, without states coming on board, several key reforms remain stalled:
Wage structure changes: The new codes redefine “wages,” which could impact basic pay, allowances, and PF calculations. Companies are yet to restructure salary components because state rules are still pending.
Provident fund and social security expansion: Provisions aimed at expanding social security to gig workers and platform workers also await clarity at the state level.
Working hours and overtime norms: While the Centre has indicated flexibility in work hours and four-day workweek options, these cannot be enforced unless states notify corresponding rules.
Hire-and-fire thresholds: Changes to industrial relations rules, including higher thresholds for government approval, remain in limbo due to lack of state-level adoption.
Why states are delaying notifications
The delay is not entirely unexpected. Labour reforms are politically sensitive, and states are weighing multiple factors like impact on local industry and MSMEs, administrative readiness, and trade union resistance.
Alignment with existing state labour frameworks
Some states have released draft rules, while others are still in consultation mode. Until final notifications are issued, the labour codes exist more as intent than action.
What this means for private sector employees
For employees, especially those on fixed-term or contractual employment, the gap between policy announcement and implementation is frustrating. The promised one-year gratuity rule has raised expectations, but no legal right has been created yet.
Until states notify rules, companies are not obligated to pay gratuity after one year and existing employment terms continue to apply.
Legal enforceability remains unclear and in effect, the old system continues by default.
The bigger picture: Reform delayed, not denied
The Centre has repeatedly maintained that labour reforms are essential to modernise India’s workforce ecosystem. However, the current situation highlights a familiar challenge — policy execution in a federal structure takes time.
While the new labour codes mark a significant shift on paper, their real impact will only be felt once states move decisively. Until then, employees and employers alike will continue to navigate uncertainty.
For now, the one-year gratuity rule remains a promise waiting for state approval — a reminder that in India’s labour law landscape, implementation matters as much as legislation.