The flexible workforce – an essential guide to fixed term contracts

Many small businesses require flexibility in their workforce and often engage staff on fixed-term contracts to meet a specific need, for example, a new project or client contract. So, what does your small business need to know from an HR perspective if you regularly need to hire staff on fixed-term contracts?

At its most basic, a fixed-term contract is a contract of employment for a specified period of time, i.e. with a defined beginning and defined end.  It’s also common to have contracts end when a particular task or project is complete, or to cover maternity leave.

It can be easy to assume that by employing staff on a fixed term contract it automatically means that the person will leave at the end of the contract.

However, what actually happens is when a fixed term contract comes to an end on an appointed date, a dismissal takes place. This means the contractor has the same right as any employee with two years continuous service, to claim unfair dismissal.

If you’re an employer, you’ll need to have a fair reason for not continuing the employment – quite often this may well be classified as redundancy. This is why many employers choose to keep fixed-term contracts to under two years, but it’s worth remembering that this two year period does not apply to reasons for unfair dismissal, such as discrimination.

Ending the contract early

What happens when the employer wishes to terminate the contract early, perhaps because the work is complete or circumstances change? 

As a general rule, a fixed-term contract cannot be terminated before its expiry except for gross misconduct or by mutual agreement, so It’s important to draft the contract carefully in the first place in order to enable flexibility for both parties.

For example a fixed-term contract may include a clause giving either or both parties the right to terminate it before the expiry date by giving due notice. If this clause isn’t in place and the contract is terminated prematurely, the employer can be open to a breach of contract.

If you’re an employee, you’d also have the right to claim unfair dismissal provided you’ve been employed for the requisite period of continuous employment, currently two years.  For maternity contracts, it’s common to see clauses stating that should the employee on maternity leave return before the end of the term of the fixed term contract, the contract can be terminated with due notice.

There are further considerations for those on fixed-term contracts. For terms of the contract, such as pay and pensions, fixed-term employees have the right not to be treated less favourably than a comparable employee.

In addition, it’s worth remembering that anyone on a fixed-term contract has the opportunity to receive training or to secure permanent employment in the organisation. 

They also have the right to be informed of any permanent, suitable vacancies. If they’re not informed within three months of the date other individuals – regardless of whether these are other employees or people outside of the organisation – were informed of the vacancy then the fixed-term employee can bring a claim against the business.

Longer term employment

Once a single fixed-term contract or succession of such contracts mean the individual has been with the company for four years or more, the contract will be deemed to be what’s known as a contract of indefinite duration and the minimum periods of statutory notice will apply.

Again, once you have employee who has been with you for four or more years, they have the right to request a written statement either giving reasons why their contract remains fixed-term beyond the four year limitation period, or confirming that this contract has become open-ended.

Finally, there will be times when the person you’ve hired has done such a great job that you’ll want to keep them on permanently or re-hire them as soon as work is available. So what are the options here?

The simplest way is for the employer to renew the fixed term contract or, where a vacancy exists, make the position permanent with the agreement of the employee. A new permanent contract would be drawn up and the employee would become permanent.  If there’s been no break in service, the continuous service date would be the beginning of the fixed term contract.

If there’s no work available at the end of the contract and the individual has moved on, it’s sensible for both parties to keep in touch so they can discuss any opportunities that may arise in the future.

Alternatively, a person could be engaged on a self-employed basis, although you’ll need to take extreme care with regard to their employment status both from an employment law and tax perspective. If you’re unsure where you stand on this, it’s best to get advice to avoid problems further down the line.

No matter what the contract, if you take on a contractor to assist your business, you will also need to take out employers’ liability insurance. This cover is a legal requirement for any organisation with staff on full time, part time, contractual or voluntary basis.

If you want to understand your rights as a contractor, make sure you have investigated contractor insurance and understand fully how this can protect you from the risks you may encounter.

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