Fixed term contracts

Fixed term contracts are versatile legal structures used across multiple business contexts, from employment relationships to commercial agreements. They offer defined timeframes and clear completion parameters, providing businesses with strategic flexibility to adapt to changing circumstances and address short-term needs without long-term commitments.

While primarily associated with employment law, fixed term contracts are also commonly used for consultants, freelancers, and commercial agreements in sectors such as IT, property, and professional services.

Key Points Summary - fixed term employees

1. Employees on fixed term contracts are entitled to equal treatment with permanent employees, including comparable terms, benefits, and opportunities unless objectively justified.

2. After four years of successive fixed term contracts, employees automatically convert to permanent status unless the employer can provide genuine objective justification.

3. Non-renewal of a fixed term contract constitutes a dismissal in law; under unfair dismissal law, employers must have fair reasons and follow proper procedures for employees with two years' service.

4. Including proper early termination provisions is essential; without them, employers may be liable to pay for the entire remaining contract term if terminated prematurely.

5. Fixed term employees can bring discrimination claims from day one - no qualifying period applies for claims related to protected characteristics.

Fixed term employment contracts are regulated

The primary legislation governing fixed term contracts in the UK is the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002.Key rights for fixed term employees in the Regulations include :-

• Equal treatment - entitled to the same terms and conditions as permanent employees (e.g. pay, holidays, pensions).

• Automatic permanent status - if an employee has been on successive fixed-term contracts for four years or more, they may automatically become a permanent employee, unless the employer can justify continued use of fixed-term arrangements.

• Redundancy and dismissal rights - same rights to redundancy pay and unfair dismissal protection as permanent staff, provided they meet the required length of service.

• Non-renewal = dismissal - non-renewal legally treated as a dismissal, meaning employers must follow fair dismissal procedures to avoid claims.

Common Uses for Fixed Term Contracts

Fixed term contracts are typically used in the following situations:

• Covering temporary absences (maternity leave, long-term sickness)

• Seasonal work (retail Christmas staff, summer hospitality roles)

• Project-based work with defined timelines

• When funding is only available for a limited period

• To fill skills gaps or acquire specialist expertise temporarily

• To manage fluctuations in business demand

• Providing interim leadership during recruitment for permanent roles

Risks and Considerations for Employers

• Lack of proper notice provisions leading to breach of contract claims

• Risk of claims for discrimination

• Need to monitor contract durations to prevent unintentional conversion to permanent status

• Unintentional creation of permanent employment through implied terms

• Regular renewal processes requiring careful documentation

• Need to adhere to consultation requirements for non-renewal

• Lower employee engagement and commitment

Ending Fixed Term Employment Contracts

Fixed term contracts typically end automatically when they reach the agreed end date. This is considered a dismissal in law, so employers should ensure there is a fair reason for non-renewal (if the employee has two years' service) and follow a proper procedure similar to dismissal processes

If a fixed term contract needs to be ended early:

• The contract must include an early termination clause (notice provision)

• Proper notice must be given according to the contract or statutory minimums

• Without an early termination clause, employers may be liable to pay for the remainder of the contract term

• Fixed term employees are entitled to minimum notice periods of 1 week if they've worked continuously for at least 1 month and 1 week for each year if they've worked continuously for 2 years or more

"Objective Justification" relevance

A key concept in managing fixed term contracts is "objective justification" which means having legitimate business reasons for:

• Using a fixed term rather than permanent contract

• Treating fixed term employees differently than permanent staff

• Continuing to use fixed term contracts beyond four years

Valid objective justifications might include:

• Genuine need for temporary cover during absence

• Project-based work with a clear end date

• Funding that is genuinely time-limited

• Seasonal fluctuations in business demand

Contract Renewal and Continuation

When a fixed term contract comes up for renewal, employers should consider:

• Whether the role is still temporary in nature

• How many previous renewals have occurred (approaching four years?)

• If the employee has accrued employment rights (e.g., unfair dismissal protection)

• Whether proper consultation has occurred regarding renewal/non-renewal

If an employee continues working past the end date without formal renewal, there is an 'implied agreement' that the end date has changed, and proper notice would be required to terminate.

Non-Employment Fixed Term Contracts: Key Considerations

Fixed term contractual arrangements are also widely used in other commercial contexts. Key considerations for non-employment fixed term contracts include:

• Essential Clauses - include precise termination mechanisms, extension/renewal terms, early termination rights, key personnel provisions, intellectual property rights provisions, and confidentiality obligations extending beyond the term.

• Service level agreements (IT contracts) - consider price review provisions, and exit/transition arrangements

• Common Risks - watch for automatic renewal "evergreen" clauses, inflexibility to changing business needs, termination rights imbalance, inadequate performance remedies, and regulatory change implications

• IT and Technology Considerations -  address rights to updates/patches, technology obsolescence, data migration rights, and intellectual property ownership