Australia: Maximum term employees may be entitled to make unfair dismissal claims and be paid redundancy

Last Updated: 1 March 2018
Article by Mark Cox and Lauren Wright

A maximum term contract is a contract which automatically ends at the expiry of a specified period while giving either party the right to terminate prior to the specified expiry by giving notice. This can be contrasted with a fixed term contract, which is also for a specified period but which does not make provision for early termination.

It has commonly been thought that employees on specified term contracts, whether maximum term or fixed term, fall within the exception under in section 386(2)(a) of the Fair Work Act 2009 (Cth) (FW Act) and therefore cannot make an unfair dismissal claim upon expiry of the contract. The rationale behind this was that the end of employment was due to the effluxion of time rather than at the initiative of the employer: Department of Justice v Lunn (2006) 168 IR 410 (Lunn).

However, this has been put into doubt in the recent decision by the Full Bench of the Fair Work Commission in Saeid Khayam v Navitas English Pty Ltd t/as Navitas English (Navitas) [2017] FWCFB 5162.

The background

Mr Khayam had been on a series of maximum term contracts with Navitas English Pty Ltd. Towards the end of the last of these contracts, Mr Khayam was informed that Navitas had decided not to offer him a further contract after concerns about the unsatisfactory performance of his administrative duties. Mr Khayam's employment ended on the nominated end date set out in his maximum term contract. Mr Khayam alleged that this constituted termination at the initiative of the employer within the meaning of section 386(1)(a) of the FW Act.

The decision

In a 2-1 majority, the Full Bench of the Fair Work Commission held that an employer is not necessarily exempted from an unfair dismissal claim by allowing a maximum term contract to expire. The majority, comprised of Vice President Hatcher and Commissioner Saunders, outlined a five-point assessment to determine whether "termination on the employer's initiative" is likely to have occurred in circumstances where an employee's maximum term contract has expired. This is significant because it means that, even where the parties have agreed to a specified end date, this does not exclude the possibility that termination was at the initiative of the employer and thus can still give rise to an unfair dismissal claim.

The majority of the Full Bench stated that it may be necessary to go further than just examining the terms of a specified term contract because these may not in truth represent an agreement that the employment relationship will end at a particular time, for example:

  1. the contract itself may have been entered into as the result of misleading conduct, a serious mistake, unconscionable conduct, duress or coercion, lack of legal capacity or sham contracting;
  2. the contract may be illegal or contrary to public policy;
  3. the contract may have been varied, replaced or abandoned such that the ostensible time-limit no longer applies;
  4. the contract may not represent the reality of the employment relationship and may be part of a series of contracts;
  5. the conduct or representations of the employer may provide a legal foundation to prevent the employer relying on the terms of the contract (presumably an estoppel);
  6. the terms of contract may be inconsistent with the award or enterprise agreement which will prevail over the contract.

However, the Full Bench made it clear that, absent any vitiating factors such as those listed above, merely not offering an employee a new contract at the end of a specified period contract will not result in a successful unfair dismissal claim.

What are the implications?

In the wake of this decision, there is uncertainty around the status of specified term contracts and the potential ability of those employees to access other entitlements, such as redundancy. There may be a shift towards looking more closely at the reality of an employment contract and inquiring whether it is in truth a mechanism being used to avoid employer obligations in relation to terminating employment.

Further, the rationale applied in decision may have broader application to casual employees who are employed on a long-term basis.

Future cases will no doubt shine a light on the implications of the Navitas decision more broadly for maximum term employees and possibly casuals. In the meantime, it would be prudent to consider your own contracts and employment practices in light of this decision.

Next Steps

As an employer, you should consider reviewing your current employment contracts and practices particularly with reference to employees on maximum term contracts. To best manage your risk:

  • implement a protocol from managing and ending maximum term contracts by tracking when your maximum term contracts are due to expire;
  • it may be worth expressly stating, for example in recitals to the contract, the legitimate reasons for the use of a specified term contract, which may relate to the nature and seniority of the role or the dependency on external funding;
  • do not enter maximum term contracts to simply to avoid unfair dismissal claims;
  • assess whether a maximum term contract is the most appropriate agreement for your business' needs; and
  • consider whether a true fixed term contract without the right to terminate the employment on notice would be a better option – noting the risk that if you want to end a fixed term contract early, other than for serious misconduct, you may have to pay out the whole balance of the specified term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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