A fixed term employment contract is one in which the employment is only provided for a ‘specified period of time’, and has fixed start and end dates.
Fixed term contracts can be very useful – for example, to cover another employee’s parental or long service leave, or to hire an employee for the exact length of a particular project.
You can easily choose not to renew the employment contract upon its nominated expiry date without suffering through the risks and complexity of performance management or disciplinary procedures, and the employee will have no right to bring an unfair dismissal claim. After all, there was no termination of employment as such – the agreement simply ceased to have effect.
But fixed term contracts have their downsides too. A fixed term contract is unable to be terminated before its nominated expiry date, leaving you stuck with an undesirable employee, or locked into continued payment of wages even when a project has finished or was cancelled before its expected date.
We recommend using maximum term contracts, which are fixed term contracts in all but one respect: the ability to terminate early remains. An expiry date is still allocated to the agreement upon which the employment will automatically end, but it is a maximum rather than definite term, so either party can terminate the employment relationship before this date if the need arises.
It’s certainly a double edged sword as it allows employees to resign and leave you short, but it also provides you with the ability to escape the contract early if things aren’t working out.
There are other risks inherent in these types of contracts. A fixed/maximum term employment contract which is repeatedly renewed over a long period of time may allow the employee to argue that they have a ‘continued expectation of ongoing employment’. This means that the simple act of the employer allowing the latest contract to expire without renewal counts as termination of employment. The fixed term agreement has become permanent without any changes in wording, simply through the conduct of the employer in continually renewing the contract.
This situation has occurred in a few cases over the last several years, shattering employer’s faith in the use of fixed and maximum term contracts. If you use such contracts, perhaps now is the time to consider whether they are appropriate for your business.
For more information on fixed and maximum term contracts and what this means for you, clients should contact the HR Assured team. If you’d like more information about the benefits of becoming an HR Assured client contact us today for an informal chat.