Fixed term contracts masterclass

In Australia, there are 3 main types of employment contracts: permanent (full-time or part-time), casual, and fixed term (whether full-time or part-time).

This article focuses on fixed term contracts, which are perhaps the least common type of employment contract. They can be a great tool for employers, but do carry some risks and complexities that employers should be aware of from the outset.

What are fixed term contracts?

Fixed term contracts are designed to limit the duration of the employee’s employment with a particular employer. Fixed term contracts fall into two categories: ‘specified period of time’ and ‘specified task’.

A specified period of time contract has an unambiguous start and end date, either by reference to certain dates or by reference to an employment duration (i.e. 8 months). These types of contracts are typically used when an employer is filling a temporary vacancy, or when an employer requires services only over a certain season (for example, the Christmas season for retail employers, or a fruit picking season for agricultural employers).

A specified task contract employs an employee to work on a particular job or project. Once the job or project ends, the employment arrangement expires. These types of contracts are commonly used in the engineering, construction and project management industries, as well as for activities with fixed government funding.

A fixed term contract can be used to employ someone on either a full-time or part-time basis. However, the employee is considered to be a permanent employee during the term of the contract. This means that they will accrue entitlements ordinarily associated with permanent employees, such as annual leave and sick leave.

What are the benefits?

Fixed term contracts are excellent tools when used correctly and appropriately, as they allow an employer to hire someone to meet a specific need. This is especially the case for maternity leave contracts (which are generally ‘specified period of time’ fixed term contracts) and for project-specific contracts. Fixed term contracts are also suitable for employers who require additional labour during certain seasons or projects – for example, fruit pickers may be employed on a fixed term contract for a picking season.

Fixed term contracts are also sometimes used for senior employees who are often only hired to a role for a limited period of time, such as a senior manager overseeing the implementation of an organisational change. A fixed term or project-based employment arrangement can ensure that their employment simply lapses when they are no longer required.

At the end of a fixed term contract, employees are excluded from making an unfair dismissal claim, and the employment arrangement concludes due to the passage of time or completion of the relevant project. This provides a real benefit to the employer as they have no ongoing employment or payment obligations to the employee.

What are the risks?

Unfortunately, fixed term contracts are often abused or used incorrectly. This is where an employer can run into all sorts of risks.

Incorrectly structuring a fixed term employment arrangement can expose the employer to significant cost. For example, early termination of a ‘specified period of time’ contract that is not properly drafted may require the employee to be paid out to the end of the fixed period.

It is becoming increasingly common for employers in some sectors to abuse fixed term contracts as a way of avoiding ongoing responsibilities to their employees. Often these ‘fixed term’ arrangements are really a sham, and the employees can be deemed to be permanent employees.

Accordingly, it is important for employers to avoid entering into too many back-to-back contracts, which can be deemed to give rise to an expectation of ongoing employment on the part of the employee. This is a greater risk if the same job is being offered for the same fixed term on a loop. The general rule is that the longer the series of fixed term contracts, the riskier it will be for the employer that the arrangement may be deemed a sham.

It is also important that the fixed term contract is not expressed to be renewable or seen to be renewable. Fixed term contracts that are stated to be automatically renewable look very much like a permanent arrangement and are often deemed to be. Employers should bear in mind that they can always offer to re-employ a fixed term employee at the end of their current contract if they want to keep the person as part of their team.

Can I terminate a fixed term employee?

Fixed term employees can be terminated prior to the end of the term, but the financial consequences of termination for the employer will depend on the terms of their contract.

The general principle is that fixed term employees have an expectation to be employed for the duration of the fixed term. This means that employers have to be extra careful if they wish to end employment early.

Any fixed term employee who is terminated at the employer’s initiative before the expiry of the fixed term, but after serving the threshold employment period (6 months, or 12 months for small business employers), will be eligible to make an unfair dismissal claim. Employees who have been working for less than this will not be eligible to claim. Similarly, employees whose employment terminated simply as a result of the fixed term coming to an end are not eligible to claim.

Employers need to be careful to ensure that they have the right under the contract to terminate fixed term employment early for issues such as misconduct, breach of contract or poor performance. If the employer exercises the right to terminate early with cause, the employee will still be entitled to any applicable notice of termination.

In some cases, a fixed term employee’s role may become redundant prior to the end of the fixed term. An employer can terminate the employee provided the employer can meet the ‘genuine redundancy’ tests, which include that the job is no longer required to be done by anyone and that the employee cannot be redeployed. Again, the redundant employee will still be entitled to any applicable notice of termination and redundancy pay (if the employer is not a small business employer).

Our top tips for fixed term contracts

Despite the risks, fixed term contracts are often an excellent solution for employers to fill a gap or meet a need. However, it is easy to get these contracts wrong, so care needs to be taken at each stage of the contract’s lifecycle.

If you have decided that a fixed term contract is appropriate, then the first matter to consider is whether you put in place a ‘specified period of time’ contract or a ‘specified task’ contract. Unless you are filling a temporary vacancy or meeting a seasonal need, a specified task contract can be beneficial as it ensures that employment ends once the work has been done. Choosing the right type of fixed term contract before entering into an agreement with your employee can save you real cost in the future.

The drafting stage of the fixed term contract is vital, and we recommend that you seek professional legal input on the fixed term contract to ensure that it is appropriately and flexibly drafted.

When drafting or reviewing a fixed term employment contract:

  • If it is a ‘specified task’ contract, ensure the task is framed clearly so that there is no room for argument about when the contract ends;
  • If it is a ‘specified period of time’ contract, limit the fixed term of the arrangement to the shortest workable timeframe; and
  • Ensure that the contract allows for you to terminate the employee during the term due to misconduct or poor performance.

At the end of the contract term, you should ensure that you confirm the conclusion of the employment arrangement in writing and by your conduct. If an employee continues to work for you after expiry of the fixed term contract, but without a new contract having been entered into, the employee is deemed to be working for you on the same terms as the previous contract, but without the fixed term. For any employee that you wish to re-engage, you should enter into a new employment contract immediately following termination.

Lastly, you should avoid back-to-back fixed term contracts where possible. If a further fixed term contract is appropriate in the circumstances, the terms of the contract should be updated to reflect the new job role and new period/task to which the contract relates. Undergoing a real review and update process will help to demonstrate the legitimacy of the successive contract.

If you would like some help with fixed term contracts or other employment law issues, please contact us on 1300 654 590.

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