UK: Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations

Last Updated: 20 September 2002

The Fixed-term Employees Regulations have finally been enacted and will come into force on 1 October 2002. So what action should you take now to ensure you do not fall foul of the Regulations in a few weeks’ time?

This briefing explains in detail the scope of the Regulations and how they will impact on your business. In summary, the key action points now are:

  • check whether you have any fixed-term employees, including those on very short (day or week) contracts;
  • ascertain whether these employees have any permanent employee comparators;
  • analyse the way in which your fixed-term employees are treated in terms of pay, benefits, training and generally and identify any areas where comparable permanent employees are treated better;
  • determine whether these differences can be objectively justified;
  • if any differences cannot be justified, analyse whether the overall package (ignoring any differences which can be justified) is equivalent;
  • if not, consider improving the position for the fixed-term employees, either by providing the benefit or an alternative benefit or cash equivalent;
  • in some cases it may be appropriate to consider whether benefits for permanent employees can be reduced to the fixed-term level (for example, if the employer has a discretion to remove certain benefits - but care needs to be taken to avoid constructive dismissals of current permanent employees), or whether to cease using fixed-term contracts (given that their perceived advantages have been reduced by these Regulations);
  • review recruitment procedures - ensure there is a means for informing all employees (including fixed-term employees) of internal vacancies, whether by staff notice board, magazine or intranet, bearing in mind any employees working off-site or at home.

Detail of the Regulations

Currently a fixed-term employee paid less or provided with fewer or a lower level of the same benefits than comparable permanent employees will usually only have a claim if he/she can establish indirect discrimination (i.e. that a considerably larger proportion of the employer’s fixed-term workers than of permanent workers are of one gender or race, so that in practice one gender or race is disadvantaged, and that the difference in treatment is not objectively justifiable). The Regulations will provide an alternative avenue of claim for such employees, who will no longer need to show a disproportionate impact on one gender or race.

Which employers are affected?

Anyone who employs staff on a "fixed-term" contract. There are no exclusions for small employers or for very short contracts.

The Regulations will affect employers who use fixed-term contracts on a regular basis, e.g. to cope with the fluctuating demands of the business (whether employees are required on a predictable, seasonable basis or simply for a day or week from time to time). It will also cover employers needing employees for specific tasks, either where the business is project-based or where one-off support projects need to be completed (such as designing a new IT facility). Employers will also be affected where they use a fixed-term contract to provide for maternity leave or holiday cover.

What is a "fixed-term" contract?

A contract which provides that it automatically terminates after a specified time, on a specific event, or on a specific task being completed. (In determining whether a contract is "fixed-term", contractual provisions allowing earlier termination on notice or providing for termination on reaching a retirement age are ignored.)

What if all my fixed-term staff are self-employed or agency workers?

It is only employees who are covered by the Regulations, not the wider category of "workers" covered by certain other pieces of legislation.

Agency workers, apprentices, those on training schemes arranged by the Government or funded by the European Social Fund, students on placements of up to a year and armed forces are also excluded from the Regulations.

What restrictions do the Regulations impose?

The Regulations concentrate on two main areas:

  • prohibiting discrimination against fixed-term employees, and
  • preventing abuse arising from the use of successive fixed-term employment contracts.

Discrimination

A fixed-term employee has the right not to be treated less favourably than a comparable permanent employee on the grounds of his being fixed-term, unless this is objectively justified.

What is less favourable treatment?

Less favourable treatment can be in relation to:

  • terms and conditions of employment (including pay and pensions);
  • a requirement to have a particular length of service before being eligible to receive a benefit;
  • the opportunity to receive training;
  • the opportunity to secure any permanent position (not necessarily employment) at the same establishment; or
  • some other detriment (e.g. harassment, selection for redundancy or denial of non-contractual benefits or opportunities).

The "pro rata" principle is to be applied where appropriate. This means that where benefits are offered on an annual basis, such as a lump-sum clothing allowance every 12 months, where possible the pro rata entitlement should be offered to a fixed-term employee – if he is on a 6 month fixed-term, he should be given 6 months’ worth.

Note that the Regulations do not prohibit treating fixed-term employees more favourably than permanent employees.

As the Regulations (and the EU Directive) expressly provide that period of service qualifications for particular benefits must be the same for fixed-term employees as for permanent employees (unless a longer period is objectively justified), this presumably means that it is not less favourable treatment "on the grounds of" fixed-term status simply to subject benefits to period of service qualifications (even though employees on short fixed-terms may never qualify for them). There is no concept of indirect discrimination under the Regulations.

Who is a comparable permanent employee?

An employee can compare himself with a permanent employee (i.e. someone who is not on a fixed-term contract) who is:

  • engaged by the same employer;
  • in the same or broadly similar work (having regard, where relevant to the job, to whether they have a similar level of skills and qualifications);
  • in the same establishment - or, if there is no comparable permanent employee in the same establishment, in a different establishment of the same employer.

The Regulations do not provide for employees to compare themselves with a hypothetical comparator or with employees of an associated employer (such as a group company). If a fixed-term employee cannot point to a comparator, no claim under the Regulations will be possible.

How can I justify different treatment?

An employer can only defend less favourable treatment if it can be "objectively justified". The DTI Guidance states that this requires the employer to show that the purpose of the treatment is to achieve a legitimate objective (e.g. a genuine business objective), the treatment is necessary to achieve that objective, and it is an appropriate way to achieve it, giving due regard to the needs and rights of individual employees.

Employers can objectively justify different conditions for fixed-term employees in two different ways:

  • by showing that there is an objective justification for not giving the fixed-term employee a particular benefit ("Term by Term Approach"); or
  • by showing that the value of the fixed-term employee’s total package of terms and conditions (taking into account any pro-rating) is at least equal to the value of the comparable permanent employee’s total package of terms and conditions ("Package Approach"). The DTI Guidance states that the value of benefits is to be assessed on the basis of "objective monetary worth" (which presumably means the financial cost to the employer of providing the benefit rather than the cost of the employee purchasing equivalent benefits direct, although this is not stated). The Package Approach allows employers to pay a higher salary in return for not providing certain other benefits (which it would not otherwise be objectively justifiable to withhold).

Whether certain treatment is objectively justified will be determined on a case-by-case basis. Less favourable treatment may be justified where the cost of offering a particular benefit to a fixed-term employee is disproportionate when compared to the benefit that the employee would receive.

What rights will a fixed-term employee have when his/her contract comes to an end and is not renewed?

The failure to renew any type of fixed-term contract will amount to a dismissal, entitling the employee to claim unfair dismissal where appropriate provided he/she has 1 year’s continuous service. (The ability to include a contractual waiver of the right to claim unfair dismissal was removed in 1999).

In this situation the reason for the "dismissal" will often be redundancy - employers often use fixed-term contracts for jobs where it is known in advance that the available work will cease at a certain point. In the past, employers could avoid the need to pay statutory redundancy pay in this situation by including in the fixed-term contract an effective waiver of the employee’s right to a statutory redundancy payment. The Regulations now provide that such waivers will no longer be effective in any contracts agreed, renewed or extended on or after 1 October 2002. Employees on such contracts will therefore be entitled to statutory redundancy payments if the non-renewal is on the grounds of redundancy and they are otherwise eligible (e.g. have 2 years’ service). Waiver clauses agreed before 1 October 2002 remain effective.

It will be a breach of the Regulations to select fixed-term employees for redundancy (or to dismiss them in a non-redundancy situation) purely because they are fixed-term (whatever their length of service), unless this can be objectively justified. However, where the redundancy is brought about by the completion of a specific piece of work, and the fixed-term employee was recruited specifically to complete this work, it is likely that in most cases the employer would be justified in selecting that employee for redundancy at the end of his/her contract.

The DTI Guidance states that the Regulations will not prohibit the use of length of service as a criterion for redundancy selection, even though it is likely that more fixed-term employees will be selected as a result, provided the same criteria are applied to both fixed-term and permanent employees (unless a difference can be objectively justified).

Where employers provide redundancy payments/benefits in excess of the statutory entitlement, fixed-term employees and permanent employees should be given the same entitlement (for example, where the entitlement is service-related, the same service qualifications should apply to fixed term and permanent employees) - unless a difference can be objectively justified. Where the purpose of the scheme is to compensate employees for the unexpected loss of their jobs, it may well be objectively justifiable to exclude from the scheme employees who are employed on fixed-term contracts with no reasonable expectation of a renewal.

Notification of vacancies

A fixed-term employee has the right to be informed by the employer of available vacancies at his workplace (whether or not the employee has the requisite qualifications). The employer must either publish the vacancy in an advert which the employee has a reasonable opportunity of reading in the course of his employment or the employee must be given reasonable notification of the vacancy in some other way. The DTI Guidance suggests that this can be satisfied if vacancies are posted on a company notice board, intranet or in an email to all staff. An advert in a local newspaper is unlikely to be sufficient, even if this is the employer’s usual practice and permanent employees are not given internal notification either.

Fixed-term employees who apply for internal vacancies do not have to be given priority over other applicants (provided they are not rejected because of their fixed-term status or because they have asserted rights under the Regulations).

How can a fixed-term employee claim the new rights?

Employees are protected by the Regulations from day one of their fixed-term employment, however short the fixed-term. Claims for infringement of rights under the Regulations can be made to an employment tribunal within 3 months (or later if just and equitable). A tribunal may award a declaration of rights, award compensation or recommend action to alleviate any less favourable treatment. Compensation is potentially unlimited and will have regard to any loss suffered by the employee.

In most cases, a fixed-term employee can also ask the employer (in writing) for a written statement as to the reason for any treatment which the employee considers may be less favourable. The employer must provide the statement within 21 days of the request. (This right does not apply if the claim relates to dismissal and the employee is entitled to request written reasons for dismissal under the Employment Rights Act 1996 - the only significant difference is that under that Act the employer must respond within 14 days.)

If the employee then complains to an employment tribunal, any statement given by the employer will be admissible evidence. If the employer deliberately fails to provide a statement without reasonable excuse or gives an evasive or equivocal statement, the tribunal can draw any inference it considers just and equitable, including the inference that the employer has infringed a right under the Regulations.

Dismissal for asserting rights under the Regulations in good faith will be automatically unfair (and the employee will not need to have 1 year’s continuous service or be under the upper age limit). Other detrimental treatment because of asserting rights under the Regulations will be a breach of the Regulations.

It is possible for rights under the Regulations to be effectively waived by using a statutory compromise agreement or by ACAS conciliation.

Is there a limit to the number of successive fixed-term contracts employees can be given?

The Regulations provide that, once an employee has been continuously employed for 4 years (counting service from 10 July 2002 only) under at least 2 fixed-term contracts, the current contract will be deemed to be of an indefinite duration, unless there is an objective justification for continued engagement on a fixed-term basis. Given that service prior to 10 July 2002 is not counted, these provisions will only start to bite in July 2006.

By way of example, if an employee has a 5 year contract from 1 August 2002 to 1 August 2007 which is then renewed for a further 3 years, it will be deemed to be an indefinite term contract from 1 August 2007 (unless the use of a second fixed term in 2007 was objectively justified); if the employee has a 3 year contract from 1 August 2002 to 1 August 2005 which is then renewed for a further 2 years, the second contract will be deemed to be for an indefinite term with effect from 1 August 2006 (unless it was justifiable to use a second fixed-term contract in August 2005).

This aspect of the Regulations can be modified by a collective or workforce agreement which can specify a limit on the total duration and/or number of successive fixed-term contracts and/or a list of permissible objective reasons justifying successive fixed-term contracts. Employers will in due course need to consider whether to negotiate such collective or workforce agreements.

Employees who consider that their employment is to be regarded as permanent under these provisions can request in writing a written statement confirming that fact or reasons why the contract continues to have effect as a fixed-term contract. The employer must provide the statement within 21 days of the request and, as with the statement of reasons for treatment, a tribunal can draw appropriate inferences. If the employer does not confirm that the employment is now permanent on the employee’s request, the employee can seek a declaration from an employment tribunal (provided he is still employed).

Other changes

  • Employees on contracts to complete a specific task will now be treated in the same way as those contracted to work for a fixed period, in that the end of the contract will be deemed a "dismissal" for certain statutory purposes. This will render them eligible for the first time to claim unfair dismissal, a written statement of reasons for dismissal, and statutory redundancy payments (where they satisfy the service requirement). There are also changes to the statutory minimum notice provisions in relation to task contracts.
  • The Regulations remove discrimination against fixed-term employees in respect of guarantee payments, statutory sick pay and payments on the ground of medical suspension.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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