The Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (“the Regulations”) came into force on 1 October 2002.  The Regulations were intended to provide protection to employees engaged by an employer on a fixed-term basis, to ensure that they are afforded broadly the same rights and entitlements as their permanent colleagues, unless a difference in treatment can be objectively justified.

A fixed term employee is described in the Regulations as a person with a contract of employment which is due to end when a specified date is reached, a specified event does or does not happen or a specific task has been completed. 

Why use a fixed-term contract?

Employees may be engaged on a fixed-term basis for a number of different reasons.  Commonly where employees go on maternity leave, a fixed-term employee will replace them during the period they are absent from the office, usually for between six and 12 months.  Employees who are absent from the office on long-term sick will also commonly be temporarily replaced by fixed-term employees, to help the business to cope with their absence, whilst still leaving the permanent position open for the employee when they are fit to return.  Another common use for fixed-term contracts is where there is a specific project during which a company needs to engage employees with particular skills (for example the implementation of a specific IT project), or where additional employees are needed to provide extra support during a busy period (for example extra warehouse assistants being brought in to cover the busy Christmas period).  Fixed-term contracts can also be useful because, psychologically, they prepare the employee for the likelihood that their employment will terminate at the end of a specified period.

What rights do fixed-term employees have?

Fixed-term employees have the right not to be treated any less favourably than comparable permanent employees because they are fixed term, unless the different treatment can be justified.  A comparable permanent employee will be someone who works for the same employer in the same establishment, doing the same or broadly similar work, taking into account their skills and qualifications.  So, in the example of a fixed-term employee who is covering a period of maternity leave, they will be entitled not to be treated any less favourably than permanent employees who are engaged to do that work.  If there are no comparators in the same establishment, the employee can use a comparator in another of the employer’s establishments.

Less favourable treatment could occur when a fixed-term employee does not receive the same benefits as a comparable permanent employee (whether these are contractual or non-contractual) or is offered a benefit on less favourable terms.  For example, a fixed-term employee may be offered fewer days holiday, or may not be entitled to participate in the employer’s bonus scheme.  Less favourable treatment could also occur if, for example, fixed-term employees are selected for redundancy or dismissed solely on the basis that they are fixed term rather than permanent employees.  Note though that the dismissal of a fixed-term employee by reason of their contract having expired cannot, of itself, represent a detriment for the purposes of a less favourable treatment claim (although it can give rise to a claim for unfair dismissal).

A difference in treatment between a fixed-term employee and a comparable permanent employee will not be unlawful if the employer can show objective justification, i.e. that there is a good reason for treating the fixed-term employee less favourably.  This means that it must be necessary to achieve a legitimate objective, such as a genuine business objective, and an appropriate way to achieve that objective.  For example, in some instances it will not be possible to pro-rate all the benefits which a permanent employee is awarded.  An example of this could be a company car, or an award of stock options where the cost to the employer of providing the benefit may be disproportionate compared to the benefit the employee would receive.  A comparison between the two packages can either be assessed on a term-by-term basis, or on a package basis. Where a fixed term employee is not offered a particular benefit, an employer would usually be expected to compensate the fixed term employee in some other way for the loss of that benefit.

Watch out for the potential pitfalls!

Employers frequently forget that where a fixed-term employee’s contract is terminated, this amounts to a statutory dismissal, even if this is at the expiry of the fixed term.  Therefore, where a fixed-term employee has more than 12 months’ employment, they will have the right to claim unfair dismissal in the usual way if there is no substantively fair reason for the dismissal and if a fair process is not followed.  The fact that the fixed term has expired is unlikely to amount to a fair reason for dismissal.  Fixed-term employees should also be notified about any permanent positions which become available which they are suitably qualified to do.  Note too that under the statutory dismissal and grievance procedures, where a fixed-term employee is dismissed (where they have more than 12 months’ service), it will be an automatically unfair dismissal if the statutory dismissal procedure is not followed in terminating the contract.  It is possible that the expiry of a fixed-term contract could assist an employer in arguing that there was “some other substantial reason” for dismissal, but this is unlikely always to be successful. Like permanent employees, fixed-term employees will also be entitled to statutory redundancy payments if their position is made redundant and they have more than two years’ service.

Becoming a permanent employee

Where a fixed-term employee is retained on successive fixed-term contracts, as above they will accrue statutory protection against unfair dismissal after one year.  However, the Regulations provide additional protection which is that if a fixed-term employee has been engaged on a succession of fixed-term contracts then after four years they will need to be treated as a permanent employee (unless there is a workforce or collective agreement specifying a different time).  This has been in the news recently since on 10 July 2006 any employees who were still engaged on successive fixed term contracts that started before or on 10 July 2002 (which is when time starts running from for the purposes of the Regulations) will have become permanent employees.  Any fixed-term employees who commenced work after 10 July 2002 will become permanent employees four years after they started work.

Once a fixed-term employee is a permanent employee, they will be entitled to be treated in the same way as any other permanent employee and, therefore, any benefits which had previously not been extended to them should be offered.  This would also include other relevant contractual terms, including notice periods.

It is still technically possible for an employer to renew a fixed-term contract after four years  by replacing it with another fixed-term contract (which would mean that the employee would not become a permanent employee), but only if that decision can be objectively justified.  This is likely to be a fairly limited category since it will be unusual circumstances where after that period of time it would be appropriate and necessary to engage the employee on a further fixed-term contract rather than allowing them to become a permanent employee.

The end of the fixed term?

Given the degree of protection which is offered to fixed-term employees, in many instances an employer may be better to “bite the bullet” and treat the employee as a permanent employee from the outset, or at least after 12 months when the employee will have protection against unfair dismissal in any event.  From a legal perspective, there are very few advantages to keeping employees as fixed-term employees since they enjoy most of the protection afforded to their permanent colleagues in any event.  There may however be commercial reasons to try to “keep headcount down” or to continue a practice of engaging employees on shorter term contracts to cover busy periods.  This is of course still lawful, but employers who continue to engage fixed-term employees must be aware of the possibility of claims for unfair dismissal or less favourable treatment, and that in most cases after four years the employee will become permanent in any event.  Ignoring these issues could be an expensive mistake, particularly if a large number of fixed-term employees accrue these rights at the same time.

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