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Risks associated with fixed-term employment contracts

Ben Tallboys and Anthony Massaro

A recent decision of the Fair Work Commission highlights the risks in misusing fixed-term employment contracts.

The major benefits of a fixed-term employment contract are that that the employer can conclude the employment relationship on the expiry date without having to give a reason for termination (such as misconduct or poor performance). The decision can simply be made to not renew the term of the contract. This can be very useful when dealing with senior employees such as Chief Executive Officers, Principals and coaching staff.

Also, an employee on a genuine fixed-term contract may be prevented from making an unfair dismissal claim in some circumstances.

However, employers fixed-term contracts have their own risks:

For example, a fixed-term contract generally cannot be terminated before the nominated expiry date. An attempt by the employer to bring the contract to an early conclusion may require the employee to be paid out for the remaining term of the contract, which may cost the employer hundreds of thousands of dollars for a senior employee on a long-term contract.

Also, an employee engaged over a number of years under a series of fixed-term contracts may be able to argue that they have a continuing expectation of employment and are actually employed on an ongoing basis.

The consequences of mismanaging a fixed-term employment relationship were illustrated in last year’s decision by the Fair Work Commission in Downes v The Uniting Church in Australia Property Trust (Q.) T/A Wesley Mission Brisbane. In that case, the employee was employed on a fixed-term contract, with no right for early termination by the employer, but was nonetheless dismissed before the end of the term. The Fair Work Commission decided that the employment relationship was not concluded due to the passage of time and, hence, that the employee was entitled to proceed with a claim for unfair dismissal.

Employers should carefully consider the potential benefits, and often greater risks, when deciding whether to engage a new employee on a fixed-term or ongoing basis.

Where a fixed-term arrangement is appropriate, employers should consider:

  • limiting the fixed term of the arrangement where possible;
  • ensuring that appropriate safeguards are included in the formal contract that allow the employer to dismiss the employee for misconduct or poor performance in breach of the contract; and
  • immediately concluding the employment relationship at the end of the fixed term unless a written agreement has been made to renew the employment.

Please do not hesitate to contact Russell Kennedy’s Workplace Relations, Employment and Safety Team if you would like assistance in drafting, negotiating or concluding a fixed-term employment contract.

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