Welcome to 2017. Now is a good time to think about reviewing existing employment arrangements and planning for the year. An option for employers can be to employ workers as necessary on fixed term contracts. But beware – there are dangers!
A true fixed term contract is for a definite and specified period of time, eg from 1 January 2017 to 31 December 2017. There is no need to give notice of the end of the contract or pay redundancy pay – it just ends on the specified date. However, if the employer wishes to end the contract before the specified end date, it will be required under the common law to pay the balance of the contract and the employee may have statutory unfair dismissal rights and redundancy pay rights. Similarly, if an employee wishes to terminate a fixed term contract early, they may be liable in damages to the employer.
One solution is to include an early termination clause in the fixed term contract allowing the contract to be ended by shorter notice before the end date. This turns the contract into an “outer limit” contract, ie the employee will be employed “up to” a specified period of time or date. If the full term is worked, there is no need for notice and the employee has no statutory unfair dismissal rights or redundancy pay rights (although other legal options may exist). The upside is that an outer limit contract can be terminated at an earlier date by the employer without having to pay the full balance of the contract. The downside is that the employee may have statutory unfair dismissal rights if they have served the required minimum employment period under legislation and redundancy pay rights. Annual and personal leave entitlements will also accrue under both fixed and outer limit contracts.
What if an employer wants to extend the fixed term? This can be done but a further fixed term contract should be offered before the end of the original fixed term. If this is not done, then there is a danger that the employment may become permanent in nature. The other danger is that a series of “rolling” fixed term contracts may be regarded as permanent employment over time.
So, be careful. Fixed term or outer limit contracts should be used for specific tasks or projects and should not take the place of permanent employment. The use of casual or fixed task or seasonal employees can also be considered as well as contractor arrangements. Expiry and renewals must also be diarised and managed properly.
We can help with advice about the appropriate choice of contract for employers and employees. All the best for 2017.