Five myths about fixed-term employment contracts

When used correctly, fixed-term employment contracts are an effective tool for matching staffing levels with the needs of the business. However, there are some surprising myths about fixed-term employment contracts that can lead even seasoned HR professionals into difficulties.

Make sure this doesn’t happen to you by reading our myth-busting guide to fixed-term employment contracts.

First, let’s cover the basics

A fixed-term employment contract is an employment contract that ends on a specified date or on completion of a particular task/project.

They are used for a variety of reasons, including:

  • to provide cover for a permanent employee who is on maternity or shared parental leave or who is taking a sabbatical;
  • to ensure adequate temporary staff to cope with seasonal increases in demand, without the reliability issues associated with using casual workers; and
  • to ensure sufficient staffing to see a specific project through to completion.

Now let’s tackle the myths

1. It’s cheaper to hire fixed-term employees because there’s no need to give them the same pay and benefits as permanent employees.

Under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, employers must not treat employees on a fixed-term contract less favourably than permanent employees that do the same or a broadly similar job.

This means employers have to provide fixed-term employees with the same pay and benefits as permanent staff. Therefore, it would be unlawful for employers to exclude fixed-term employees from benefits such as pensions (now also covered by the rules on auto-enrolment), insured benefits such as private medical and income protection and other benefits such as subsidised gym membership.

The restriction on less favourable treatment of fixed-term employees goes far beyond parity of pay and benefits. Any form of less favourable treatment is potentially unlawful – for example, not offering fixed-term employees the same career development opportunities offered to permanent employees (such as regular appraisals, training and access to promotion opportunities). 

The only circumstance in which fixed-term employees can be treated less favourably than permanent employees is if it can be objectively justified. 

2. If there is a notice provision in the contract then it’s not a fixed-term employment contract.

Although a fixed-term contract will end without the need for notice on the date or event specified in the contract, it is not uncommon for employers to include a provision allowing for early termination on notice. For example, it is possible to have a 12-month fixed-term contract that can be terminated at any time after the first six months on 4 weeks’ notice. An employee working under such a contract would still enjoy the benefits of the Fixed Term Workers Regulations.

It will often be advisable for an employer to include a notice provision in a fixed-term contract. In the absence of such a clause, unless there are grounds for summary dismissal, if the employer wishes to end the contract early it will have to pay the employee out for the remainder of the fixed-term, which could be very expensive.

Purporting to end the contract early without a right to do so under the contract would amount to a breach of contract, which would entitle the employee to treat themselves as released from any post-termination restrictions.

3. The expiry of a fixed-term contract does not constitute a dismissal.

Failing to renew or extend a fixed-term contract on its expiry still constitutes a dismissal. Just like permanent employees, fixed-term employees who have more than two years’ service benefit from statutory protection against unfair dismissal. Therefore, employers who do not intend to renew a fixed-term contract should ensure that they follow a fair process and that they have a fair reason (in many cases, the non-renewal of a fixed term contract will be potentially fair by reason of redundancy). 

Note that the ACAS Code expressly states that it does not apply to the non-renewal of fixed-term contracts on their expiry, so there would be no uplift for failure to follow the ACAS Code unless the reason for terminating the fixed term was a disciplinary issue.

4. Using successive fixed-term employment contracts will preserve the flexibility of a fixed-term contract indefinitely and avoid taking on permanent employees.

An employee who has been employed on successive fixed-term contracts for at least four years will become a permanent employee unless the continued use of fixed-term employment contracts can be objectively justified. 

This conversion of a fixed-term contract into a permanent contract for an indefinite period can catch employers out. For example, if the contract does not include a notice provision and the employee stays on as a permanent employee beyond the fixed-term stated in their contract, there is a potential for a dispute as to what length of notice is required to terminate the contract. 

The change in terms will also trigger the duty under the Employment Rights Act 1996 to issue a written statement of the change, which is often overlooked.

5. If we need to reduce headcount, we should just let the fixed-term contracts expire rather than make any permanent employee redundant.  

Failing to renew a fixed-term contract constitutes a dismissal, and employers must have a fair reason and follow a fair process to have a defence to a claim for unfair dismissal from fixed-term employees with more than two years’ service. 

One of the biggest myths about fixed-term workers is that the reason for not renewing a fixed-term will always be “some other substantial reason” or “SOSR”. However, if there is a reduced need for employees to do a particular type of work, the real reason is likely to be redundancy. 

This means that employers should follow a fair redundancy process (including applying objective selection criteria to employees in the redundancy pool). Choosing not to renew fixed-term employees purely on the basis of their fixed-term status is likely to be unlawful less favourable treatment and give rise to a claim for unfair dismissal.

It also means that fixed-term employees whose contracts are not renewed may be entitled to a statutory and (if available to permanent employees) an enhanced redundancy payment.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.