Drafting masterclass: fixed-term contracts

Fixed-term contracts can be really useful when a business needs people to come on board for a specific task or project. Unfortunately, however, they are easy to get wrong. We look at some of the pitfalls to watch out for when drafting such contracts.

What are the main types of fixed-term contract?

• “Pure” fixed-term contracts expire automatically at the end of the term without the employer needing to serve notice. These contracts do not allow for early termination.
• Fixed-term contracts which allow for early termination do exactly what they say on the tin. They provide for a fixed-term but allow the employer to serve notice before the end of the fixed term, if it wants to shorten the arrangement.
• Fixed-term contracts which require notice to be given prior to expiry are slightly more unusual. While in theory these contracts provide for a fixed-term, the important point to note is that employment doesn’t automatically terminate at the end of the fixed-term; notice must be served in accordance with the contract.

What protections are offered to those employed on fixed-term contracts?

Those employed under fixed-term contracts have statutory protection under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002. This means they should be treated just as favourably as permanent staff, for example, when it comes to: pension and bonus schemes, free or subsidised gym memberships, opportunities to receive training, opportunities to secure permanent positions, regular appraisals. It goes without saying that they shouldn’t be subject to any form of detriment because of their fixed-term status.

Where are businesses most likely to fall down?

• Trying to serve notice of early termination when the drafting of a contract either provides for a pure fixed-term or is otherwise unclear. If a business terminates a pure-fixed term contract early, the employee could seek damages for loss of earnings for the remainder of the contract.

• Not making clear that benefits will be pro-rated where appropriate. For example, a clause which provides for the employee to have 28 days’ holiday will mean that the employee can have 28 days’ holiday, even if they are only employed for three months!

• Using a succession of fixed-term contracts without good reason. Employees who have been continuously employed for four years or more on a series of successive fixed-term contracts are automatically classed as permanent employees unless the continued use of fixed-term contracts can be objectively justified.

• Terminating a fixed-term contract after two years without having a fair reason to do so. After two years’ continuous service, fixed-term employees are protected from unfair dismissal in the same way that permanent employees are – and it is not possible to contract out of this right. A fixed-term employee will be classed as being dismissed when their contract is not renewed. For the dismissal to be fair, it needs to be for one of the five potentially fair reasons (conduct, capability, redundancy, illegality or some other substantial reason). Employers need to identify the relevant reason and subsequently follow a fair procedure. While redundancy is a commonly used reason for not renewing a fixed-term contract, it is important for employers to remember that if a fixed-term employee has at least two years’ continuous service, and their contract is not renewed because of redundancy, they will be entitled to a statutory redundancy payment. If relying on redundancy as a potentially fair reason, employers should have also considered alternative employment for the fixed-term employee.

Top tips when drafting fixed term contracts

• Make sure that the drafting of the contract is clear. If you want the ability to terminate early, make sure that there are notice provisions which allow you to do that! Make sure that any clauses dealing with the fixed term and any dealing with termination are consistent and that the contract generally makes sense when read as a whole.
• Ensure that the fixed term contract is no less favourable that that offered to permanent staff.
• Be clear about whether benefits are offered on a pro-rata basis.
• Diarise expiry dates

Finally, it is important to communicate with the employee both at the start and when the fixed-term is coming to an end. Being clear about the fixed term nature of the contract and what will happen at the end of the fixed term is important. If you want to extend the term or make the contract permanent at the end of the fixed term, having these discussions at an early stage can prevent you from losing a good employee who may otherwise have decided to move on. If you don’t want to extend the term, managing expectations can help reduce the risk of claims (even if unfair dismissal isn’t a risk, there’s still the potential for claims for “less favourable” treatment and/or discrimination depending upon the circumstances).

In our final drafting masterclass article next month, we look at the drafting of zero hours contracts.