Is a Contract Worker Entitled to Gratuity?

The rule: gratuity is an employee entitlement, and a contract worker is an employee

Gratuity is governed by Chapter V of the Code on Social Security 2020 (Sections 53 to 58). Section 53 makes gratuity payable to an employee on the termination of employment after the employee has rendered continuous service for not less than five years. A contract worker is a worker hired in or in connection with the work of an establishment by or through a contractor (Code on Social Security 2020, Section 2(18)), so a contract worker is an employee for this purpose and is not excluded from gratuity. The entitlement is 15 days wages for every completed year of service, worked out on a factor of 15/26 of the monthly wages. A completed year of service means twelve months of continuous service (Section 2(16)), and continuous service is defined in Section 54.

The exception that usually applies to contract work: fixed-term and the five-year threshold

Two things decide most contract cases. First, fixed-term employees are entitled to pro-rata gratuity without the five-year continuous-service condition, so a fixed-term contract worker earns gratuity for the term actually served even if it is under five years. Second, for a non-fixed-term contract worker the five-year continuous-service test still has to be met, and because many deployments turn over before that, a worker on a series of short engagements may not cross the threshold on a single continuous engagement. The exact conditions and any statutory exception to the five-year rule are set out in Sections 53 and 54; check the notified text before relying on an exception beyond fixed-term pro-rata gratuity.

Who pays: the contractor is the employer, and the principal-employer point

For contract labour the employer is normally the contractor, that is, your staffing or manpower firm, so the gratuity liability sits with you, not automatically with the client. The principal employer does have a wage backstop under the OSH Code 2020, Chapter XI: if the contractor fails to pay wages the principal employer must pay and can recover the amount from the contractor, including from the licence security deposit (OSH Code Chapter XI, Section 55). But gratuity is expressly excluded from the statutory definition of wages (Code on Social Security 2020), so do not assume that a client will cover a gratuity shortfall the way it may have to cover a wage shortfall. Treat the split of gratuity responsibility as something to fix in your contract and to check against the notified rules.

How it is calculated

Gratuity is computed on wages as defined in the Code on Social Security 2020: wages here means basic pay, dearness allowance and retaining allowance, and does not include gratuity itself, house rent allowance, overtime or the other listed exclusions (subject to the Code's 50 percent rule). The working figure is (monthly wages divided by 26) multiplied by 15, multiplied by the number of completed years. Illustrative example: a fixed-term contract worker with monthly wages (basic plus DA) of Rs 20,000 who completes 2 years earns pro-rata gratuity of (20,000 / 26) x 15 x 2, which is about Rs 23,077. Illustrative example: a contract worker at the same wage who completes 5 years of continuous service earns (20,000 / 26) x 15 x 5, which is about Rs 57,692. Both figures are illustrative only.

Action step for your firm

Because the gratuity liability is usually yours as the contractor, accrue it as a cost from the first day of engagement and price it into your bill rate or the worker CTC rather than treating it as a surprise at exit. Track each worker's continuous service so you know when the five-year threshold is crossed, and remember that on fixed-term contracts gratuity accrues pro-rata with no five-year wait. Chapter V also provides for nomination (Section 55), determination of the amount (Section 56) and compulsory insurance of gratuity liability (Section 57); treat the compulsory-insurance obligation as applicable as and when notified and confirm the current position for your establishment.

Sources, last verified and disclaimer

Last verified: 20 September 2026. The labour codes came into force on 21 November 2025 and the Central Rules were notified on 8 May 2026. This page restates the governing statutory provisions and is general information, not legal advice for your specific facts. Confirm applicability, the exact section text and any state-notified rule for your establishment before acting. Legal accuracy pending named legal review (reviewer byline to be added).

Key points

• A contract worker is an employee, so gratuity applies; it is payable after not less than five years of continuous service at 15 days wages per completed year (factor 15/26 of monthly wages) under Code on Social Security 2020, Chapter V, Section 53.
• Fixed-term contract workers get pro-rata gratuity with no five-year condition, which is the exception that decides most staffing cases.
• The contractor (your staffing or manpower firm) is normally the employer, so the gratuity liability is yours; budget and accrue it from day one.
• Gratuity is excluded from the statutory definition of wages, so the OSH Code Chapter XI wage backstop by the principal employer does not automatically cover a gratuity shortfall; fix the split in your contract.
• Gratuity wages mean basic pay plus dearness allowance plus retaining allowance (Code on Social Security 2020); a completed year of service means twelve months of continuous service (Section 2(16)).
• Chapter V also requires nomination (Section 55), governs the amount (Section 56) and provides for compulsory insurance of gratuity liability (Section 57), applicable as and when notified.

Related questions

Check for your state

• The exact continuous-service conditions and any statutory exception to the five-year rule (for example on death or disablement) are set out in Sections 53 and 54 of the Code on Social Security 2020; the full section text was not in the grounding pack, so verify the notified text before relying on any exception beyond fixed-term pro-rata gratuity.
• Allocation of gratuity liability between the contractor and the principal employer is not settled by the OSH Code wage backstop (which covers wages, and gratuity is excluded from wages); confirm the split against the contract and any notified rule.
• Commencement and applicability of compulsory insurance of gratuity liability (Code on Social Security 2020, Section 57) are as notified; confirm the current position for your establishment.
• The appropriate government and Competent Authority (Section 58) that administer gratuity claims can vary; confirm which authority applies to your establishment.
• Any state-specific procedural rules, forms or timelines for gratuity determination and payment should be checked against the state's notified rules, as these are not specified in the grounding pack.