‘Fixed-term contracts are helpful for employing an employee for a defined, fixed period,’ says Jonathan Lewis, a solicitor in the employment team with QualitySolicitors Parkinson Wright. ‘But a fixed-term contract does not mean the employee has fewer rights, both in terms of the benefits they are given and their rights when the fixed-term contract ends. Now that the Employment Rights Act has been passed, employees will have unfair dismissal rights after six months’ employment and this will include employees on fixed-term contracts.’
Jonathan looks at the benefits and risks of using fixed-term contracts and gives tips on how to use them lawfully and effectively.
What is a fixed-term contract?
As the name suggests, a fixed-term contract is one that ends after a fixed period of time. For example, seasonal workers may be employed from one agreed date to another set end date.
Employment can also end on the completion of a project, for example rolling out and training employees on a major IT upgrade, or on the occurrence of a specific event, such as when an employee returns from long-term sickness absence or maternity leave.
Where the job is dependent on a specific funding stream, the fixed-term contract can end when the funding stream stops.
What are the benefits of fixed-term contracts?
Fixed-term contracts, used properly, allow employers to avoid having to take on the commitment of a permanent employee. Where there is an objectively justifiable reason to take on an employee for a defined period or a specific project, the employer should have a fair reason to end the fixed-term contract. Usually this is the statutory potentially fair reason of ‘some other substantial reason’, or redundancy.
Common pitfalls with fixed-term contracts
Treating employees differently
Do not assume that staff on fixed-term contracts can be treated differently to permanent staff, as an employee on a fixed-term contract can compare themselves to a permanent member of staff doing similar work. Unless the employer can objectively justify treating them differently, it is unlawful to treat the fixed-term contract employee less favourably than their permanent colleague. This applies to contractual benefits like annual leave entitlement and pension membership, as well as benefits like access to training and promotion opportunities. Less favourable treatment includes excluding them from regular appraisals and invitations to team events.
Contract length or renewals
Avoid using very long or successive fixed-term contracts. After four years of employment on fixed-term contracts the employee’s contract will automatically change to a permanent contract, unless the continuing use of a fixed-term contract can be objectively justified.
Redundancy
Take care not to select employees on fixed-term contracts for redundancy over permanent staff just because they are on a fixed-term contract. It may be possible to objectively justify this, but please speak to us first to assess if it can be justified on a case-by-case basis.
Unfair dismissal
Remember to treat the end of a fixed-term contract as a dismissal. Whether the contract was ended on notice or expired, this is still a dismissal under the law. A fair process needs to be followed and we can advise you on the most suitable fair reason. Once the new Employment Rights Act is in force, employees will have protection from unfair dismissal after six months’ employment, instead of two years. This change is expected from January 2027.
Job opportunities
Remember your obligation to inform employees on fixed-term contracts of vacancies for permanent positions in the organisation. Opportunities can be shared with everyone, for example on an intranet. If not, the employee can bring an employment tribunal claim.
Tips for effective use of fixed-term contracts
As with any contract of employment, it is important to ensure that the terms are specific to the needs of your business. A few things to look out for when using fixed-term contracts include:
- ensure that the contract includes provision to terminate the contract early on notice, particularly with longer contracts. If not, and the contract is terminated before the end date, the employee would have a breach of contract claim for the balance of the contract term;
- if the employee on a fixed-term contract is not given the same package of benefits or access to other benefits, consider if there is an objectively justifiable reason and document this;
- consider compensating for the lack of a contractual benefit by giving a bonus or a more generous benefit. This may allow the employer to compare the overall remuneration package to show that, on balance, the employee is no worse off than the comparator permanent colleagues, and this would usually avoid the employee having a claim for less favourable treatment; and
- diarise the dates for reviewing the contract or starting the dismissal procedure in good time before the expiry of the contract.
How we can help
We can ensure that your fixed-term contracts are drafted in the most appropriate way for your business needs, including notice and termination provisions. We can advise on any different treatment and help you establish an objective justification for this. To minimise the risk of unfair dismissal claims, we can advise and prepare the documentation for a fair dismissal procedure at the end of the fixed-term.
For further information, please contact Jonathan Lewis or a member of the employment team on 01905 721600 or email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.