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Understanding fixed term employment contracts – what business owners need to know

February 8, 2017

Fixed term employment contracts are generally seen by employers as those which “plug the gap” when their normal, permanent employees are absent for a period of time.

Fixed term contracts are useful tools for businesses who need to employ staff to cover short term peaks in business demands. But before employing staff on a fixed term contract, employers need to be aware of the rights fixed term employees have to ensure they are not at risk of a tribunal claim.

So to help make sure you don’t get caught out, we asked employment law expert, Peter Done to explain the key points of fixed term contracts for small businesses;

What’s different with a fixed term employment contract?

As the name suggests, these contracts employs an individual for an agreed length of time and automatically end when they reach an objective condition. These conditions are usually: where a specified period or date is reached; upon completion of a specific task or where a specific event occurs.

Typical uses of fixed term employment contracts are to cover maternity leave, to employ highly-skilled individuals for a particular project, such as introducing new computer software, or to cover a role which is subject to external funding because, when this funding is removed, their employment will end.

RELATED: Guide to Employment Contracts for small businesses

Renewing a fixed term contract

Where the need to employ the individual continues, employers can renew the fixed term contract for an additional term. There are rules in place to ensure a fixed term employee is not on successive fixed term contracts where they should have the protection of a permanent contract.

If an employee is continuously employed on successive fixed term contracts for four years or more then they will automatically receive permanent status after four years’ service.

There are exceptions to this rule if the employer has an objective reason at the renewal for not offering a permanent contract or if there is a workforce or collective agreement in place which has changed the four year time limit.

RELATED: Becoming an employer – Your responsibilities when you hire staff

What happens when the fixed term contract expires?

Although the end of the contract is predetermined and agreed, the expiry of a fixed term contract is still classed as a dismissal in law.

Generally, employers do not have to give notice of the end date of the contract because this has been agreed in advance, although the contract needs to be checked to see if there is a minimum notice clause. It may be best practice to provide written notice of the date of the contract ending so both parties are aware of the end position.

Fixed term employees with two years’ service have the right to not be unfairly dismissed so employers have to follow a fair dismissal procedure. In most cases, the reason for the expiry of the contract is redundancy as the work has ceased or diminished.

A fair redundancy procedure has to be followed which includes consulting with the employee about the end of their contract, considering alternatives to redundancy and making a fair and objective selection for redundancy.

Fixed term employees with 2 or more years’ service will be entitled to a statutory redundancy payment.

‘Some other substantial reason’ is another main reason for ending the contract where the work still exists but the need for the person has gone, for example, where the individual is covering maternity leave but the employee on maternity returns to work.

A fair dismissal procedure will still need to be followed in these circumstances to avoid a claim for unfair dismissal.

Can a fixed term contract be ended early?

Where the employee is taken on but is just not working out, maybe for reason of their conduct or capability, then employers can look to end their contract early in order to take on another individual.

It is advisable to look through the contract to see whether there is a clause prohibiting early termination. If so, the employee will remain entitled to their remaining wages even if the contract is ended early.

If there is no clause prohibiting early termination, the contract can be ended early but, again, a fair dismissal needs to be followed. Ending the contract early will require correct notice to be given, either statutory notice or contractual notice if provided for in the fixed term contract.

RELATED: Statutory & Contractual Notice Periods: Advice for small businesses

What rights do fixed term employees have?

As discussed above, fixed term employees with two years’ service have the right to not be unfairly dismissed. A failure to follow a fair dismissal procedure could result in a tribunal claim for compensation.

Fixed term employees are specifically protected by the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002. These Regulations prevent fixed term employees from being treated less favourably than comparable permanent employees.

This means that they cannot be given lesser terms and conditions of employment than permanent staff simply because they are fixed term. It covers all terms such as holiday entitlement, bonus schemes, training opportunities, selection for redundancy and access to permanent positions.

Different treatment is lawful only where the employer can justify the less favourable treatment with a genuine business reasons but this may be difficult to prove.

Once the fixed term employee reaches four continuous years’ service through successive fixed term contracts, they can request a written statement confirming they are a permanent employee.

Within 21 days of the request, the employee has the right to be provided with this statement or a statement setting out the objective reasons why they remain on a fixed-term contract. This statement can be used as evidence in any tribunal proceedings against the employer.

About the author

This guide has been written exclusively for ByteStart by Peter Done, Managing Director of Peninsula Business Services – the UK’s leading specialist Employment Law, HR and Health & Safety service. Peter has written a series of employment guides for ByteStart, including;

More help from ByteStart

ByteStart is packed with help on all aspects of starting and running your own successful business, just some of our other guides include;

Employing staff

Motivating your team

Leading a business

Going for growth

Funding your business