What is a Fixed-Term Contract?

There are many benefits to using a short-term contract - a popular one used by businesses are fixed-term contracts.

These employment contracts are beneficial for both the employer and their staff. They offer certainty, flexibility, and a better work-life balance.

Despite their good points, they come with legal rules. If you neglect any of these, you could end up raising flawed contracts, paying compensation, and facing unfair dismissal claims.

You may also be wondering what happens if an employee refuses to sign a new contract? Find out more here.

In this guide, we'll look at what a fixed-term contract is, when they're used, and how to support fixed-term employees when their contract ends.

What is a fixed-term contract?

A fixed-term contract is a type of employment contract used to hire someone for a specific period.

This type of contract is often used for a seasonal or casual employee. They're useful when businesses need full rotas, extra staff, or cover for absences. For example, covering an employee currently on maternity leave or other family-related leave.

According to employment law, a fixed-term contract requires an end-date. This is usually after a particular task or project has been completed.

What is the law on fixed-term contracts?

The main employment law you need to comply with is the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2002. The regulations cover legal rights for fixed-term employees, like:

• Less favourable treatment: They cannot face less favourable treatment (discrimination) compared to other employees. For example, if a permanent employee is given a company car, a fixed-term employee in the same role should have one, too.
• Permanent contract: If they've been continuously employed for four or more years, they automatically class as a permanent employee. Their original contract should then be changed to an indefinite or permanent contract.
• Statutory redundancy payment: If they've worked for two or more years, they're legally entitled to statutory redundancy pay. (This usually applies if a fixed-term contract is not renewed due to redundancies).
• Unfair dismissal: If they've worked for two or more years, they're legally allowed to raise an unfair dismissal claim.

Statutory rights for fixed-term staff are usually judged against 'comparable permanent employees'. A comparable permanent employee is someone who works at the same establishment and position as a fixed-term employee.

If fixed-term staff face less favourable treatment, they could raise this to an employment tribunal (ET). Successful claims could result in facing compensation, reputational damage, and lost revenue. The only time this treatment is allowed is when it’s objectively justified.

Can you terminate a fixed-term contract early?

Under employment law, you cannot terminate a fixed-term contract early - without consent. (This is unless it’s a contractual right).

Early termination is only allowed in accordance with the employment arrangement if the correct notice is given. This can only apply at the end of the notice period if the employer has given notice to end the contract term early.

Employers can also end contracts without consent if their reasons are 'objectively justified'. Objective justification (OJ) is when a discriminatory act is seen as legal because it has a 'proportionate means of achieving a legitimate aim'.

What if a fixed-term employment contract is less than three months?

If a fixed-term employment contract is three months or less, employees are legally entitled to the legal minimum notice period of one week.

However, the minimum notice period is only applicable if their fixed-term contract expires before the end-date and they've already done one month's continuous service. These fixed-term employees are also entitled to:

• Statutory sick pay (SSP).
• Guarantee payments (if they have worked at least one month and were laid off).
• Pay during medical suspension.

What are the benefits of a fixed-term contract?

There are numerous benefits when using a fixed-term employment contract. And these apply to both the employer and employees. Let's take a look at a few examples:

No need to worry about contract termination

The biggest benefits of fixed-term employment contracts offer is straight-forward contract termination. End-dates are already outlined - meaning, employers often don't have to deal with notice periods and dismissal processes.

Contracts expire automatically

Because fixed-term contracts already have end-dates, they will legally automatically expire. In these situations, some employers decide to extend or renew the employment contract - especially if they want to retain a specialist employee for future projects.

Provide fuller work schedules

Fixed-term contracts allow employers to have fuller work schedules. This is especially useful for businesses that require 24/7 service or run during busy, seasonal periods.

Hire unique and talented employees

Using a fixed-term employment contract allows you to hire unique and talented employees. This allows you to collate the very best employees who'll be part of growing your business success.

What are the downsides of a fixed-term contract?

Whilst the benefits are attractive, there are downsides to fixed-term contracts you can't afford to ignore. Let's take a look at a few examples:

Hard to find fixed-term employees

Despite it being a popular form of work, it can be hard to actually find fixed-term employees. This type of employment contract lacks stability and longevity. And some may not like the idea of having to keep finding jobs after their contract's end date.

Limited time to complete work

Fixed-term employment is only set for a specific time. For example, employees could be given one week or a three-month contract as an implied agreement. This can lead to unsatisfactory, rushed production - wasting your valuable business resources.

May require early termination

If a fixed-term employee breaches conduct rules, you may want to end their contract earlier. For example, you may want to dismiss them for gross misconduct (after following disciplinary and grievance procedures). Here, you might need to pay them for any hours they worked.

Less legal rights than permanent employees

Fixed-term employees should have the same rights as permanent employees in the same role. However, they may face discrimination through objective justification; like if a collective agreement stops certain rights. These issues can be tricky to manage and lead to legal breaches.

How to create a fixed-term employment contract

Whatever industry you work in, a fixed-term employment contract comes with positive points for your business.

However, it's important for employers to ensure the right rules and requirements are followed beforehand. If not, fixed-term employees may feel like they were unfairly dismissed or discriminated against - resulting in employment tribunal claims.

Let's take a look at how to create a fixed-term employment contract for your employees:

Choose a fixed-term contract template

The first step employers should take is choosing a fixed-term contract template. Under the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2002, there are two fixed-term contracts to choose from:

• Pure fixed-term contract: This contract expires automatically and doesn't generally require a minimum notice period. They're also quite rigid because you can't terminate the contract earlier than you specify.
• Fixed-term contract with notice period: This contract includes a minimum notice period that usually applies if early termination is followed. If proper notice isn't followed, the contract will expire automatically at the given end-date.

Define the term 'fixed-term employee'

It's really important to clearly define what a 'fixed-term employee' covers. For example, this might be someone doing seasonal work during a peak period; or someone on a fixed work experience placement.

If their employment status categories them as a worker, they'll have different statutory rights compared to an employee. These should be outlined in their written statement of engagement.

Comply with statutory rights

Every fixed-term employee is legally protected from less favourable treatment compared to a comparable permanent employee. Meaning, they should be given the same statutory rights as their equivalent in a permanent position (unless the reasons are objectively justified).

For example, if comparable permanent employees receive a pay rise after two years’ service, fixed-term employees should receive the same right. Or if permanent staff are entitled to maternity leave, so should fixed-term employees.

Decide on a predetermined end-date

Your fixed-term contract should clearly define a particular date that it ends. Without one, their contract may last for longer than you intended.

For example, maybe you only need them for nine months to cover a current employee's maternity leave. Whatever the case, make sure your fixed-term contracts include a predetermined end-date.

Renegotiate fixed-term contracts fairly

Whilst it's not a legal obligation, you may wish to renegotiate an employee's fixed-term contract. Maybe they're a specialist employee or you want to retain their service.

In these cases, make sure you renegotiate their contract fairly. This means they might need a new written statement, additional benefits, and even a salary increase.

End fixed-term employment contracts properly

If you decide not to renew an employee's fixed-term contract, you need to do this properly and legally. This will count as a dismissal, so you can only end it based on five fair reasons:

• Capability: For example, if an employee is unable to perform a basic specific task asked of them.
• Conduct: For example, if an employee committed gross misconduct (according to disciplinary and grievance procedures).
• Redundancy: For example, if an employer needs to lay off all their staff due to business closure.
• Breach of a statutory restriction: For example, if an employer needs to end a contract because the employee's work VISA has expired.
• Some other substantial reason (SOSR): For example, if an employee has leaked confidential information which causes a company-wide data breach.

Is a fixed-term contract different to a permanent contract?

Yes, a fixed-term contract is different to a permanent contract. Permanent employees are hired with set conditions. For example, working 9-5pm, Monday to Friday. They'll usually have an indefinite contract - providing them with long-term job security.

However, fixed-term employment contracts usually have an end-date. This means they'll expire automatically if they're not renewed or extended.

Can you offer successive fixed-term contracts?

Yes, you can offer successive fixed-term contracts. Successive contracts are used to rehire fixed-term employees again and again.

However, if a fixed-term employee is given successive contracts for four years or more, they will automatically class as a permanent employee. You'll need to give them a new contract, define the contractual relationship, and provide any additional statutory rights.

Get expert advice on fixed-term contracts with Peninsula

When it comes to fixed-term employment, the biggest obligation you have is ensuring fair and legal treatment to everyone.

Failing this means you could end up with flawed employment contracts, paying compensation, and causing unfair dismissal.

Peninsula offers expert advice on fixed-term contracts. Our teams offer 24/7 HR advice which is available 365 days a year. We take care of everything when you work with our HR experts.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.