What is a Fixed Term Employment Agreement?
A fixed term employment agreement is, as the name suggests, a contract with an employee that lasts only for a set period of time. It is a formal agreement between the employer and employee that the employment will commence and finish on certain dates within the future.
As mentioned above, fixed term employment contracts are a formal, legal agreement between you and your employee. It lays out the basic expectations of both parties, as well as the conditions of employment, such as start and finish date, remuneration, hours of work etc.
Because they are a formal contract, fixed term employment agreements cannot be terminated early by either party without consulting your employment lawyer first. By signing a fixed term employment agreement you agree to keep your role, and be employed by the company, until the end date outlined and agreed upon in the contract. Similarly, the company must hold a position for you until your fixed term employment ends .
Just like a permanent employment contract, fixed term employment agreements can include other legal obligations and guidance for your position, such as but not limited to: The purpose of a fixed term employment agreement is to offer short-term employment to businesses or organisations on a temporary basis. Generally to cover a shortfall in either hours of work, or workers, due to circumstances such as: Fixed term employment agreements are also commonly used when funding is allocated to staff, such as in government departments or funding bodies. Often funding is given to last for a set period of time, with funding usually paid quarterly or annually. Once the funding runs out, so too does the employment of the staff on fixed term agreements.
Fixed term employment agreements are different from standard employment contracts in that they have a set end date. However, it is important to note that no matter the length of time of the fixed term, clauses such as unfair dismissal law apply in the same way as they do for permanent employment contracts.
Essential Clauses in a Fixed Term Contract
When a fixed term employment agreement is being drafted there are a number of key clauses which should be included. These are: 1. Length of the term 2. Termination clauses 3. The right of renewal of the agreement and the terms of a "rolling contract"; and 4. Whether the employee is to be compensated for the loss of his position if he had been a permanent employee.
The length of the term of the employment agreement and the method of calculating the term is vital. In a case called Re Provincial Agricultural Depot v Ontario (Food Land Development Corporation), an employee was required to quit because he was nearly old enough to retire and the employer wanted to avoid paying him the employment severance entitlement that would be due to him. This case is still good law and provides the basic framework for determining the appropriate fixed employment term. The provincial Ministry of Labour’s Employment Standards Act (the ESA) provides that, after two years of service, notice of termination must be provided by the employer. Therefore, the minimum amount of notice that should be given to an employee of such a fixed term agreement if it is not renewed or terminated for cause should be two years.
It is also important in fixed term employment agreements to state explicitly what will happen upon termination. The employee may be entitled to an additional amount of notice called "common-law reasonable notice". This period may be longer than the entitlement under the ESA because it takes into account the employee’s service, the nature of the employment, the salary and the availability of similar employment. In addition to the notice of resignation, an explicit provision may be included in the agreement to ensure there is no obligation to provide common-law reasonable notice upon termination of the agreement. The employee may waive his common-law entitlement on any termination under the ESA.
In the agreement, the parties should specify if the contract is to be renewed, either on the same terms or with amendments. The issue of renewal is contentious because there could be a claim for wrongful dismissal if the contract is not renewed and at the common law there is an obligation that reasonable notice has to be given. So long as the contract is for a fixed term of no more than five years, the contract can provide that there will be no renewal and that the further extension of the contract must be negotiated by the parties. If, however, the parties want to maintain a renewal of the fixed term, they are free to do so.
If the fixed term employment agreement is a rolling agreement, then in contract renewal is automatic every year. Termination of the contract would then depend on the requirement of the ESA that gives an employer the right to terminate the contract on reasonable notice. If there is a fixed term of five years, for example, then each renewal period would be fixed for that five years.
It is common to have a clause indicating the compensation for the employee for the loss of the position if he was a permanent employee. For example, if, instead of a fixed term, the employee had been an employee for a number of years, there would be a demand for overtime pay, benefits and other benefits which the employee would be entitled to if he had been a permanent employee. If the contract is stated to be for a fixed term, the compensation provided would be the only money owed under the contract. The employer and the employee should explicitly indicate in the fixed term employment agreement what the compensation should be as well as the benefits entitlements which can and will be held by the employer for the employee. It is not enough to incorporate the terms by reference to an existing employment agreement. Each subject matter should be dealt with in the fixed term employment agreement to prevent disputes between the employee and the employer.
In the case of Horel v General Electric Canada Company no compensation was required to be paid to the employee because the fixed term employment agreement clearly excluded any obligation on the part of the employer to continue the employment of the employee or to compensate the employee on the termination of the employment agreement.
Fixed Term Agreements – Legal Consequences
"Fixed-term employment agreements must also satisfy the minimum wage and ordinary hours of work requirements for an employee under the relevant award" – City of Port Phillip – EBA 12 – [2015] FWC 694
Section 22 of the FW Act provides that an employee employed under a fixed term contract does not have to be paid any less than the amount that he or she would have received if he or she had been employed under a permanent contract. If the contract is entered into for a longer period than five years, it is deemed to be a permanent contract unless the employer can show that the contract is not designed to avoid payment of the minimum monetary entitlements of the employee and the employment has a definite end date.
The High Court of Australia in Phoenix v Australian Federation of Air Pilots (2003) 215 CLR 366, at [1.2] observed that "the policy underpinning the [equivalent section of the repealed Industrial Relations Act 1988 (Cth)] is that fixed-term contracts should not be used as a device to disadvantage employees by avoiding a permanent employee’s financial entitlements such as parental leave or redundancy payments." This led the High Court to rule that a fixed term employee is entitled to unpaid annual leave when the employment terminates at the end of the fixed term.
An employee covered by an award or enterprise agreement may negotiate a contract for a fixed period of up to twelve months and where there is a contract period greater than twelve months, the employee must have rights to pay out on termination of up to 13 weeks annual leave and 13 weeks redundancy pay unless the employer shows that the contract is not being used to circumvent the minimum monetary entitlements contained in the award or enterprise agreement.
To avoid disadvantaging employees under the terms of the applicable award or enterprise agreement, the fixed term contract must provide for the accrual of annual leave and personal/carer’s leave at the normal rate.
Some coverage clauses in modern awards prevent employers from employing casuals or labour hire staff where the employer employs casuals or labour hire staff to do the work normally performed by permanent employees. These clauses are intended to preserve the integrity of security of the ongoing workforce and to protect against avoidable periods of non-employment without income and access to the social supports and entitlements that flow from continuing employment.
The Upsides and Downsides of Fixed Term Employment
Every employment contract has its pros and cons, and fixed term contracts are no exception. An obvious advantage for employers is that they can engage staff for a specific purpose and duration. A fixed term contract allows employers to more easily control costs, particularly when the employer is unsure whether the role will be needed on an ongoing basis. For example, a project may have a specific term and cost, and if it is clear from the outset that the project will not continue indefinitely it may be cheaper in the long run to hire staff on fixed term contracts. The predictability of fixed term employment contracts is also appealing. It is easier to know when recruitment can begin, and which staff will still be required once the period of the contract has expired (whether staff are to be kept on or dismissed). On a more personal level, a fixed term contract can be welcomed by employees who are willing to move into a new area of work or even a new country, with the knowledge that the arrangement is no more than a temporary position. On a practical level however, the down sides of fixed term contracts are the same as the down sides of permanent contracts. Although they end on a specified date, it is important to remember that any rights accrued during the course of employment continue even after the fixed term comes to an end . Employees who are made redundant after a fixed term ends retain the benefit of a redundancy payment, and a satisfactory reference will still need to be provided at the end of the contract if requested. It is also important to ensure that there is no implied renewal of the contract. If this happens then the contract will be broken and there is a risk that an employee will gain the status of permanent employee with all the benefits that entails, even if the company did not want this to happen. Employers will often have the option to extend the contract either by using the right "to extend or reduce notice period" clause contained in most employment contracts, or by clearly defining the end date of the contract. However, one thing an employer must not do is simply convert the fixed term contract into a permanent contract. If a fixed term employee has worked continuously for three years, they are entitled to claim for an unfair dismissal (or constructive dismissal). There is no obvious prejudice whether a fixed term contract is left to expire or is terminated at the end of a fixed term. The main issue is over how the contract is extended or renewed and ensuring that a new contract is entered into rather than simply letting the original contract run into the next year.
Converting from a Fixed Term Position to Permanent Employment
On this basis, if the intention to commence a permanent employment relationship is present at the outset, all the terms will then be covered by the Employment Contract and no separate contract for permanent employment will be necessary. However, as the critical intention of the parties is often difficult to identify, it is important that a timeline for the transition from fixed term to permanent be arranged and codified within the Employment Contract used to govern a fixed term employment relationship.
Often the desire for continuity of employment is not expressly reflected on the face of the written Employment Contract or its terms may not be sufficiently agreed between the parties. In such circumstances, any amendments anticipated will need to be made to the written Employment Contract to implement the transition. This may require an amendment or replacement Employment Contract to be prepared.
At the outset the Employment Contract should anticipate the fixed term duration of the proposed employment. The likely commencement and termination date of the employment relationship should be reflected in the Employment Contract. The provisions relating to renewal of the Employment Contract should be clearly spelt out and any action required notified to the employee. For example, a provision requiring the employee to provide six weeks’ notice to the employer to renew the Employment Contract or to implement the transition to permanent employment.
It is good practice, when the intention to move from fixed term to permanent is anticipated in advance by the parties, to provide employees with written notice of the impending transition once there is a likelihood of a change of status. This can be done by writing to employees 2 months in advance to indicate the anticipated transition and to confirm that a final two to three month fixed term contract will be issued to the employee. The final fixed term Employment Contract should be clear as to the anticipated transition and should state the following:
If the transition is intended to be immediate, either upon the expiry of the fixed term period or immediately after the issue of the final fixed term Employment Contract, then the Employment Contract should indicate this. A clause of this nature should make it clear that the assumption is that the transition will take place, but the Company does reserve the right to vary the employment relationship type.
It is also good practice to give employees an opportunity to raise objections in circumstances where the transition from fixed term to permanent employment is likely to have an effect on other elements of their terms and conditions. For example, where a fixed term employee is offered a permanent position at a higher level of responsibility than their previous role, the right to object to the transition is important.
If there is no anticipation of a move from fixed term to permanent employment in the original Employment Contract, it is generally not necessary to wait until the end of the fixed term period to implement a transition. It may be possible to amend the existing fixed term Employment Contract to provide for the continuation of the employment relationship as a permanent employee. However, an alternative would be to issue a new permanent Employment Contract to the employee.
The duration of the fixed term period remains critical to determining whether an employee qualifies as a continuous service employee and the dispute resolution forum to which they are entitled. Any changes to the Employment Contract should reflect this.
Fixed Term Contracts – Common Myths
Common Misconceptions About Fixed Term Employment Agreements
With any type of employment contract, there are going to be misconceptions about what the contract’s terms mean and what effect they will have on a person’s employment.
One such misconception about fixed term employment agreements is that if they are not treated as a means of hiring employees on a permanent basis, they do not need to be renewed or otherwise continued. That is a misconception because the law relating to fixed term employment contracts is still developing and therefore some judges’ decisions have been in conflict with others. Where that happens, the lowest common denominator is normally adopted, meaning that the least favourable interpretation that can be drawn from a particular judge’s position will be considered. In this sense, judges interpret and apply the law against employers (being the party who has the most bargaining power) to protect employees (being the most vulnerable party).
Sometimes employers are not aware that fixed term employment agreements must be renewed in order to preserve the employee’s continuing employment. One case saw a fixed term employment contract run from May 1, 2006 to April 30, 2007. The employer terminated the contract on July 31, 2008, a year and three months after the fixed term was to come to an end. The issue in question was whether or not the employee had any basis for claiming severance pay under the Labour Standards Code. After a long series of legal proceedings, the Nova Scotia Court of Appeal essentially found that the employer was in breach of the employee’s contract and held that the employee was entitled to severance pay, the Court of Appeal essentially confirming that a fixed term contract continues until it is renewed or replaced by a new contract. What gives rise to conflict in decisions made in that case were that the judge at first instance had ordered the employee to make efforts to mitigate his losses but that the Nova Scotia Court of Appeal considered the employer to be at fault in the breach of the contract and held that the employee was not obliged to look for other employment where there was a reasonable expectation he would have remained with the employer until the end of the contract were it not for its breach.
In one English court case , the Court held that the dismissal of a fixed term employee gave rise to a claim for unfair dismissal. Now, in that case it was the employee who was found to have breached the contract and therefore the employer was able to recover damages that it lost as a result from the employee, including additional costs incurred as a result of replacing him and lost delivery contracts. Again, the decision in this case conflicts with the Nova Scotia Court of Appeal’s decision that a contract continues unless renewed or replaced.
A final case to consider is one where an employer entered into a series of fixed term employment contracts with the employee, setting the term from June of one year to May of the next year. The employee’s contract was not renewed and the employer simply allowed the employment to continue without further contract. The Court considered how a contract of employment may be extended and held that the employer essentially created a contract of indefinite duration from one year to the next. It found that no priority was given to the employer’s version of what was intended. It found therefore that the employee was in fact covered under the Labour Standards Code as it considered the employment to be indefinite. On this point, the Court considered that when an employer enters into a second or later fixed term employment contract, the employee moves from being a fixed term employee to an indefinite term employee. As a result, the employer would have to provide notice of termination of the employee rather than allowing the contract to run its course. If this were not the case, the employee would reach a position of having accrued significant rights in law due to the length of time for which he/she had been in employment.