Section 54 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 54 defines "continuous service" for Chapter V. It decides whether an employee has completed the years of service that section 53 needs for gratuity. It counts service that was interrupted by sickness, leave, lay-off or strike, and gives day-count tests for breaks and for seasonal establishments.
An employee is in continuous service if his service was uninterrupted, including interruption by sickness, accident, leave, unauthorised absence (unless the standing orders treat it as a break), lay-off, strike, lock-out, or cessation of work not his fault (clause (A)). If there was a break in a year, he is deemed continuous for that year if he actually worked 240 days (or 190 days for below-ground mine employees and establishments working fewer than six days a week) in the twelve months before the reference date (clause (B)). For six months the figures are 120 and 95 days. Seasonal employees need 75 per cent of the days the establishment operated (clause (C)).
Why it matters
Section 53(1) makes gratuity payable after "continuous service for not less than five years" (three for working journalists, and not needed for death, disablement or fixed-term expiry). Section 53(2) pays fifteen days' wages for every completed year or part over six months. Section 54 supplies the definition that both rely on: see our article on section 53. A payroll team that counts service by calendar dates alone will miss that section 54 sometimes keeps service alive through gaps. A periodic payroll compliance audit should test this logic.
Clause (A): uninterrupted service, widely read
An employee is in continuous service for a period if, for that period, he has been in uninterrupted service, including service interrupted on account of:
- sickness or accident;
- leave;
- absence from duty without leave, unless an order treating the absence as a break in service has been passed in accordance with the standing orders, rules or regulations governing the establishment's employees;
- lay-off, strike or a lock-out;
- cessation of work not due to any fault of the employee,
and it does not matter whether the service was rendered before or after the commencement of the Code. So pre-Code years count.
The unauthorised-absence limb is the one most likely to be tested. Absence without leave does not break service unless an order treating it as a break has been passed in accordance with the establishment's standing orders, rules or regulations. An employer who wants to treat a spell as a break should therefore pass a proper order.
Clause (B): a break inside a year or six months
For an employee in a non-seasonal establishment who is not in continuous service under clause (A) for some period of one year or six months, he is deemed in continuous service for that period if he actually worked under the employer for at least the following days in the calendar months preceding the date with reference to which the calculation is made:
| Period deemed | Employee below ground in a mine, or establishment working less than six days a week | Any other case |
|---|---|---|
| One year (twelve calendar months) | 190 days | 240 days |
| Six months (six calendar months) | 95 days | 120 days |
Days counted as "actually worked"
The Explanation to clause (B) says days actually worked include days on which the employee:
- was laid off under an agreement, or as permitted by standing orders made under the Industrial Employment (Standing Orders) Act, 1946, the Industrial Disputes Act, 1947, or any other law applicable to the establishment;
- was on leave with full wages, earned in the previous year;
- was absent due to temporary disablement caused by an accident arising out of and in the course of employment; and
- in the case of a female, was on maternity leave, provided the total period of maternity leave counted does not exceed twenty-six weeks.
The last item links to ESI and employer maternity benefit; see our post on ESI maternity benefit for 26 weeks.
Clause (C): seasonal establishments
Where an employee in a seasonal establishment is not in continuous service under clause (A) for some period of one year or six months, he is deemed in continuous service for that period if he has actually worked for not less than seventy-five per cent of the number of days on which the establishment was in operation during that period. The day-count tests in clause (B) do not apply; clause (B) is expressly for employees "not being an employee employed in a seasonal establishment".
For the amount payable to a seasonal employee (seven days' wages for each season), see section 53(2), second proviso.
Worked examples
Example 1: a six-day establishment. An employee has a spell of unpaid absence in a twelve-month period and worked 235 days in the twelve months before the reference date. The establishment works six days a week. Since the test is 240 days for "any other case", he falls short, so that year is not deemed continuous under clause (B) unless clause (A) already covers the gap (for example, because it was leave or sickness). The employee must first be tested under clause (A).
Example 2: a five-day establishment. The same employee works in an establishment that operates fewer than six days a week. The test drops to 190 days, so 235 actual days qualify and the year is deemed continuous.
Example 3: maternity. A woman worked 150 days and took 26 weeks of maternity leave in the twelve months. Days of maternity leave count, up to twenty-six weeks, as days worked under the Explanation. Counting them can bring her over the threshold.
Example 4: seasonal. A sugar unit operated for 120 days in a season; an employee worked 92 days. 92 ÷ 120 is about 77 per cent, which is above seventy-five per cent, so he is deemed continuous. (Figures are illustrative.)
How the count feeds the gratuity calculation
Once service is established as continuous, section 53(2) counts every completed year and any part in excess of six months as a year. Fifteen days' wages for a monthly-rated employee is monthly wages ÷ 26 × 15 (Explanation 3 to s.53). Read the formula in our article on section 53 and the wages definition in section 2.
The existing post on continuous service for gratuity discusses the same idea under the old Act; check the Code text before relying on it.
Which rules apply
Section 54 is self-contained in the Code. The Central Rules, 2026 on gratuity apply where the Central Government is the appropriate Government; where the State Government is, its own rules apply.
Need help testing gratuity service records?
Service history is where gratuity disputes begin. If you would like your attendance, leave and break-in-service records tested against section 54 before an exit or an audit, our payroll compliance audit team can assist.
Key takeaways
- Continuous service includes gaps for sickness, accident, leave, lay-off, strike, lock-out and cessation of work not the employee's fault.
- Unauthorised absence breaks service only if an order treating it as a break was passed under the standing orders, rules or regulations.
- Deemed continuity: 240 / 190 days (year) and 120 / 95 days (six months) for non-seasonal establishments.
- Maternity leave up to 26 weeks, earned leave on full wages, lay-off and temporary disablement days count as worked.
- Seasonal establishments: 75 per cent of the days the establishment operated.
- Service before or after the Code's commencement counts.
Read next
- Section 53: Payment of gratuity
- Sections 55 and 56: Nomination and determination of gratuity
- Gratuity under the new Labour Codes
- Gratuity compliance checklist for employers
Disclaimer: Based on the Code on Social Security, 2020 (as enacted) and, where noted, the Code on Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026), as on 30 September 2026. The Code is in force from 21 November 2025; some provisions may be notified later, and State Governments make their own rules for establishments where the State is the appropriate Government. Verify the current position before acting.