Fixed Term Contracts – Failing to Renew Can Prove Costly

Fixed term contracts can be effective when used properly and fairly, for example if a business has a specific project that has a limited time period then a fixed term contract would be a good option but it’s important to be mindful of the risks involved when it comes to terminating a fixed term contract.

Employees who are on a fixed term contract have the same legal rights as permanent staff.  There is also the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 to take into account when considering terminating an employee.  So it is not as straight forward as simply terminating once the contract has reached its end date and failing to take into account the risks involved can prove very costly.

When an employee is nearing the end of a fixed term contract take the following points into consideration:

  1. The need to understand, if any, what notice provisions are included in the contract.  Once you know this, you can determine when to start discussing terminating or renewing the contract with the employee.  Depending on how the contract of employment is written, some fixed term contracts may expire automatically on the expiry date or completion of a task but this would need to be specified in the contract.
  2. If there is a requirement to serve notice before the expiry date, failing to do so may entitle the employee to a payment in lieu of notice or an extension to the contract.
  3. If looking to terminate the contract early (with the exception of a gross misconduct dismissal) then it’s important to have a break clause otherwise this could prove costly as the employee may be able to make a claim for loss of earnings for the remainder of the term.
  4. By law, the non-renewal of a fixed-term contract amounts to a dismissal. Even where employment continues past the end of the term, there may still be a dismissal if the terms and conditions are different from the original contract, even if the employee has accepted the new terms.
  5. If an employee has two or more years’ continuous service you can only terminate if you can show one of the five potentially fair reasons for dismissal (conduct, capability, redundancy, illegality/contravention of statutory duty or some other substantial reason).
  6. If using redundancy for the reason for non-renewal consideration will need to be given to the pool for redundancy as well as the availability of alternative employment.  The employee may also be entitled to a statutory redundancy payment.
  7. If a fixed term contract has been used to cover the absence of a permanent employee, the fixed term employee will not be made redundant upon the return of the permanent employee.  In this case you would need to rely on the ‘some other substantial reason’ (SOSR).

In order to reduce the risks it’s important to have clearly written clauses within a fixed term contract and to monitor the operation of a fixed term contract.  It’s good practice to diarise the expiry dates of fixed term contracts so that decisions can be made in good time as to whether a contract is to be renewed or terminated.

For help and guidance on fixed term contracts speak to us at Solve.