The dangers of not renewing fixed-term contracts

24 Jan 2018 By Sam Murray-Hinde

They can give certainty and flexibility and are useful where a business has a specific project of limited duration, but employers should exercise caution when considering termination, says Sam Murray-Hinde

Employers are sometimes unaware that fixed-term employees have the same legal rights as permanent staff, as well as additional protection under the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2002. Termination is therefore not always straightforward and getting it wrong can be costly. 

The point at which the process for terminating a fixed-term contract, or discussing its renewal, needs to start will depend on what notice provisions, if any, are included. Some fixed-term contracts expire automatically on the expiry date, on completion of a specific task or the occurrence or non-occurrence of an event. Others will provide for a period of notice to be served ahead of the expiry date. 

If the employer is looking to terminate early, it should check that there is a break clause. Save in cases of gross misconduct, where the contract is terminated ahead of the expiry date the employee will have a claim for loss of earnings for the remainder of the term, which could be expensive. Conversely, where there is a requirement to serve notice before the expiry date, failing to do so may leave the employee needing to make a payment in lieu, or extend the contract. 

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. 

Fair reasons for dismissal

Where an employer does not wish to renew the contract, and where the employee has two or more years' continuous service, it will need to show one of the five potentially fair reasons for dismissal. Consideration should be given to what reason will be relied on ahead of the expiry date to allow the employer time to prepare, particularly if notice needs to be served. A fair procedure should be followed, although the Acas Code of Practice on Disciplinary and Grievance Procedures expressly states that it does not apply to the non-renewal of fixed-term contracts. 

Redundancy is the most common reason for non-renewal, although employers will need to carefully consider the pool for redundancy, as well as the availability of alternative employment. The employee may also be entitled to a statutory redundancy payment.

Employers should be aware, however, that where a fixed-term contract has been used to cover the absence of a permanent employee, the fixed-term employee will not be redundant on the return of the permanent employee. This is because the statutory definition of redundancy is not met, as before and after the dismissal there was a requirement for one person to carry out the work. The employer would need to rely on 'some other substantial reason' in those circumstances.

Ultimately, the reason for dismissal will depend on the employer's reason for using the fixed-term contract, unless there are performance or conduct issues. The usual ‘band of reasonable responses’ test will apply to whether it was fair to dismiss for that reason.

Employers should monitor the operation of fixed-term contracts and diarise expiry dates so that decisions can be made in good time as to whether the contract is to be renewed for a further fixed term, continued indefinitely or terminated. Where the employee qualifies for unfair dismissal rights, the employer should follow a fair procedure and identify a fair reason for termination.

Sam Murray-Hinde is a partner in the employment team at Howard Kennedy

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