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Demystifying Fixed Term Employment Contracts: In Pen and In Practice

Contributed by: Samvad Partners

The Central Government has recently enacted the Industrial Relations Code, 2020 (“Industrial Code”), the Code on Social Security, 2020 (“Social Security Code”) and the Occupational Safety, Health and Working Conditions Code, 2020, on September 29, 2020, with an aim not just to consolidate and simplify the fragmented labour law regime, but also to acknowledge the changing face of traditional employment relations in India.

One such significant step is with respect to the statutory recognition afforded to the concept of ‘fixed term employment’. While the rules to be formulated under the labour codes, which will eventually be instrumental in the implementation of the provisions of the codes, are not yet in effect, the mandatory social security benefits sought to be extended to ‘fixed term employments’ under the labour codes are far-reaching.

Fixed term employment, as a concept, is not new in law or in practice in India. It was included as an exception in the provision relating to calculation of ‘retrenchment compensation’ to workmen under the Industrial Disputes Act, 1947, vide an amendment in 1984. However, it was not formally recognised as a ‘tenure’ of service within the said Act.

An early attempt at an industry-wide introduction of the concept of fixed term employment dates back to 2003. However, this was preliminarily withdrawn due to strong opposition faced from trade unions, which found its root in the traditional socialist outlook towards labour rights in India. The opponents of fixed term employment were of the view that fixed term contracts had the potential to intensify the power imbalance between an employer and employee and sow seeds of job insecurity, given that the power of renewal of fixed term contracts would typically vest in the hands of the employer.

Thereafter, the concept of fixed term employment was once again introduced with respect to all organizations governed under the provisions of the Industrial Employment (Standing Orders) Central Rules, 1946, vide a notification dated March 16, 2018. This move was instrumental in laying the foundation for introduction of the concept of ‘fixed term employment’ under the recently enacted labour codes.

The proponents of fixed term employment highlight that the rapidly changing labour law regime demands the flexibility offered by fixed term employment. It is believed that fixed term employment will seek to bridge the gap between an employer and employee by allowing them to negotiate the terms of employment directly, while simultaneously ensuring that each fixed term employee gets the same benefits and conditions of work as provided to permanent employees at an organization.

The Industrial Code and the Social Security Code each define ‘fixed term employment’ as an engagement of an employee for a fixed tenure, on the basis of a written contract of employment.

A natural enquiry that has followed the introduction of fixed term employment under the recently enacted labour codes is with respect to how this concept will stand against the existing forms of employment, namely badli, casual, or contract workers. While a badli worker is someone who is employed on the muster-rolls of an establishment in place of another worker, a contract worker is usually referred to a worker who is employed in an establishment through a contractor, and does not directly form part of the muster-rolls of the said establishment. Finally, a casual worker is someone who is employed for a few days on a work of perennial nature. In contrast to the above, a fixed term employee is not employed as a replacement to another person, but directly forms part of the muster rolls of the establishment that engages his / her services. Further, as per the Industrial Code and the Social Security Code, there appears to be no limitation or threshold associated with respect to the nature, tenure or number of fixed term employees that may be engaged by an organization, so long as the same are contractually agreed upon. However, it remains critical to examine the rules which are yet to be formulated under the labour codes, to ensure that there are no restrictions that are eventually imposed with respect to these discrete engagements.

In terms of the social security benefits sought to be extended to fixed term employees under the labour codes, the same are fairly sweeping in nature and are likely to have a significant impact on compliance to be adopted by employees, once the rules under these labour codes are in effect. Amongst the notable revisions, the Industrial Code and the Social Security Code state that where an employee is engaged under a fixed term employment at an organization to which such Code applies, his / her hours of work, wages, allowances and other benefits must not be less than that of a permanent employee undertaking the same work or work of a similar nature in such organization. Further, all benefits as are available to a permanent employee must be provided to such fixed term employee in proportion to the period of service rendered by such employee, irrespective of his / her period of employment not meeting the qualifying timelines (if any) stipulated under the relevant statute.

The Industrial Code states that any person engaged in a fixed term employment shall be eligible to gratuity if he / she renders service under the said contract for a period of one year. Further, the Social Security Code, vide Chapter V (Gratuity), provides that persons covered under the Social Security Code and engaged pursuant fixed term contracts, shall be entitled to gratuity on a pro rata basis upon the termination of their fixed term contract, which could be prior to the completion of continuous service of five years (as stipulated under the applicable gratuity laws in India). Additionally, in terms of compliance, the requirements to maintain registers and records under the Social Security Code, have also been extended to persons engaged under fixed term contracts.

While it is encouraging to see the manner in which fixed term employees are proposed to be treated as par with tenured employees vis-à-vis social security benefits, it is unfortunate that protections have not been extended to ‘workmen’ engaged on a fixed term basis with respect to the provisions relating to ‘retrenchment’ under the Industrial Code. This implies that protections associated with retrenchment, including the provision of a mandatory notice prior to retrenchment, will not apply to workmen engaged under fixed term contracts.

Further, while it is undeniable that the concept of fixed term employment will usher in some flexibility to the process of termination, it will remain to be seen if the same would amount to facilitation of a ‘hire and fire’ model in India. This is especially crucial in the context of the historical pro-labour stance taken by the Indian courts, where labour laws have been read in consonance with the laws against unconscionable contracts and public policy.

The new dawn of transformed labour laws in India has highlighted the fact that clear and unequivocal terms of employment are no longer mere ‘good practice’, but the very skeleton upon which an organization’s human resource will operate. It will be crucial for employers to have a marked clarity between their permanent employees and persons engaged under fixed term contracts. Similarly, it will be vital for employees to ensure that employment agreement entered into by them are thoroughly scrutinized and its true nature understood, to ensure that such employees are aware of the nature of engagement being entered into by them. However, what will remain to be seen is how this legal framework matures in the rapidly changing employment market in India.

Contributed by Samvad Partners

The above article has been authored by Ms. Junaira Rahman(Partner) and Ms. Nikita Tanwar(Associate)

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