There are some important differences between a fixed-term and an upper-limit employment contract. If you do not classify the employment arrangement correctly, your business may be facing unexpected termination payments and other legal issues.
If you’re not sure whether an agreement is a fixed-term or upper-limit contract, you should contact an employment law firm.
What is a fixed-term contract?
A contract is a fixed-term contract if:
- the contract terminates by the passing of time at the end of the six-month period, rather than at the initiative of the employer
- the commencement and end date are unambiguous (this also applies to extensions of the fixed term)
Fixed-term contracts, by their very nature, are intended to give both parties certainty.
What is an outer limit (or upper limit) contract?
A contract is not a fixed-term contract if:
- the contract gives either party an unqualified right to terminate the contract on notice, or with payment in lieu of notice (regardless of whether a party exercises that right)
- the commencement and end date are ambiguous (this also applies to extensions of the fixed term)
- there are a series of fixed-term contracts and renewal is a mere formality
- the contract includes a term (i.e. 12 months) but does not state that the employment relationship will come to an end when that term expires
The court’s reasoning is that ‘Fixed-term contracts, by their very nature, are intended to give both parties certainty in relation to the date of commencement, duration of the employment relationship and the completion date.
The inclusion of a termination provision within a fixed-term employment contract destabilises this certainty, which explains why the Courts and the Commission have found that the inclusion of such provisions prevents the contract from being classified as a fixed-term contract’.
There is, therefore, a distinction between:
- a fixed-term contract (which contains no termination provision, except for breach of contract/default and does not get the benefit of unfair dismissal protection); and
- maximum term / outer limit contracts (which contains termination on notice provisions (including probation periods), identifies the date beyond which the employment relationship will not continue and does get the benefit of unfair dismissal protection).
If you seek to terminate an employee on an outer limit contract, you must go through the same process as you would with employees who are engaged under ongoing contracts, otherwise there is exposure to an unfair dismissal claim or (if the term has run for a sufficient length of time) redundancy pay, plus potential penalties under the Fair Work Act 2009.
Termination of fixed-term and outer limit contracts
Outer limit contracts and the Fair Work Act
Section 386 of the Fair Work Act 2009 defines when a person is considered to have been ‘dismissed’ for the purpose of the unfair dismissal provisions.
A person is taken to have been dismissed if their employment has been terminated at the employer’s initiative or if a person has resigned (but was forced to do so by the employer).
However, a person has not been dismissed if the person was employed under a ‘contract of employment for a specified period of time’ (i.e. fixed term contract) and the employment has terminated at the end of the period. The rationale is that a fixed-term contract comes to an end by agreement of both parties, rather than at the initiative of the employer.
Case law and outer limit or fixed term employment contracts
The courts have held that outer limit employment contracts do not fall within section 386(2)(a) above because an outer limit contract cannot be classified as a fixed-term contract (Andersen v Umbakumba Community Council (1994) 126 ALR 121)
The courts have then considered in what circumstances a person will be considered to / not to have a ‘contract of employment for a specified period of time’. Below are some principles which have come out of the case law:
|Topics||Fixed Term||Outer Limit|
|Redundancy||Not payable||Payable if the term has run for a sufficient length of time|
|Unfair dismissal||No protection||The employee has access to unfair dismissal protections|
|Termination for any reason||Disallowed – termination must be for breach/default||Allowed during the probation period|
|Termination for breach||Allowed at any time||Allowed, but always exposed to a risk of an unfair dismissal claim|
|Flexibility on term||Minimal flexibility regarding the term, however, this can be addressed by (for example) having a six-month term plus a six-month extension option||Greater flexibility during the probation period, however, there is an exposure to an unfair dismissal claim after the first six months|
Andersen v Umbakumba Community Council (1994) 126 ALR 121
In the above case, the Court stated the rules for determining whether an employer has initiated the termination of an outer limit employment contract pursuant to section 386(1)(a), after that contract has expired:
Consider the entire employment relationship
The question should be answered by referring to the employment relationship. The analysis should not be done solely by reference to the termination of the contract of employment. A consideration of the circumstances of the entire employment relationship and not merely the terms of the final employment contract is necessary where the termination has occurred at the end of a series of outer-limit contracts.
Unilateral decision of the employer
Termination at the initiative of the employer means that the termination of the employment contract was brought about by an employer. It is also necessary that the termination was not agreed to by an employee.
Where an employee does not voluntarily end their employment or agree to the termination of the employment contract, the focus is on the employer. Was the action on the part of the employer the principal contributing factor that resulted (directly or consequentially) in the termination of the employment contract?
A genuine agreement to end after a specified date
A contract will not be considered where the terms of a fixed-term contract reflect a genuine agreement to end the employment after a specified date. This requires that the contract reflects a true intention on the part of the employer and the employee that the employment relationship will not continue after a specified date. There must not be anything that would indicate to the contrary.
However, if the term contract does not in represent a genuine agreement that the employment relationship will end at a particular time, the decision not to offer a further contract will be one of the things taken into account. It will be an indicator that the employer was the principal contributing factor that resulted in the termination of the employment.
Matters that may indicate an outer limit employment contract
An illegal contract or one that is contrary to policy
The term of the contract may be illegal or contrary to public policy. It needs to be determined whether it is appropriate and usual in the relevant industry or occupation where employment is constituted by successive short-term contracts. If it is not, this could be problematic for an employer.
An employment contract may not be limited to the terms of a written document. An employment contract may be one of a series of standard form contracts that operated for the administrative convenience of the employer. In those circumstances, the employment contract may not represent the reality of the employment relationship.
Contrary to a Modern Award or Enterprise Agreement
The terms of an outer limit employment contract may be inconsistent with the terms of a Modern Award (or enterprise agreement). They may prohibit or regulate terms of employment. If they do, they will take precedence over the employment contract.
How can Prosper Law help?
If you are entering into an employment contract, talk to our executive employment lawyer and request a quote.
Farrah Motley | Director
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