All You Need To Know About Fixed-Term Employment Agreements

Sometimes you don’t need an employee forever, but just for a short duration. However, you don’t want a casual employee – you want someone you can rely on to turn up and work a set number of hours every day, even if it is for a limited time.

You are allowed to hire employees on this basis. They are described in the Employment Relations Act as fixed-term employees.

WHY NOT EMPLOY EVERYONE ON A FIXED TERM?

Once you know this is allowed, you might start to wonder why you don’t hire all your employees on this basis. If every employee was only hired for a limited time, you could choose not to rehire the ones that you don’t like and extend the term of those that you do like. Wouldn’t this avoid personal grievances and nasty disputes?

Of course, the issue with this approach is that employees would have little security of employment and be left unable to plan their lives beyond every fixed term. Employers might also find it counterproductive because employees might show little loyalty to employers who are not willing to commit to them, and prefer to end their employment by means of a fixed term rather than addressing underlying issues of misconduct or poor performance.

Because of concerns like these, you can only hire an employee on a fixed term if there is a good reason for why the employment relationship cannot continue beyond that expiry of that limited timeframe.

And to ensure this obligation is met, the law requires you to explain the reasons for the fixed term to the employee and include a clause to that effect in the employment agreement.

WHAT IS A GOOD REASON?

Not just any reason will qualify as a genuine basis for a fixed term. Rather, a good reason will explain why the employment can only be for a limited time and why the employee’s role (not the employee themselves) is no longer needed in your business after that period.

That means some reasons will not qualify, such as:

  • you want to assess the employee’s fitness or performance. This is not a good reason, because it does not explain why the role is not required beyond the expiry of the fixed term. If you want to assess an employee’s performance, place them on a 90-day trial period. Or if they are already your employee and have gone beyond the 90 days, you can manage their performance;
  • you do not want to commit to the employee in case you don’t need them after a term. This is not a good reason, because you cannot be certain you will not need the employee’s role in the business when the fixed term comes to an end. If you find that after a period the business cannot sustain continuing to employ that person, you may initiate a process that may result in the redundancy of their role. If they are the last employee on and you need to select between employees, you might justify their selection on the basis of “last on, first off”; or
  • you want to avoid a personal grievance or having to pay holiday entitlements. These reasons are expressly excluded by the Act and also fail to explain why the employee’s role is unnecessary after the end of the fixed term.

Reasons that will qualify include:

  • the employee covers for another employee who has gone on a period of leave;
  • you require extra resourcing for a particular project; or
  • you know that the business is going to be sold and you only need the staff member to work until the sale occurs.

HOW FIXED-TERM AGREEMENTS CAN END

Provided you have a good reason, you should be able to articulate when and how the employment relationship will end. It is key to a fair fixed-term relationship that this is made clear from the outset.

You don’t necessarily need to know the exact end date, because you can choose from three possible ways for describing how a fixed-term agreement will come to an end.

On a particular date

The most obvious way for a fixed-term agreement to end is on a date that has been specified from the outset.

For example, you may know that you have a date that a project must be completed by and that after that date you will no longer need the employee’s role.

On the occurrence of an event

Sometimes you don’t know the exact date when the fixed term will come to an end, but you do know that it will end when a specified event occurs.

For example, when an employee is hired for a fixed term to cover an employee who has gone on parental leave, you may not know the exact date the employee who has gone on leave will return to work. Yet you do know that their return to work is the event that will cause you to no longer need the fixed-term employee to cover for that person.

Another example would be when you have an agreement to sell your business, but you need a fixed-term employee to work in the business until the sale goes through. Often the sale date can be flexible, but you can specify that when the sale does occur, the fixed-term employment will come to an end.

At the end of a project

Sometimes you need some extra assistance for a particular project. It could be a one-off increased order that you have to fulfil, a project that needs someone to fill a role with specialist expertise, or a discrete job that just needs greater people power.

In these cases you will often not know the exact date that the employment will come to an end, but you can specify it will come to an end at the conclusion of the project.

The key to ending a fixed-term agreement of this nature is to be sure you have clearly articulated when you will consider the project to have come to an end. If there is uncertainty around that, you could face problems.

WHAT PROCESS MUST YOU FOLLOW?

There are two things you must advise the employee of when negotiating a fixed-term agreement. These are:

  • when or how the employment will end; and
  • the reasons for the employment ending in that way.

It is best practice to record in writing that the employee has been advised of these things. This may be a cover letter to the employee when providing them with a draft employment agreement to review.

Most often employers record that they have informed the employee appropriately by including an acknowledgement to this effect in the employment agreement. The acknowledgement could read:

“I acknowledge that I am employed on a fixed term and that the employer has told me when or how my employment will end and the reasons for my employment ending in that way.”

WHAT CLAUSE MUST BE IN THE AGREEMENT?

Not only must you tell an employee the details discussed above, you must also include a clause in the employment agreement that sets out:

  • the way in which the employment will end; and
  • the reasons for ending the employment in that way.

An example clause for an employee covering for another employee who is on parental leave might be:

“The Employee’s employment will start on the commencement date and will continue for a fixed term until the incumbent employee whose position the Employee is employed to cover returns to work (Expiry Date), unless terminated earlier in accordance with this agreement.

The reason for the fixed term is that the Employee is required to cover for a position while the incumbent employee is on a period of parental leave. The Employee’s employment will conclude on the Expiry Date, because that is the anticipated date that the incumbent employee will return to work following their period of parental leave, at which point the Employer will no longer require the Employee’s services.

Neither party will be bound by any agreement to employ the Employee for a further term commencing on or after the Expiry Date, unless the agreement is in writing and signed by both parties.”

NO CLAUSE, NO FIXED TERM

If you don’t put a clause in the employment agreement that explains the fixed term as above, you risk there not being a fixed term at all.

Under the Act, employees are entitled to ignore any assertion by their employer that there is a fixed term to their employment. They can choose to simply keep working beyond the expiry date. Or if you dismiss them, they can raise a personal grievance on the grounds that they were not dismissed fairly.

WHEN THE EXPIRY DATE PASSES BY…

What happens if the expiry date goes by and the employee continues to turn up for work?

In those situations, the employee will be regarded as no longer bound by the fixed-term agreement. That is because you have acted as though the end date of the fixed term does not matter.

To prevent this from occurring, put a reminder in your calendar to think about whether you want to end the employee’s employment on the expiry date as you initially agreed. At that point, you can either:

  • propose a new expiry date to the employee if you consider that you need them for a further period beyond the current expiry date. To do this, write to the employee suggesting your variation to the expiry date and the reasons for it, and require them to sign a copy of your letter or otherwise confirm in writing (by email is fine) that they agree to that change. You must get their confirmation before the current agreement expires and ensure that the variation is in writing and complies with the requirements for a written clause; or
  • remind the employee in writing that their employment is coming to an end and that they will no longer be needed after the expiry date in accordance with their fixed-term agreement. If they turn up for work after that date, gently remind them that their employment has ended.

CONCLUSION

To have an enforceable fixed-term employment agreement, you must:

  • have a good reason for why you need the employee only for a fixed term;
  • advise the employee of how the employment will end and why;
  • have an employment agreement that states the same thing; and
  • adhere to the terms of the fixed-term agreement and ensure that the employee doesn’t work beyond the expiry date.