Five Things Every Employer Should Know About. Fixed-Term Contracts

Five Things Every Employer Should Know About Fixed-Term Contracts by Susan Bernstein A fixed-term contract is a contract of employment that will termi...
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Five Things Every Employer Should Know About Fixed-Term Contracts by Susan Bernstein A fixed-term contract is a contract of employment that will terminate on the expiry of a fixed term; on the completion of a particular task; or, on the occurrence or nonoccurrence of any other specific event (other than the attainment by the employee of a bona fide normal retirement age). Examples of fixed-term contracts are: •

A contract that ends on a specific date;



A contract to provide cover for a permanent employee’s sabbatical, sickness or maternity leave, where the contract will terminate on the permanent employee returning to work;



A contract linked to a specific funding stream, which is used to pay for the employee’s salary, where the contract will terminate on the expiry of the funding stream;



A contract that ends on the completion of a particular project.

Understandably, fixed-term contracts are often used by employers to provide certainty and flexibility. However, it is a common misunderstanding that fixed-term employees have less employment rights than permanent employees. Here are some points to be aware of: 1. A fixed-term employee has the right not to be treated less favourably than a permanent employee doing the same or broadly similar work unless such treatment can be objectively justified. Less favourable treatment can occur where a fixed-term employee is given “different contractual terms” to a permanent employee or where a particular benefit is provided to a permanent employee but not to a fixed-term employee. Common examples are the exclusion, by reason of the employee’s fixed-term status, from a pension, a bonus, health insurance or gym or crèche membership. Where a particular benefit is offered over a specified period of time (usually annually), such as a season ticket loan, employers should consider whether it is possible to offer the benefit to its fixed-term employees

on a pro-rata basis in proportion to the duration of their contract. In addition, less favourable treatment can take the form of subjecting a fixedterm employee, because of their fixed-term status, to disadvantages which are not applied to permanent employees, such as not being given the opportunity for promotion; or not being given an appraisal where permanent employees have them as a matter of routine. However, an employer may treat a fixed-term employee less favourably than a permanent employee in relation to any of the above matters if the employer can show that there is a good business reason for doing so, giving due regard to the needs and rights of the individual employee and the need to balance those rights against business objectives. This is known as “objective justification”. For example, this might be established where the cost to the employer of offering a fixed-term employee a particular benefit offered to permanent employees, such as a company car, is disproportionately high when compared to the benefit the fixed-term employee would receive and the business need for the fixed-term employee to travel can be met in some other way. Alternatively, justification might be established by showing that the fixed-term employee is compensated for any difference in terms by providing the fixed-term employee with an alternative benefit such as a bonus so that the value of the fixed-term employee’s total package of terms is at least equal to that of the permanent employee. 2. It is likely to be unlawful to select fixed-term employees for redundancy simply on the basis of their fixed term status unless their selection can be objectively justified. Justification for selecting fixed-term employees for redundancy could, by way of example, be established where the fixed-term employees have been employed for six months to complete a particular task and that task has been completed. Even if it has the effect of selecting fixed-term employees first, it would also be lawful to use “length of service” as one of a number of criteria to select employees in a pool for redundancy where the pool comprises both fixed-term and permanent employees so long as this criterion is applied equally to the fixed-term and permanent staff. Fixed-term employees should not be excluded from enhanced contractual redundancy payment schemes offered to permanent employees, without a legitimate reason.

3. Fixed-term employees have the right to be informed of all permanent vacancies in the establishment at which they work. This applies even if the permanent vacancies are not necessarily suitable. Notification can be done via the staff intranet or on its notice board. 4. Non-renewal of a fixed-term contract constitutes dismissal. Fixed-term contracts will normally end automatically when they reach the agreed end date. The employer does not have to give any notice unless this is required by the contract. The requirement of notice could be an express term of the contract or might be implied by workplace custom so, if the employer wishes to ensure that the contract will end automatically, it may be advisable for it to expressly state that the contract will terminate without the need for further notice on a particular date or on the completion of a task so that the employer is protected in the event that they forget to give notice. Alternatively, the contract could provide that it will continue after the expiry of the fixed-term subject to being terminated by giving a particular period of notice. Any employee whose fixed-term contract expires without renewal on the same terms as before will have the same rights to unfair dismissal protection as a permanent employee with the same length of service who is dismissed. This means that a fixed-term employee is potentially able to bring a claim for unfair dismissal if dismissed on the expiry and non-renewal of their contract if the employee (provided that they commenced employment on or after 6th April 2012) has a minimum of two years’ length of service. If the employee has sufficient service to qualify for unfair dismissal rights upon the expiry and non-renewal of the contract, the employer should establish which of the potentially fair reasons set out in Section 98 of the Employment Right Act 1998, such as capability or redundancy, that it seeks to rely on in good time before the expiry of the contract and will need to follow a fair procedure as if terminating a permanent contract. Often, the non-renewal of a fixed-term contract will be potentially fair by reason of redundancy but, in other cases, there may be a different valid reason, depending on the employer’s reason for using a fixed-term contract in the first place, or the performance or conduct of the employee concerned. If redundancy is to be relied on, the employer may have to look for suitable

alternative employment for the employee and will have to make a redundancy payment if the employee has two years’ service or more. If a fixed-term contract is used to cover the absence of a permanent employee and the permanent employee returns to the same position, the expiry of the fixed-term contract will not be regarded as redundancy because the requirement for an employee to carry out the particular work that the fixed-term employee was doing still exists. However, the employer would usually be able to rely on “some other substantial reason” as a potentially fair reason in those circumstances. 5. Employees who have been continuously employed for four years or more on a series of successive fixed-term contracts are automatically deemed to be permanent employees unless the use of a fixed-term contract can be objectively justified. Since the use of successive fixed-term contracts (even if there are short breaks between the contracts) could lead to the fixed-term employee becoming a permanent employee, the employer should consider on renewal whether there are objective grounds, relating in particular to the activity being undertaken by the employee in question, for a further fixed-term contract and if so, the employer should keep a written record of these. It should also be noted that, if an employee continues working beyond the end of a contract without it being formally renewed, there is likely to be an implied agreement by the employer that the employee is now employed on an indefinite term as a permanent employee. Top Tips 1. Audit contract terms and benefits offered to fixed-term employees to ensure they are offered the same terms, pro-rated or compensatory benefits, or justify any differences. Keep a record of the steps taken to compare benefits in case this is subsequently challenged by the fixed-term employee. 2. If you do not intend your fixed-term employees to obtain ordinary unfair dismissal rights, do not make the fixed term more than one year 50 weeks so they do not gain the requisite period of service for unfair dismissal. 3. Ensure any permanent job vacancies are displayed on the staff intranet or notice board and a vacancy list is included with the letter of non-renewal, where appropriate.

4. Ensure that the expiry date of any fixed-term contract is put in the diary so that decisions can be made in good time as to whether the contract is to be renewed indefinitely, for a further fixed term or terminated. Susan Bernstein is a partner in OGR Stock Denton LLP Solicitors and can be contacted on 020 8349 5480 or by e-mail at [email protected] if you require any further information regarding this article.