UK: Are Fixed-Term Contracts Coming To An End?

Last Updated: 15 August 2005
Article by James Libson and Joanna Blackburn

As things are generally quieter at this time of year, now may be a good opportunity to turn your attention to matters that often get overlooked, one being your fixed-term contracts. Traditionally, many employers have taken the view that fixed-term contracts are a convenient way to manage short-term or uncertain demand without any of the liabilities that attach to permanent employees. However, following the Fixed-term Employees Regulations which came into force in the UK in 2002, this is no longer the case. For employers who are considering terminating or not renewing fixed-term contracts, there are now additional considerations to bear in mind. In this month's briefing we look at the obligations that attach to fixed-term contracts and what you need to think about when these contracts are coming to an end.

What is a fixed-term contract?

A fixed-term contract is a contract that is not intended to be permanent and that is expressed to terminate either on a specific date, on the completion of a specific task or on the occurrence or non-occurrence of an event.

Discrimination against fixed-term employees

A fixed-term employee has the right not to be treated less favourably than a comparable permanent employee as regards the terms of their contract or by being subjected to any detriment by their employer. In addition, the employer is under an obligation to inform fixed-term employees of any permanent vacancies in the establishment where they work.

Examples of less favourable treatment include excluding fixed term employees from a pension, bonus or medical insurance scheme or selecting fixed-term employees for redundancy over permanent employees. An employer may be able to treat fixed-term employees less favourably than permanent staff if it can "objectively justify" the treatment. For example, an employer may be able to justify not providing a particular benefit by compensating the fixed-term employee for the loss of that benefit. This can be done by either providing an alternative benefit or making a specific payment.

Dealing with the expiry of a fixed-term contract

Whereas many employers appreciate that the early termination of a fixed-term contract could constitute a dismissal (and if the employee in question has been on a fixed-term or successive fixed-term contracts for over a year, that unfair dismissal considerations will apply), not as many know that the expiry and non-renewal of a fixed-term contract also constitutes a dismissal. Therefore, the employer will need to be able to justify the non-renewal of the contract with one of the five potentially fair reasons that apply to normal dismissals. The employer will also be required to follow a fair procedure in relation to the employee in order to successfully defend a claim for unfair dismissal, provided of course that the fixed-term employee has more than one year's continuous service.

Since October last year, applying proper procedures has become even more important for employers. The new minimum statutory dismissal procedures apply equally to the non-renewal of fixed-term contracts as to normal dismissals, and it is therefore essential that employers follow (as a minimum) the statutory three-step procedure to avoid a finding of automatic unfair dismissal against them, and an uplift in the employee's compensation. As the most common way to bring a claim for a failure to follow the statutory procedures will be as part of an unfair dismissal claim, some employers may choose not to follow these procedures in the case of an employee with less than one year's service. However, since a claim for a failure to follow the statutory procedures can also be tagged on to a number of other claims, it is advisable to ensure that the three-step procedure is followed as a matter of good practice in all cases where it applies.

The use of successive fixed-term contracts

Under the Fixed-term Employees Regulations, fixed-term employees with four or more years of continuous employment who have their contracts renewed or who are re-engaged on a new fixed-term contract are deemed to be employed on a permanent contract (unless a further fixed-term contract can be objectively justified). Only service after 10 July 2002 will count towards the calculation of the four year period and therefore, if you have long term fixed-term contracts coming up for renewal next year, or if you have renewed fixed-term contracts in the past and they extend beyond 10 July 2006, it is worth bearing this date in mind.

If, after 10 July 2006, you renew a fixed-term contract of an employee who has been on that fixed-term contract for a period of four years or more, such an employee will automatically become a permanent employee. For example, if an employee has a five-year contract from 1 August 2002 until 1 August 2007, which is immediately renewed, the employee will automatically become a permanent employee from 1 August 2007 and any provision in the second contract as to a fixed term will be invalid. An employee will also become a permanent employee where you have renewed a contract (or successive contracts) before 10 July 2006 and the term of the renewed contract extends beyond 10 July 2006. In such a case, if the employee has been employed for four years or more on 10 July 2006, the employee will automatically become a permanent employee from that date.

In order to avoid this, or to at least be prepared for the effects, now may be a good time to conduct a review of your fixed-term contracts to establish which, if any, are at risk of becoming indefinite in the near future. If you are looking to renew any contracts of long standing fixed-term employees, it may be wise to ensure that the new term does not extend beyond 10 July 2006. Equally, if long-term contracts are coming up for renewal at any time after 10 July 2006, you may choose at that point not to renew them. However, if you are planning to bring contracts to an end in this way in order to avoid them becoming permanent, do not forget to ensure that there is an acceptable reason for not renewing them, and that you follow the proper procedures.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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