Fixing your fixed term agreements
Recently we have been fielding a number of enquiries about Fixed Term Agreements, the early termination of these and whether or not they are suitable for a variety of our clients needs. The answer isn’t as black and white as you may originally think.
So, what is a Fixed Term agreement?
Sometimes businesses employ workers on a temporary basis, in that there is a defined point at which their employment will end (unless it is extended). These are commonly referred to as Fixed Term agreements and are a handy tool for employers who don’t require a permanent employee, but require more commitment than a casual employee.
The Employment Relations Act 2000 (the Act) provides that an employer and an employee may agree that the employment will end after a specified date or period; or on the occurrence of a specified event; or at the conclusion of a specified project. The Act further provides that before the employer and employee agree that employment will end in such a manner, the employer must:
Have genuine reasons based on reasonable grounds for limiting the employment to a fixed period (as opposed to permanent employment) and specifying that the employment of the employee is to end in that way; and
Advise the employee of when or how their employment will end, and the reasons for their employment ending in that way (these must be clearly set out in the employment agreement).
The Act also contains that these specific requirements must be complied with before a fixed term provision is valid. 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. Further that, as always, the new employee must agree to and sign the employment agreement before commencing employment.
And what are “genuine reasons based on reasonable grounds”?
Not just any reason will qualify as a genuine reason for a fixed term agreement. A genuine reason will explain why the employment is for a limited time and why the role (not the employee) will no longer be required in the business after that period. These are assessed on a case by case basis, however as a guideline genuine reasons may include hiring someone temporarily to:
Cope with seasonal demand;
Replace an employee who is absent;
Undertake a “one-off” project; or
Cope with unexpected workload.
Reasons that are unlikely to be “genuine” included hiring someone to try them out or on a “just in case” basis. While this reason may seem obvious, other reasons are not. For example, some employers are under the mistaken belief that they can use a fixed term agreement because the industry is unpredictable, or the workflow is unknown. The employer, understandably, doesn’t want to commit to the employee in case they don’t need them after a term. This is not considered a genuine reason, however. If, after a period the business cannot sustain employing that person, an employer will need to initiate a process that may result in the redundancy of that role.
Precedent in case law indicates that even where the employer genuinely and sincerely believes that a fixed term period of employment is justified, the provision will not be enforceable unless that belief is based on reasonable grounds.
What is the process for terminating of a Fixed Term agreement?
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.
We actively encourage our clients to 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.”
In situations where this is not so well defines and a fixed-term agreement is terminated before its expiry date, and the employer terminates the agreement before the date it is set to end, the employer may have to pay the employee the remuneration they would have earned up to the date the agreement was due to expire.
Further, there have been several court decisions where employees have had their employment terminated at the end of fixed-term contracts and have taken personal grievances alleging that they have been unjustifiably dismissed. In essence, these cases have turned on the issue of whether the employee had a “legitimate expectation” of ongoing employment after the end of the agreement. If an employee has been promised or assured by authorised persons that their employment will continue beyond the fixed period, it may be unlawful for the employer to allow the agreement to expire and the employment to end.
And when the expiry date passes by…
In these 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 (note that 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).
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
Where an employee continues to be employed beyond the expiry date of a fixed term employment agreement without an extension being agreed to or having been reminded that their employment has ended, case law indicates that the employment will become permanent on the same terms and conditions.
To conclude, if your business is considering using a fixed term agreement, it is worthwhile having a good think about the reason for it, and whether that may be considered on reasonable grounds.
Ask yourself these questions;
Do you have fixed-term agreements that have been renewed (or extended) multiple times?
Is your reason for making an agreement for a fixed term because of financial uncertainty?
Do you have fixed-term agreements with no supporting evidence for the reason why they are fixed?
Can you point to a specific end date that is properly linked to your genuine reason?
Do any of your fixed-term employees complete work tasks unrelated to the reason why their employment is fixed-term?
Is there anything speculative about the terminating event (what might cause it not to occur)?
Has the reason for the fixed term changed since the employment agreement was entered into?
If you answer yes to any of the above, we would suggest seeking some professional advice. After all, if you do not met the requirements of the Act, the employment relationship may be deemed to be permanent, and the business could be open to a claim of unjustified disadvantage or dismissal.
Disclaimer This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.