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.
In a simple world, fixed term contracts would end automatically and amicably, on the expiry of the fixed term. However, the law governing fixed term contracts is complex. This note therefore sets out the key considerations and three common perils for employers to look out for when terminating fixed term contracts.
Peril 1: Failure to carefully consider notice provisions
Normally, a permanent employment contract will contain specific notice provisions. But if it does not, the law will imply a provision allowing the contract to be terminated on ‘reasonable notice’.
This is not so in a fixed term contract. So, in the absence of specific notice provisions drafted into a fixed term contract, any attempt to end it early 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 nine months’ loss of earnings to the dismissed employee (not to mention the cost of defending such litigation).
So, employers should take professional advice and ensure notice provisions are carefully drafted into fixed term contracts, to avoid this risk.
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 commencement and expiry dates and checking notice provisions in good time. It might also be prudent to include a provision which sets out what notice period will apply after the fixed term expiry date has passed (just in case the employer unwittingly misses the expiry date).
Peril 2: Failure to correctly identify one of the potentially fair reasons for dismissal
If an employer decides to end the employment relationship on 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 fixed term employees have the right not to be treated less favourably than comparable permanent employees in respect of benefits and workplace treatment (unless any difference can be objectively justified). 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 potentially 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 when taking into account all the circumstances of the dismissal. Further, the recent case of Royal Surrey County NHS Foundation Trust v Drzymala UKEAT/0063/17) made it clear that compliance with the Regulations in itself will not be a defence to an unfair dismissal claim.
Peril 3: Underestimating the risk of claims
Often, employers assume that they are safe to dismiss an employee on the expiry of a fixed term if the employee has not acquired the two year requisite length of service for bringing an ordinary unfair dismissal claim. However, when assessing risk, employers should be mindful that given fixed-term employees have the same employment protections as permanent employees, an employee may still be eligible to bring an automatic unfair dismissal claim of a type that is not contingent on that qualifying period of service (including for whistleblowing or discriminatory reasons).
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.