When you want to hire an employee for a short or specific term, you need to know what kind of employment contract to use. In today’s Workplace Bulletin, we explain the difference between fixed-term contracts and maximum-term contracts to help you understand which one is the right one to use for your employee.
What’s the difference between fixed-term contracts and maximum-term contracts?
What is a fixed-term contract?
A fixed-term contract is a contract where both parties agree employment will be for a specified period of time.
A fixed-term contract might provide for a qualified right to terminate employment on specified grounds. For example, “If you fail to remedy unsatisfactory performance within one month of being notified of the poor performance, the Company may terminate the contract immediately.”
However, the essential feature of the fixed-term contract is that both parties have forgone the contractual right to terminate employment without cause or reason. The parties assume, absent certain events or grounds for early termination occurring, the employment relationship will run for the period or term stipulated in the contract.
What is a maximum-term contract?
A maximum-term contract specifies a date upon which both parties agree employment will end.
However, under a maximum-term contract, both parties have retained the right to terminate employment without cause or reason by giving notice. The parties have no expectation (at least under the terms of the contract) of the employment lasting for the maximum period or term stipulated in the contract.
Terminating the employment of employees on fixed or maximum-term contracts
Employees employed under fixed-term contracts or contracts under which they are ‘employed for a specified period of time’ are exempted from NES entitlements to notice and redundancy pay under the Fair Work Act 2009 (Cth) (FW Act).
If you seek to terminate employment of an employee employed for a specified period of time before the expiration of the period, you may breach the employment contract if termination is not in accordance with a term allowing early termination.
If the employee could otherwise access Fair Work Act unfair dismissal laws, the dismissal of an employee employed for a specified period of time before the expiration of the period might also be challenged as an unfair dismissal.
If the parties to an employment contract agree employment will end on a specified date or the occurrence of specific event (which is the case for both fixed term and maximum term contracts), the cessation of employment on the date or event will not be at the initiative of the employer. This means the termination will not generate entitlements NES entitlements to notice and redundancy pay. It will also not be open to challenge under the FW Act unfair dismissal provisions.
Use this table to understand this more:
|Termination event||FW Act unfair dismissal exposure||Application of NES notice and redundancy pay obligations|
|Maximum-term or fixed-term contract expires||No (s 386(2)(a) FW Act provides this is not dismissal)||No, because employer does not initiate termination|
|Early termination of maximum-term contract pursuant to unrestricted right to terminate||Yes||Yes|
|Early termination of fixed-term contract pursuant to specific right in contract to terminate early||Yes (unless within minimum employment period)||No, because employee excluded under s 123(1) FW Act|
· If the employee has a reasonable expectation that the fixed-term contract will be extended or renewed (e.g. because it has been renewed on several occasions in the past, or there is no operational rationale for the fixed-term arrangement), your failure to renew the contract may amount to you initiating termination of employment.
· If a substantial reason for you employing the employee on a fixed-term contract was to avoid the application of the notice and redundancy pay NES, then the exemption will not apply (s 123(2) Fair Work Act).