One of the key considerations for employers when engaging staff is determining the most appropriate type of employment contract to use.
Some of the options include whether to engage an employee on a full-time, part-time or casual contract, but there are also options regarding using indefinite, fixed-term or maximum-term contracts.
In making this decision business should consider both their operational needs, and what hours of work can be guaranteed to be provided to employees. The choice of employment type is important as it will have ripple effects on employee entitlements, as well as on your ongoing obligations to staff. Of course, there is the ability to change an employee’s employment type in the future, but it’s important to bear in mind that such changes can typically only be made by mutual agreement between both parties. This means it is crucial for businesses to really consider what employment type best suits their needs before making any decisions in haste!
Employing employees for specific periods of time or a specific project
Sometimes employers need employees to be committed to work a regular pattern of work on an ongoing basis, but the employer knows that they will only need to employ the employee for a specific period of time, or for a specific project. The fact that the employee will need to commit to regular hours makes a casual employment contract inappropriate.
This approach to work oftentimes comes up in the building, mining and professional services industries which revolve around a lot of project work engagements. It also arises in businesses that receive external funding (e.g. Government grants) on a year-by-year basis and can only commit to employing staff whilst the funding is in place. Another common example that many businesses would have come across is hiring a temporary cover for a maternity leave period.
In these types of circumstances, offering fixed-term or maximum-term employment contracts may be effective in addressing your operational needs. However, it is important to understand the differences between these types of contracts, and when exactly these contracts would be appropriate to use.
What’s a fixed term contract and when should I use this?
Employees engaged under a fixed term contract are generally employed for a specific period of time or task, and such contracts will usually stipulate an end date i.e. the date when the project is expected to be completed. When drafting a fixed term contract, we recommend ensuring there is clear wording to indicate the end date which would be something to the effect of: You are being employed for a fixed term of X months/years. Your employment commences on [date] and terminates on [date].
There isn’t a restriction on how long fixed-term contracts can run for, however, they typically may last anywhere from a couple of months to even up to a few years. The timing of these will really depend on what project or need the business is intending to meet, and the length of the contract should match this period. Importantly, fixed-term employees must still be employed on a full-time or part-time basis and therefore they will be entitled to the same wages, penalties and leave as permanent employees, with the key difference being that there isn’t the obligation for the business to provide work beyond the end date of the fixed term.
It is important to note that fixed-term employees are not entitled to notice of termination, redundancy pay and nor do they have access to unfair dismissal when their contract terminates at the end of the specified period. Whilst this may appear to be quite an attractive option for employers, such arrangements should only be used when there is a genuine need to employ someone on a fixed-term basis, and care should always be taken when utilising these type of contracts.
Where it is found that successive fixed-term contracts have been utilised without good reason or the fixed-term contract was not actually aligned to a genuine business need, an employee could assert that they are actually a permanent employee and entitled to benefits associated with permanent employment including notice of termination, redundancy pay and the ability to access unfair dismissal upon termination of employment.
Fixed-term contracts are also quite restrictive in the sense that they may have little or no flexibility to terminate the agreement early. If the contract is drafted so that both the employee and employer commit to employment for a specific period of time, if the employer terminated the contract before the anticipated end date, then it is possible that the employer would be liable to pay the employee a payment equivalent to what they would have earned for the remainder of the contract term.
There are also risks if an employee continues to work beyond the end date in the contract, without entering into a new contract prior to its expiry. The risk of allowing the existing fixed-term contract to lapse whilst continuing to engage the employee may indicate the employee is actually now a permanent employee and would therefore have access to notice, and potentially redundancy pay and unfair dismissal if their employment ends in the future.
What is a maximum-term contract and how is it different to a fixed-term contract?
Maximum-term employment contracts include a date on which the employment will end (or else specify that the employment will end on completion of a particular task) but provide more flexibility than fixed-term contracts to terminate the contract prior to the end date (e.g. by providing an option to terminate early by providing a period of notice). Therefore, when entering into a maximum-term contract, both parties are generally aware that the engagement may not necessarily last the full contractual term.
Despite the benefit of greater flexibility that comes with using maximum-term contracts, one of the challenges is that a maximum-term contract with an unqualified right to terminate early will mean a court of tribunal are unlikely to regard the contract as truly being one where the employee is engaged for a specified period or task. This is likely to mean that the employer will be unable to rely on the exemptions in the Fair Work Act 2009 (Cth) regarding notice, redundancy and access to unfair dismissal, which only operate to protect employers who have engaged employees on a “true” fixed-term contract.
In the case of White v Sydney College of English Pty Ltd  FWA 7644, for example, an unqualified right to terminate an agreement before the end date in the contract meant it was found to not be a contract for a specified period within the meaning of section 386(b)(ii) of the Fair Work Act 2009 (Cth). As a result, there was the ability for the employee to access unfair dismissal where the agreement was terminated early.
By the same token, an unqualified right to terminate early is likely to mean that an employee may still be able to claim redundancy pay and notice of termination if their employment ends when the contract expires.
Subsequent case-law suggests that a maximum-term contract with only a limited ability to terminate the contract early (eg only where there has been serious misconduct on the part of the employee) would still be likely to be regarded a contract for a specified period or task within the meaning of the Fair Work Act 2009 (Cth) and therefore would be likely to allow an employer to avoid obligations to provide notice, pay redundancy pay or risk a challenge of unfair dismissal. This is, however, an area of great uncertainty and we would encourage you to seek our advice before engaging an employee on this type of contract.
Which contract should I use?
Fixed-term and maximum-term contracts each present various advantages and disadvantages so careful consideration should be given regarding the circumstances of the business, and the type of contract that will best align with the purpose an employee is being engaged. If you require assistance in this area, please contact us.
The future of fixed-term?
- Use one or more fixed-term contract for a period totaling more than 2 years
- Use more than two successive fixed-term contracts (i.e. can only renew once)
- Employees who are engaged to perform a distinct and identifiable task involving specialised skills;
- Employees who are engaged by way of a training arrangement (eg apprenticeship)
- Employees who earn more than the high income threshold ($162,000 p.a.)
- The contract is wholly or partly funded by government funding (or a type of funding allowed by the regulations) and the funding is for a period of more than two years and there are no reasonable prospects that the funding will be renewed after that period.
About HR Connect
HR Connect is one of Australia’s leading providers of HR and workplace safety advice service, designed to help small business owners make confident and compliant business decisions.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact HR Connect for advice.