FIXED-TERM CONTRACTS - 18.05.2011

Fixed-term contracts: how long should they last?

When you need extra staff, but don’t want anyone permanent, a fixed-term contract can offer the ideal solution. But get the duration wrong and you could face some nasty legal liabilities. So how can you protect yourself?

Advantages of fixed-term contracts

A fixed-term contract (FTC) typically has one of three outcomes; it may:

  1. Specify an exact end date.
  2. Run for a set period of time, e.g. ten months.
  3. Terminate at the end of a specific project.

Benefits. They offer employers the ability to buy in skills or expertise without adding to their permanent head count. But there are some legal issues you must consider when entering into them. So what do you need to know?

Important legal issues

Firstly, whilst an FTC can be renewed, it’s vital that the individual’s total period of employment doesn’t exceed four years. If it does, the Fixed Term Employees (Less Favourable Treatment) Regulations 2002 apply.

Risk. They state that, at this point, an FTC automatically converts to a permanent contract, unless you can objectively justify why it shouldn’t. We aren’t aware of any cases where this argument has succeeded so, as a general rule, never use FTCs for four, or more, years.

Watch out for unfair dismissal rights

Employers often assume that because they’ve offered an FTC the employee doesn’t accrue unfair dismissal rights. Unfortunately, those who work on one (or more) continuously for a year gain the continuity of service necessary to bring this type of claim, i.e. as if they were employed on a permanent contract.

Break the continuity

The termination of an FTC - even if this occurs on a date previously agreed by the employee - is always a dismissal. Therefore, if they’ve worked for you continuously for a year, you must be able to show that: (1) a fair dismissal procedure was followed; (2) it was reasonable to dismiss them in all the circumstances; and (3) you considered whether or not if they could be redeployed.

Tip. Alternatively, if you break their continuity of employment before the one-year mark, this problem ceases to exist; for example, by having a break of 14 days between each six-month FTC.

Early termination clause

To further protect you, an FTC should always include an early termination clause (see The next step). Doing this allows you to bring the contract to an end sooner and without being in breach of contract, e.g. if you’ve no further need for the individual, or it’s just not working out. In the absence of this type of clause, the employee may be entitled to claim damages which are equal to the pay and benefits of the unexpired portion of their FTC.

Tip. Assuming that an FTC is for a set time, it automatically terminates once that period is up. However, whilst you don’t have to give formal notice, avoid misunderstandings when that date draws close by confirming the end of the contract, when this will happen and the reason why, i.e. you no longer require the individual’s services.

For a free sample fixed-term contract which includes an early termination clause, visit http://personnel.indicator.co.uk(PS 13.11.06).

Never employ staff on one or a series of fixed-term contracts which exceed four years. The law says that at this point they become permanent employees. Plus, as they accrue unfair dismissal rights after one year’s employment, keep the contracts shorter than this, or have a clear break in between, e.g. of 14 days.

The next step

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