Current economic pressures mean employers are turning to more flexible and pragmatic employment arrangements when engaging workers. In many sectors, uncertainty is resulting in fewer permanent roles being offered, and a greater use of fixed term contracts (FTCs) to enable immediate workforce needs to be met without the long term commitment and costs associated with permanent arrangements.
Hiring someone on a FTC enables the employer to specify how and when employment will end. This could be on a specific date, or on the occurrence of a particular event, such as the conclusion of a project or the return of the permanent post-holder from a period of absence.
While there are many potential benefits for employers of FTCs, there are also legal risks associated with this type of employment contract. What are the fixed term contracts pros and cons to consider? As long as you are careful to take advice on the correct drafting of a FTC, particularly relating to notice provisions, a fixed-term contract can offer a pragmatic approach to managing the size of your workforce.
Fixed term contracts pros and cons for employers
The pros for employers of using fixed term contracts can include:
- They can help your organisation meet workforce and resource needs while limited to a budget, for example due during periods of economic uncertainty or where the long term nature of the work is not certain. With a FTC, you can specify the length of the contract at the outset while retaining the flexibility to offer to keep the employee on if you find that circumstances allow you to do this.
- They can help you cover for absent employees whose return date is unknown. For example, you could cover a period of long-term sickness, or someone who is unable to work because of the impact of Covid-19.
- You can trial a new approach or idea with employees on a FTC without the rigidity or commitment of a permanent contract, again while retaining the potential to offer a longer term or even permanent arrangement if this suits both parties.
The cons for employers of using employees on fixed term contracts can include:
- Depending on your sector and the type of role, it may be harder to recruit if people are used to, prefer and can find permanent contracts elsewhere. In the current climate, in many sectors this may be less of an issue where job opportunities are generally more limited, but this will remain a concern particularly when attracting ‘best talent’.
- Following on from the previous point, FTC roles may have to carry a higher rate of pay to attract the right candidate to a short term position, since the individual will be missing out on other benefits typically offered under a permanent role.
- You may find that given the flexibility afforded to both you and the worker, you are having to recruit more staff more frequently. This can increase recruitment costs and resource requirements.
- Morale and workforce stability can be adversely affected if you increase the number of temporary workers and there is a higher churn of FTC workers.
- Employers should note that FTC workers may be automatically considered permanent after four years of employment under the arrangement, unless the continued use of the fixed-term employment contract can be objectively justified or is excluded by a collective agreement.
What rights do employees on fixed term contracts have?
While FTCs can offer companies more flexibility in certain areas of the employment arrangement, employers have to remember that they still have to meet many legal duties in respect of their FTC workers.
Fixed-term employees have the same general employment rights as permanent employees, such as protection against discrimination. In addition, the law specifically protects them from being treated less favourably than permanent employees working for the same employer. This is by virtue of the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002. The Regulations prevent employers from treating employees on fixed term contracts less favourably than permanent employees, unless there is objective justification to do so.
The Regulations state that fixed term employees are entitled to receive:
- the same pay and conditions as permanent employees, including the opportunity to receive training;
- the same or equivalent benefits package (you can balance out less favourable provisions with more favourable ones so that overall the package is the same);
- the right not to be unfairly dismissed or made redundant; and
- the right to be informed of available vacancies within the establishment at which they are employed.
It may not always make sense to provide the same benefits to fixed term employees and permanent ones. The law states that if you have objective justification for treating the fixed term employee differently then you can. A common example concerns a company car. If you take on an employee on a three month contract you may decide that the cost of giving that employee a company car is too high, even though someone doing the same job on a permanent contract does have a company car. This kind of differential treatment would be allowed because there is a good business reason for doing so.
If one of your employees on a FTC considers that they have been treated less favourably than a comparable permanent employee, they can write to you requesting a written statement of the reasons for the less favourable treatment. You have to respond to their request within 21 days. If you fail to provide the explanation this would of course go against you in any Employment Tribunal proceedings. Therefore, you should be careful that any differences in treatment are carefully documented, with reasons.
The Regulations also state that an employee on a FTC has the right to be informed by their employer of available vacancies in the establishment where they work. The Regulations explain that an employee will be deemed to have been “informed by their employer” only if the vacancy is contained in an advertisement which the employee has a reasonable opportunity of reading in the course of their employment, or the employee is given reasonable notification of the vacancy in some other way.
Avoiding legal risks of fixed term contracts
One of the most costly pitfalls from an employer’s point of view is to fail to include adequate notice provision within the fixed term contract documentation.
It is the case that if you employ someone on a fixed term contract lasting twelve months, and state the start and end dates, then that contract will end when it is supposed to do so, unless you decide to renew it.
However, you must remember to consider what happens if you (or the employee) wants to end the contract before the expiry of the twelve month period. If you do not put a notice clause into the FTC, but you terminate the contract early, then you will be in breach of contact and liable to pay out the employee for the remainder of the contract term.
Therefore, it is essential that you include a notice provision setting out your right to terminate the contract upon giving notice of, say, two months. The employee would have the right to give one week’s notice if they have worked for you for one month or more, so if you would like to receive more notice than that then you will of course have to include this in the contract too.
Allowing the contract to run over
If you fail to confirm the employee’s leaving date prior to the expiry of their FTC and they simply continue to work for you and you continue to pay them, then the contract will carry on.
In this scenario you will be required to give notice for the employee to leave. In the absence of a notice period stated in the contract, this will be a week for each year that the employee has worked for you. If you have included a notice period in the contract then you will have to adhere to this.
It is advisable to include a clause within the FTC stating what notice period will apply if the contract runs over, in the event this happens.
Unfair dismissal and redundancy
The expiry of a fixed term contract still counts in law as a dismissal. Therefore an employer can still be required to give a legally fair reason for their dismissal to an employee on a FTC, even if that FTC contains a specified end date.
The key question is for how long in total the employee is employed by you when the FTC comes to an end. If the employee has been employed by you on one twelve-month fixed term contract then they will be entitled to a written statement of reasons from you for not renewing the contract. However, they will not be entitled to be given a legally fair reason for their ‘dismissal’.
If the employee has been employed on one fixed term contract, or a series of fixed term contracts for two years or more, then they will be entitled to be given a legally fair reason for their dismissal (the non-renewal of their FTC). If the reason you give is redundancy then they will also be entitled to a redundancy payment.
The legally fair reasons for dismissal are, broadly summarised, capability, conduct, illegality, redundancy, or some other substantial reason justifying the dismissal of the employee.
If you have an employee who has over two years of service and they are on a fixed term contract that you do not want to renew, then you will have to begin a dismissal procedure for that employee. This will involve meeting with the employee to explain your position, writing to that employee explaining why they are being dismissed and allowing them the right to appeal.
Employing staff on a series of fixed term contracts
The 2002 Regulations protecting employees on FTC against less favourable treatment also contain a right for those employees to be made permanent. The Regulations state that if the employee has been continuously employed on a series of fixed term contracts for a period of four or more years, then the next time it is renewed, it must be a permanent contract.
It is possible for a collective agreement between a trade union and an employer, or a staff association and an employer, to agree to disapply this Regulation.
There is an exception to the Regulation if the use of a FTC can be justified by the employer on objective grounds, but this is fairly difficult to do after the passing of four years. In any case, given that employees on a FTC with over two years of service have the same protection against unfair dismissal as permanent employees, there would appear to be little to be gained from an employer’s perspective for keeping the ‘fixed-term’ employee on a different type of contract.
DavidsonMorris’ employment lawyers can help with all aspects of employment contracts, including advice on the types of contracts suitable for your company’s circumstances and needs. We can also assists if you are considering varying existing employment contract terms in response to market challenges and changes in your business. Working closely with our specialist HR colleagues we provide comprehensive guidance on how to approach and implement changes to terms and conditions to minimise legal risk while ensuring commercial goals are achieved and employee engagement is optimised. For help and advice, speak to our experts.
Fixed term contracts FAQs
How do fixed term contracts work?
Fixed term contracts operate on the basis that the employment is agreed at outset by the employer and worker to end on a certain date or on the occurrence of a specific event, such as the completion of a project or the return to work of another employee.
Can fixed term contracts become permanent?
It is possible for a FTC to become permanent automatically where the worker has been employed under the agreement for four or more years unless the employer has a good business reason not to do so, or a collective agreement removes the right.
Is there a limit to the number of times a FTC can be extended?
FTCs can be extended successively but after four years, the employee may be considered permanent unless the continued use of the fixed-term employment contract can be objectively justified or is excluded by a collective agreement.
Last updated: 30 May 2020