What is a Fixed-Term Contract?
A fixed-term contract is a type of employment contract that runs for a set period of time. Though the term varies, it generally commences on a specific "start date," and can have a clear end date (or "expiry date"), or can run until a certain event occurs. For example, it could end on the completion of a construction project or the return of a worker from maternity leave. Section 6 of the Employment Rights Act 1996, and Regulation 4 of the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 both define this type of contract as one ‘which provides for the employment to continue until the occurrence of a specified event or the completion of a specified task’ .
As contracts of employment, these "fixed-term" contracts provide employees with a number of the same rights as long-term or permanent employees. For instance, fixed-term employees are entitled to statutory redundancy payments if they are dismissed at the end of their contract, although the statutory redundancy payment is likely to be lower than it would be for a permanent employee. However, they may only be entitled to statutory redundancy if they have two years continuous employment or more. The right to claim unfair dismissal at the end of the contract also depends on two years continuous employment.
Core Components of Fixed-Term Contracts
When preparing a fixed-term contract, the following key components should be included in order to comply with fixed-term legislation:
Duration:
The contract must express the duration of employment explicitly (i.e. start date and end date), or refer to a specific event or task for completion. If the end date is not clearly defined, or if the contract states "time is at the pleasure of either party", the contract will be classified as an indefinite-term contract and will be subject to the relevant statutory provisions.
Specific Job:
The position within the organization must be clearly defined and placed within the appropriate classification of the registered award. If the position is listed under a classification not applicable to the duties or accountabilities assigned, then the provisions of that award will not afford the employee proper entitlements.
Termination Conditions:
If the contract is due to end on a specified date, it should contain the following essential features:
This takes the uncertainty out of the equation and ensures the employee is fully aware of the conditions of their employment.
Benefits of Fixed Term Contracts
Fixed-term contracts do have many benefits beyond time-limited expectations of the parties involved. Both employers and employees can benefit from the additional flexibility these contracts offer. Employers can meet their short- to medium-term needs related to specific projects, the introduction of a new service or product, or the temporary absence of a core worker. For employees, a fixed-term contract can provide an opportunity to work in an unfamiliar industry and gain new skills, particularly if their contract is with a different division or subsidiary of their employer. There are situations where a fixed-term employed knows their contract is unlikely to be renewed and so they can enjoy their limited time at the company without any concerns over their future as an employee.
Disadvantages of Fixed-Term Contracts
It’s an unfortunate reality that fixed-term contracts aren’t always a good thing for everyone. There are a few potential disadvantages to these agreements for employers and employees alike.
For instance, from an employee’s perspective, there’s the obvious downside of job security. Part-time and temporary workers tend to move around if they’re forced to. And with companies shrinking their workforces to save money, there’s always the fear of not being hired again once a contract is up.
Along with that, there are general employment-related drawbacks. For example, most countries will grant fixed-term employees the same benefits as full-time employees. However, employees on fixed-term contracts tend to get less sick pay, vacation pay, and other bonuses than full-time workers do.
There’s also the risk of legal issues. Like any other employment agreement, fixed-term agreements can still be challenged in court. It’s important that both parties understand the limits of a fixed-term contract. If the non-existent end date of the agreement has passed, courts will generally rule that the employee now has a permanent contract.
There are many ways for an employer to have a successful business and treat its employees fairly, and a fixed-term contract must be no different.
The Regulations on Fixed-Term Contracts
The legal landscape regarding fixed-term contracts varies widely between jurisdictions. This section summarizes the legal framework in force in some jurisdictions, followed by some of the differences in rights and statutory minimum durations for such contracts.
European Union law states that the duration of fixed-term contracts may not exceed the allowable duration of the stated task for a contract of up to four years. Members states are also free to provide additional reasons such as absence of personnel, work overload or seasonal or temporary activity, for which a fixed-term may be entered into. These reasons may be provided in collective agreements but must be set out in the contract of employment if the company does not apply a collective agreement. Nevertheless, for either the EU directive or the local law to apply, the overall length of the series of fixed-term contracts, the applicable collective agreement and the reason for a fixed-term contract must all be complied with in the relevant member state. A long series of consecutive fixed-term contracts for the same reason may lead the employee to assume he/she will have a permanent contract in the future, especially if no valid reason was provided for the complaint.
Maximum Fixed-Term Durations
For existing employees in particular, the usual maximum permissible period is four years. After either an initial or two successive renewals, fixed-term employment contracts will be automatically converted into permanent ones unless the employer has obtained within those four years a waiver from a national authority for the stated task reason. The maximum duration of a fixed-term contract or contracts which count as immediate renewals, may be longer in certain jurisdictions and different maximum durations may apply to employment contracts concluded for different reasons. However, it is very likely that an increase in the maximum duration will be followed in due course by the adoption of other measures which will make it easier to renew or convert fixed-term contracts into permanent contracts without the risk of permanent employment arising. Generally, an employee who is at once employed with several companies will be able to effect their total fixed-term duration up to the four year limit, and any maximum increase will be also applied to this 4 year limit. National law may even prevent any possible waivers after the fourth year, causing the employee to be converted to permanent employment despite any unlawful conduct . In practice, employers contemplate an indefinite postponement rather than risk conversion, however, they are subject to the applicable minimum notice periods and possible damages if the contract is terminated before those minimum periods due to the passing of time and the employees’ expectation of a permanent employment status.
France
The maximum duration of a fixed-term contract may not exceed 36 months. Furthermore, a fixed-term contract already in existence may not be renewed more than once, and in any event, only if it is for a different reason. If the subsequent contract is for the same reason, it will be deemed not to have existed and the employee will gain entitlement to a permanent employment contract.
Italy
There are several categories of fixed-term contracts, depending on the work the employee will perform and the reason for the term, each having specific rules and maximum durations, including a mandatory time gap after which an employee is entitled to a new, initial fixed-term contract. In any event, in both Italy and France, there are more general rules which may limit the validity of any fixed-term employment contract to a maximum duration of two years. Such rules may apply in particular to employers with 50 or more employees, or employers who are parties to collective agreements or who employ a number of employees which exceeds certain thresholds.
United Kingdom
A fixed-term contract may be for an open-ended duration in the unemployment insurance (UI) setting (i.e., one that ends when a particular task has been completed). However, if the contract is used to circumvent statutory rights arising from permanent employment, the employee may claim employment rights notwithstanding the fixed-term contract. Importantly, regardless of the type of contract, an employee who has at least one month of continuous service with a company, and whose period of continuous service began on or after 1 October 2001, has the right not to be treated less favorably than comparable permanent employees by reason of their fixed-term status. They also have the right to be informed of any permanent vacancy within the same company or establishment, before a permanent recruitment decision has been made. In addition, a fixed-term contract must not exceed four years, unless the employee is on a definitive career path which is objectively justified by the company.
Payment and Employment Law
Pursuant to EU Council Directive 1999/70, the pay of fixed-term employees should not be less favorable than that of comparable permanent employees, nor should there be differences in their employment conditions.
When and How to Use a Fixed Term Agreement
Employers most commonly use Fixed-Term Contracts when they have a specific employment need for a set period of time. Fixed-Term Contracts are also used for temporary cover for short term absences or to fulfil a particular need. For example, to manage recruitment surges/seasonal work or to cover maternity leave, illness, paternity leave or sabbaticals.
Fixed-Term Contracts also have an attractive feature for employers: if the Fixed-Term Contract is not extended, then the Employment Rights Act does not give the employee the right to claim standard dismissal rights.
However, employers should consider the use of Fixed-Term Contracts carefully. It can only be used where there is a genuine reason for the Fixed-Term. It cannot be used to avoid the statutory unemployment rights that employees have after two years’ continuous employment. If an employer uses a Fixed-Term Contract for a role which has no genuine reason for being fixed, then the Tribunal may view any dismissal as unfair.
Further, unless there are specific circumstances, a Fixed-Term Contract should not be used where the assignment is to cover other employees on maternity leave and to be "automatically" converted to Permanent Status once this assignment has concluded. In this situation, the employer should not rely upon the terms of the Fixed-Term Contract but should be mindful of statutory rights of employees on maternity leave.
Temporary Work v. Permanent Employment
Fixed-term contracts are commonly used by employers to hire staff to work on projects with a defined end date. For example, organisations may use fixed-term contracts to hire temporary employees to cover for employees who are on extended leave or off on long-term sick leave. Other employers may use fixed-term contracts to hire staff to assist in completing a particular project over a defined period of time. Employers may use fixed-term contracts as a way of assessing whether the employee should be promoted or hired on a permanent basis.
Permanent employment is quite different to fixed-term employment. Employees that are employed to work on a permanent basis will continue to work for an employer in the absence of certain events (such as the expiry of a fixed-term or the termination of their employment). Unlike fixed-term workers, permanent employees do not have an end date. Typically, permanent employees will only cease to be employees of their employer in circumstances where a notice of termination has been given. Termination can occur on the basis of resignation, dismissal or redundancy. Permanent employees’ employment continues until they resign, retire or are terminated.
The terms of an employment contract may stipulate how long an employee’s employment will last. However, section 6(3) of the Fair Work Act 2009 (Cth) (the FW Act) provides that an employee’s employment is permanent unless their contract expressly provides for it to be non-permanent and the period of their employment is specified. If an employee’s employment is fixed-term, the end date of the employment must be set out in the contract. If the fixed-term does not expire by the date specified by the contract, the employee’s employment will continue on a permanent basis from that date unless their employment is terminated in accordance with the FW Act or their contract of employment (or they resign).
There is no obligation on employers to issue fixed-term employees with the same entitlements as those employees engaged under ongoing contracts of employment.
Common Misunderstandings about Fixed-Term Contracts
Recognising the key features of a fixed-term contract is only half the battle: the real challenge lies in debunking the many myths and misconceptions than can affect day-to-day practice. Here is a list of the common ones:
Myth 1 – "I will never again be able to have a fixed-term contract if I have previously employed someone on a permanent contract"
This is answered very simply by the Employment (Fixed-Term Employees) Regulations 2002 – there are no restrictions provided that the period of the fixed-term contract has expired or the reason for the termination of the contract has occurred. If necessary, a further fixed-term contract may be entered into.
Myth 2 – "If I put my fixed-term employees on a 12 month + fixed-term contract and then employ them again shortly thereafter, it will mean they automatically have a permanent contract"
As above, the person will have a permanent contract if the fixed-term contract ends and they are employed by you under a permanent contract again soon after. However, if necessary, a further fixed-term contract may be entered into. In this scenario therefore, it is all about timing and frequency of further appointments rather than the duration of any one contract .
Myth 3 – "I can terminate the claim for an extension of a fixed-term contract if I think the reasons are not valid"
A claim made by an employee to have the fixed-term period extended cannot be dismissed simply because you have your own opinions on whether the reasons are valid. Heads of terms should be drafted to be agreeable with the employee to the extension of the fixed-term contract until such time as the legal formalities of the agreement are completed, ie the contract is physically amended and signed by both parties.
Myth 4 – "I can’t give notice in the first year of an employee being on a fixed term contract"
There is no statutory protection against an employer giving notice in the first year of a contract, however, notice must then be given to the employee no later than the point at which the period of the contract would have expired. It is simply the time between giving notice and the expiry of the contract that is de facto protected from dismissal.
Myth 5 – "It’s okay to have a term of less than 4 years but then I can’t let the contract continue or employ them at all in the future"
Employers must not allow a series of fixed-term contracts to continue beyond four years. Beyond this point, the employee automatically acquires the same rights enjoyed by permanent employees (unless there is clear objective justification for not doing so). However, that does not prevent you from employing the same employee on a permanent contract if you wish to do so.