Navigating the Pitfalls of Repeated Fixed-Term Contracts
In the dynamic landscape of employment in New Zealand, fixed-term agreements are a common feature. These contracts, as dictated by the Employment Relations Act 2000, are designed for specific durations or for specific projects. However, recently we have had a number of clients seeking advice regarding a a growing trend which raises concerns: the continuous extension of these fixed-term agreements.
This practice, while seemingly flexible, can lead to legal and ethical complications.
Fixed-term employment contracts are legally binding agreements that terminate on a specific date or upon the completion of a specific task. These agreements are governed by strict clauses under the Employment Relations Act 2000, which mandates clear specification of the reason for the fixed-term and its duration and are designed to meet genuine reasons for temporary employment, such as covering maternity leave, seasonal peaks, or project-based work.
Continually extending a fixed-term contract can be seen as a breach of the Employment Relations Act.
Legal Limitations and Risks:
Genuine Reasons Requirement: The law requires that fixed-term contracts be used only for genuine reasons based on reasonable grounds for specifying the duration of the contract. Continuously extending these agreements without valid justification can be seen as an attempt to circumvent permanent employment rights, leading to potential legal challenges.
Good Faith Obligation: Both parties in an employment relationship must adhere to the principle of good faith. Repeatedly extending fixed-term contracts without a genuine reason can breach this principle.
Risk of Implied Permanent Status: If an employer continually extends a fixed-term contract, an employee could argue that they have the expectation of ongoing employment, leading to potential legal disputes if they are terminated without a fair process. There is a risk that the employment could be deemed permanent by a court or tribunal, especially if the employee has a reasonable expectation of ongoing employment.
Why Continuous Extensions Are Not Recommended
Legal Risks: Employers risk breaching employment laws and opening themselves up to Personal Grievance (PG) claims if they cannot justify the continual renewals of fixed-term contracts.
Employee Morale & Stability: Continuous uncertainty can impact employee morale and mental health, as employees may feel insecure about their job stability.
Workplace Culture and Reputation: Over-reliance on fixed-term contracts may create a culture of transience, impacting team cohesion and long-term planning as well as the employer's reputation, potentially making it harder to attract and retain talent.
Cost Implications: The costs associated with repeated contract negotiations and responding to potential PG's can be significant.
Transitioning to Permanent Employment
After one or two extensions of a fixed-term contract, employers should consider converting the role to a permanent position, unless there are compelling and legitimate business reasons not to. This approach aligns with legal requirements and fosters a more stable and committed workforce.
While fixed-term contracts offer flexibility, it's crucial for employers to use them responsibly and in line with New Zealand's employment laws. Continuously extending these agreements can lead to PGs and workplace issues.
Transitioning to permanent employment after one or two extensions is a best practice that benefits both employees and employers, fostering a stable, productive, and legally compliant workplace. Employers should carefully consider the implications of fixed-term contracts and prioritise the long-term benefits of permanent employment arrangements.
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.