Five myths about fixed-term employment contracts

When used correctly, fixed-term employment contracts are an effective tool for matching staffing levels with the needs of the business. However, there are some surprising myths about fixed-term employment contracts that can lead even seasoned HR professionals into difficulties.

Make sure this doesn’t happen to you by reading our myth-busting guide to fixed-term employment contracts.

First, let’s cover the basics

A fixed-term employment contract is an employment contract that ends on a specified date or on completion of a particular task/project.

They are used for a variety of reasons, including:

• to provide cover for a permanent employee who is on maternity or shared parental leave or who is taking a sabbatical;
• to ensure adequate temporary staff to cope with seasonal increases in demand, without the reliability issues associated with using casual workers; and
• to ensure sufficient staffing to see a specific project through to completion.

Now let’s tackle the myths

1. It’s cheaper to hire fixed-term employees because there’s no need to give them the same pay and benefits as permanent employees.

Under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, employers must not treat employees on a fixed-term contract less favourably than permanent employees that do the same or a broadly similar job.

This means employers have to provide fixed-term employees with the same pay and benefits as permanent staff. Therefore, it would be unlawful for employers to exclude fixed-term employees from benefits such as pensions (now also covered by the rules on auto-enrolment), insured benefits such as private medical and income protection and other benefits such as subsidised gym membership.

The restriction on less favourable treatment of fixed-term employees goes far beyond parity of pay and benefits. Any form of less favourable treatment is potentially unlawful – for example, not offering fixed-term employees the same career development opportunities offered to permanent employees (such as regular appraisals, training and access to promotion opportunities). 

The only circumstance in which fixed-term employees can be treated less favourably than permanent employees is if it can be objectively justified. 

2. If there is a notice provision in the contract then it’s not a fixed-term employment contract.

Although a fixed-term contract will end without the need for notice on the date or event specified in the contract, it is not uncommon for employers to include a provision allowing for early termination on notice. For example, it is possible to have a 12-month fixed-term contract that can be terminated at any time after the first six months on 4 weeks’ notice. An employee working under such a contract would still enjoy the benefits of the Fixed Term Workers Regulations.

It will often be advisable for an employer to include a notice provision in a fixed-term contract. In the absence of such a clause, unless there are grounds for summary dismissal, if the employer wishes to end the contract early it will have to pay the employee out for the remainder of the fixed-term, which could be very expensive.

Purporting to end the contract early without a right to do so under the contract would amount to a breach of contract, which would entitle the employee to treat themselves as released from any post-termination restrictions.

3. The expiry of a fixed-term contract does not constitute a dismissal.

Failing to renew or extend a fixed-term contract on its expiry still constitutes a dismissal. Just like permanent employees, fixed-term employees who have more than two years’ service benefit from statutory protection against unfair dismissal. Therefore, employers who do not intend to renew a fixed-term contract should ensure that they follow a fair process and that they have a fair reason (in many cases, the non-renewal of a fixed term contract will be potentially fair by reason of redundancy). 

Note that the ACAS Code expressly states that it does not apply to the non-renewal of fixed-term contracts on their expiry, so there would be no uplift for failure to follow the ACAS Code unless the reason for terminating the fixed term was a disciplinary issue.

4. Using successive fixed-term employment contracts will preserve the flexibility of a fixed-term contract indefinitely and avoid taking on permanent employees.

An employee who has been employed on successive fixed-term contracts for at least four years will become a permanent employee unless the continued use of fixed-term employment contracts can be objectively justified. 

This conversion of a fixed-term contract into a permanent contract for an indefinite period can catch employers out. For example, if the contract does not include a notice provision and the employee stays on as a permanent employee beyond the fixed-term stated in their contract, there is a potential for a dispute as to what length of notice is required to terminate the contract. 

The change in terms will also trigger the duty under the Employment Rights Act 1996 to issue a written statement of the change, which is often overlooked.

5. If we need to reduce headcount, we should just let the fixed-term contracts expire rather than make any permanent employee redundant.  

Failing to renew a fixed-term contract constitutes a dismissal, and employers must have a fair reason and follow a fair process to have a defence to a claim for unfair dismissal from fixed-term employees with more than two years’ service. 

One of the biggest myths about fixed-term workers is that the reason for not renewing a fixed-term will always be “some other substantial reason” or “SOSR”. However, if there is a reduced need for employees to do a particular type of work, the real reason is likely to be redundancy. 

This means that employers should follow a fair redundancy process (including applying objective selection criteria to employees in the redundancy pool). Choosing not to renew fixed-term employees purely on the basis of their fixed-term status is likely to be unlawful less favourable treatment and give rise to a claim for unfair dismissal.

It also means that fixed-term employees whose contracts are not renewed may be entitled to a statutory and (if available to permanent employees) an enhanced redundancy payment.