The Dilemmas of Fixed Term Employment Agreements
Most employment agreements are 'on going' in nature, in that there is a commencement date, however the termination date is unknown at the beginning of the employment relationship.
Employers at times offer some employees 'fixed term' employment agreements that operate for a fixed period of time (i.e 12 months). When using such agreements, there are some important issues that employers should take into consideration.
Termination and Unfair Dismissal
Where an employee has been employed for a "specified period of time", and the employment is terminated at the end of that period, then the employee will not be entitled to make an application for unfair dismissal.
However, if a fixed term agreement is terminated prior to its expiration date (for any reason other than for misconduct), then two issues arise:
1. Is the employer obligated to 'pay out' the employee until the expiration date?
2. Can the employee make an application for unfair dismissal?
Firstly, the employer should always ensure that the fixed term agreement contains clear words that allow the employer to prematurely terminate the agreement for any reason. This will ensure that the employer's obligation to pay the employee remuneration ends at the termination date (other than notice of termination and leave entitlements).
Secondly, an employee cannot make an application for unfair dismissal unless he or she has completed the statutory qualifying period, which is as follows:
If the employer employs:
(a) less than 15 employees – the qualifying period is 12 months; or
(b) 15 or more employees – the qualifying period is 6 months.
Given this, an employer who intends to prematurely terminate a fixed term agreement will need to consider the relevant statutory qualifying period.
For example, if an employer who employs 20 employees has entered into a fixed term agreement for a period of 12 month, and after 9 months the employer prematurely terminates the agreement for poor performance, then the employee may be able to make an application for unfair dismissal because they have served their 6 month qualifying period. In this scenario, the maximum compensation available to the employee would be three (3) months' wages.
If the same employer prematurely terminates the agreement for genuine redundancy reasons (i.e the position is no longer required), then unfair dismissal remedies will generally be unavailable to the employee (for specific information relating to redundancy, CLICK HERE to read our earlier blog on Redundancy and Unfair Dismissal).
Creation of a New Agreement
At the conclusion of the fixed term, if an employee continues to work for the employer without a formal extension of the fixed term, even by one day, then the law will treat such as the creation of a new ongoing employment agreement that has the same terms as the previous agreement, without the fixed term.
Given this, employers should always do one of three things when a fixed term employee is nearing the end of their contract period:
1. Notify the employee that upon the expiration of the fixed term, their services will no longer be required and the employment will come to an end; or
2. Notify the employee that the employer wishes to extend to the fixed term agreement for a further period; or
3. Enter into a new 'on going' employment agreement with the employee.
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