Understanding the difference between a fixed-term and upper-limit employment contract (also known as a maximum-term or outer-limit employment contract) is essential for both employers and employees. Incorrectly classifying employment arrangements can expose employers to claims for unfair dismissal, redundancy pay, and other legal risks.
This article explores the legal differences between a fixed-term employment contract and an upper-limit employment contract, key legislative updates, and a case study which provides additional guidance on how these contracts are interpreted and enforced.
Key Takeaways
- Fixed-term employment contracts must end automatically at a clearly defined date or event and cannot include termination on notice clauses
- Upper-limit employment contracts allow termination on notice and are subject to unfair dismissal provisions
- New laws from 6 December 2023 limit fixed-term contracts to two years and one renewal, with several exceptions
- An FTCIS (Fixed Term Contract Information Statement) must be provided for every fixed-term contract entered
- Non-compliance may result in contracts being deemed ongoing, with access to full entitlements and protections
What is a Fixed Term Employment Contract?
A fixed-term employment contract is designed to end automatically when a clearly defined period concludes or when a specific task or project is completed. These contracts are typically used when there is a clear and limited need for employment, such as covering maternity leave or completing a short-term project.
To be considered a genuine fixed-term contract:
- The start and end dates must be clearly stated and leave no room for ambiguity.
- The contract should not include any clause allowing either party to terminate the agreement with notice.
- It must genuinely reflect the intention that the employment relationship will end on the specified date or upon completion of a defined task.
If these conditions are not met, the contract may instead be classified as an upper-limit employment contract. Fixed-term contracts, by their very nature, are intended to give both parties certainty.
What is an Upper limit Employment Contract?
An upper-limit contract sets a clear end date but allows either the employer or employee to end the agreement early by giving notice. This flexibility makes it suitable for roles where there may be changing operational needs, shifting project scopes, or performance-based considerations that require an early exit option.
The end date may be flexible or indicative rather than fixed. Such contracts are often capable of being renewed multiple times which can give rise to an implied ongoing employment relationship.
Recent Reforms under the Fair Work Act 2009 (Cth)
From 6 December 2023, significant new restrictions have been introduced governing the use of fixed-term employment contracts in Australia. These reforms are intended to strengthen job security by curbing the repeated or extended use of fixed-term arrangements for the same or substantially similar roles.
Under the new rules, fixed-term contracts are limited to a maximum duration of two years, including any extensions or renewals. In practice, this means that employers may only renew a fixed-term contract once and are limited to a total of two contracts (initial + renewal).
Employers are also now legally required to provide a “Fixed Term Contract Information Statement” (FTCIS) at the commencement of each new fixed-term engagement. Non-compliance by an employer may result in the contract being deemed an ongoing employment relationship, exposing employers to obligations such as unfair dismissal protections, redundancy entitlements, and potential penalties. More about this legislative update can be read on our article here.
Exceptions to the New Restrictions
Certain roles and employment scenarios are exempt from these restrictions. Employers relying on these exceptions must ensure the basis for exemption is genuine and supported by proper documentation, such as project scopes, training contracts, or funding agreements. The following table outlines the permitted exceptions:
Exception | Description & Example |
High-Income Earners | Employees earning more than $167,500 p.a. (indexed in 2024) are not subject to the two-year or renewal cap. |
Government-Funded Positions | Roles funded by public grants where the funding period exceeds two years or is renewed. For example, a researcher on a 4-year university grant. |
Emergency or Peak Periods | Contracts needed for seasonal surges or emergency response situations such as temporary hires for disaster recovery. |
Training Arrangements | Formal apprenticeships or traineeships that extend beyond two years. |
Specialised Project Work | Employment tied to specific, time-limited projects that exceed two years. For example, an engineer on a multi-year infrastructure project. |
Terminating a Fixed-Term Employment Contract
A fixed-term employment contract is intended to expire automatically on a specified end date or upon completion of a specific task. These contracts are typically used when the employment period is predetermined and short-term in nature such as maternity leave cover or project-based roles.
Under the Fair Work Act 2009 (Cth), fixed-term employment contracts must not contain a general termination on notice clause. Early termination is only lawful by mutual agreement or for serious misconduct. Including a notice clause may reclassify the contract as an upper-limit employment contract, exposing the employer to unfair dismissal claims.
If the fixed-term employment contract ends as agreed, it is not a dismissal under section 386 of the Fair Work Act 2009 (Cth). However, early or improper termination may be treated as ongoing employment, creating a legal risk.
Terminating an Upper-Limit Employment Contract
Upper-limit employment contracts differ from fixed-term employment contracts because they include both a set end date and a clause allowing either party to terminate the contract early by giving notice. While this provides employers with greater flexibility, it also introduces specific legal obligations, particularly when ending the contract before its expiry date.
An employee on an upper-limit employment contract has the same protections as a permanent employee if they are terminated before the end of the contract. This means that the employer must:
- Have a valid reason for the termination (e.g., performance, misconduct, or redundancy)
- Follow a fair and lawful process, including providing the employee with an opportunity to respond
- Comply with minimum notice periods and any procedural requirements
If the employer fails to follow proper procedure, the employee may bring an unfair dismissal claim, provided they have met the minimum employment period.
Additionally, when an upper-limit employment term expires, the employer must assess whether the relationship was genuinely intended to end or whether it resembles ongoing employment.
Casee Study: Andersen v Umbakumba Community Council (1994) 126 ALR 121
In the decision of Andersen v Umbakumba Community Council (1994) 126 ALR 121, the court was required to determine whether a succession of short-term employment contracts should be regarded as genuine fixed-term contracts or, when viewed collectively, amounted to an ongoing employment relationship. The factual scenario involved an employee engaged under a series of contracts, each specifying a limited duration, but with provisions allowing for early termination.
The court undertook a detailed analysis of the substance of the employment arrangement, rather than relying solely on the written terms. It was found that the contracts in question included clauses for early termination by notice, which is inconsistent with the strict definition of a fixed-term contract under Australia law. As a result, the court characterised the arrangement as an upper-limit (maximum-term) employment contract, not a genuine fixed-term contract.
A key legal consequence of this characterisation is the application of section 386(2)(a) of the Fair Work Act 2009 (Cth). This section excludes genuine fixed-term contracts from the definition of “dismissal” if employment ends at the expiry of the term. However, because the contracts allowed for early termination by notice, they did not meet this exemption. The court held that where an employer chooses not to renew such a contract, or where the manner in which employment ends indicates that the employee did not voluntarily agree to its conclusion, the termination may be classified as a dismissal. This opens the door for the employee to pursue an unfair dismissal claim under Australia law.
The case highlights several practical considerations for employers:
- Substance Over Form: Courts will look beyond the language of the contract to the real nature of the relationship, including patterns of renewal and how the contract is executed in practice.
- Repeated Renewals: If contracts are continually renewed, or if there is ambiguity about whether the employment relationship is genuinely intended to end, this may indicate ongoing employment.
- Employer Actions: If an employer initiates non-renewal or otherwise acts in a way that suggests unilateral termination, this will be closely scrutinised.
- Statutory Protections: Misalignment between the contract’s stated intent and actual conduct may result in the arrangement being treated as ongoing employment, thus conferring full statutory protections (including unfair dismissal, redundancy pay, and notice requirements) on the employee.
Employers using upper-limit employment contracts must ensure both their documentation and their conduct are consistent with the intended nature of the relationship. Any divergence may expose them to significant legal risk under the Fair Work Act 2009 (Cth) in Australia.
Final Thoughts
Employers must approach fixed-term and upper-limit employment contracts with caution. Employers can’t rely solely on contract wording to avoid liability. Courts and the Fair Work Commission will closely examine the real nature of the employment relationship, including how the contract ends and whether the termination process was fair and lawful.
Frequently Asked Questions
Can I terminate a fixed-term contract early if I include a notice clause?
No. Including a termination on notice clause in a fixed-term contract undermines its fixed nature and may cause it to be classified as a maximum-term contract. Under the new Fair Work Act provisions, genuine fixed-term contracts must not allow early termination unless there is serious misconduct or mutual agreement between the parties.
What happens if I forget to provide the Fixed Term Contract Information Statement (FTCIS)?
Failure to provide the FTCIS at the start of a fixed-term contract is a breach of the Fair Work Act 2009 (Cth). This may result in the contract being treated as ongoing employment, giving the employee access to entitlements such as unfair dismissal protection and redundancy pay. It may also expose the business to regulatory penalties.
What’s the safest contract type if I need flexibility beyond two years?
If you require employment arrangements that may exceed two years or need flexibility to end early, a maximum-term (outer-limit) contract may be more appropriate. However, these contracts are subject to unfair dismissal protections if terminated early, so you must follow fair process. Legal advice is essential to ensure the structure aligns with your business needs and risk profile.
What happens if a fixed-term or upper-limit contract is silent on renewal or extension?
If a contract does not specify whether it may be renewed or extended, and the employee continues working past the expiry date without a new written agreement, the employment may be deemed ongoing. This can expose the employer to obligations such as redundancy pay, notice of termination, and unfair dismissal protections under Australia law.
Can an employer use different titles or job descriptions to avoid fixed-term contract restrictions?
No. Attempting to circumvent fixed-term contract restrictions by changing job titles or descriptions, while the substantive role and duties remain the same, is not effective under Australia law. The Fair Work Commission and courts will look at the actual nature of the work and employment relationship rather than just the written contract or title, and may deem the arrangement ongoing if it is essentially the same role repeated.
