Beware the expiry of a fixed term contract

What is a fixed term contract?

Regulation 1(2) of the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (“the Regulations”) defines fixed term contracts as contracts ending:

• on the expiry of a fixed term;
• on the completion of a particular task; or
• on the occurrence or non-occurrence of any other specific event.

If employment law was straightforward, fixed term contracts would automatically and amicably end on the expiry of the fixed term. However, the law governing fixed term contracts is not straightforward and, unfortunately, employers cannot expect to part ways at on the expiry date without  going through the formalities enshrined in employment law.

The Regulations also provide fixed term employees with protection against being treated less favourably than permanent employees, therefore, employers should bear this in mind throughout the employment relationship.

Failure to identify one of the potentially fair reasons for dismissal

If an employer decides to end the employment relationship on or before the expiry of the fixed term, this will constitute a dismissal pursuant to sections 95 and 136 of the Employment Rights Act 1996. Further, under the Regulations, unless any differences can be objectively justified, fixed term employees have the right not to be treated less favourably than comparable permanent employees in respect of benefits and workplace treatment. These are crucial points to remember since fixed term employees have the same rights as permanent employees in respect of unfair dismissal, statutory redundancy pay and written reasons for dismissal.

In view of the nature of fixed term contracts, many employers believe they can rely on the expiry of the fixed term as the primary reason for dismissal without properly identifying one of the statutory potential fair reasons for dismissal (namely: capability, conduct, redundancy, contravention of a statutory obligation or some other substantial reason). However, as with any other dismissal, employers must identify one of the potentially fair statutory reasons for dismissal, they must follow a fair process and they must act reasonably taking into account all the circumstances. Case law has also made it clear that compliance with the Regulations in itself is not a defence to an unfair dismissal claim.

Failure to carefully consider notice provisions

In the absence of professional advice and applicable drafting experience, it is easy to overlook early termination provisions in a fixed term contract. However, because reasonable notice terms are not implied in fixed term contracts, this omission could be a disaster for employers who have not carefully considered the risk of failing to include such provisions. In particular, early termination without the appropriate contractual provisions could lead to a very expensive wrongful dismissal claim and liability for loss of earnings between the actual termination date and the stated expiry date of the fixed term. For example, if an employer terminates a 12 month fixed term contract (with no early termination provisions) after three months, they could be liable to pay 9 months’ loss of earnings to the dismissed employee (not to mention the cost of defending such litigation).

Another common issue is the failure to give correct notice in accordance with the provisions of the fixed term contract. If an employer forgets the expiry date or does not comply with the contractual notice terms, they may be required to extend the contract or make a payment in lieu of notice on termination. This risk could easily be avoided by keeping careful records of fixed term expiry dates and checking notice provisions in good time. It might also be prudent to include a provision which deals with the notice period which will apply after the fixed term expiry date has  passed (just in case the employer unwittingly misses the expiry date).

Maternity Pay and Shared Parental Pay

If a fixed term employee’s contract is terminated before or during her maternity leave, she may still be entitled to Statutory Maternity Pay from the employer provided she meets all of the qualifying criteria. However, the employee’s entitlement to any contractual enhanced pay is not as straightforward and employers will need to take care when considering any conditions relating to enhanced terms (for example, does enhanced maternity pay cease to be payable if an employee has been served with notice and/or are there any clawback provisions if an employee’s employment terminates during maternity leave).

If an employee’s fixed term contract ends during a period of Shared Parental Leave, they will no longer meet the Shared Parental Leave eligibility requirements. However. they may still be entitled to Shared Parental Pay provided they meet the applicable criteria.

Underestimating the risk of claims

Often employers assume they are safe to dismiss an employee on the expiry of the fixed term if the employee has not  acquired the two year requisite length of service to bring an ordinary unfair dismissal claim. However, when assessing risk, employers should be mindful that an employee may be eligible to bring an automatic unfair dismissal claim which has no qualifying period of service. This is especially relevant to fixed term contracts since Regulation 6(1) of the Regulations contains provisions which make it automatically unfair to dismiss a fixed term employee in certain circumstances. Employers should also consider any potential claims for discrimination, less favourable treatment (on the grounds of fixed term status) or whistleblowing  as part of any risk assessment in connection with dismissal.

For the above reasons, to minimise risk when terminating fixed term contracts, it is always good practice for employers to keep careful records, to follow a fair process and to clearly identify the statutory reason for dismissal. Finally, many fixed term contract disputes can be avoided by careful and considered drafting of the contractual terms.