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Significant decision on the use of fixed-term contracts

Submitted on Thursday, 21st December 2017

A recent Full Bench decision of the Fair Work Commission (the “Commission”) found an employee’s employment had been terminated at the initiative of the employer when his fixed term contract was not renewed beyond its expiry date. The direct consequence of the finding is the employee is now able to pursue a claim for unfair dismissal even though his fixed term contract expired according to the agreed end date. Historically an employee employed on a fixed-term contract described by the Commission as “time-limited” has been unable to pursue a claim for unfair dismissal in circumstances where the employment contract expired due to what is referred to as the “effluxion of time”. The rationale being the employment had not ended at the initiative of the employer but rather it had expired according to the agreed terms. This decision potentially opens the door for an employee to pursue an unfair dismissal claim when a decision has been made to not renew a fixed-term contract upon its expiry. Accordingly, employers are advised to carefully consider the use of fixed-term contracts in circumstances where on the face of it the work is of an ongoing nature.

Decision

In Khayam v Navitas English Pty Ltd(the “Navitas decision”) the Commission held that not renewing a fixed-term contract after it had expired at the agreed end date does not exempt an employee from making an unfair dismissal claim. It had previously been widely accepted that an unfair dismissal claim could not be made when a fixed-term contract is not renewed. Accordingly many employers utilise the use of fixed-term contracts as a means of providing flexibility in circumstances where it may not be certain the work is ongoing in nature or, the employer wants to trial the employee before making a decision to offer more permanent employment. Many sectors widely use fixed-term contracts for these and other reasons in the knowledge they can safely decide to not renew the contract upon its expiry. The Navitas decision means employers should now consider the possibility of an unfair dismissal claim when intending to not renew a fixed-term contract.

When analysing the nature of a fixed-term contract, the Commission has established there is a difference between a “time-limited” contract and a contract for a “specified period of time”. A “time-limited” contract is deemed to be one where the employment is reasonably expected to continue until its agreed expiry date but nonetheless the employer has the discretion to end the employment with the required period of notice before the agreed expiry date. On the other hand, a contract which is genuinely for a “specified period of time” cannot be terminated with notice prior to the expiry date for any reason other than for serious misconduct. Such contracts are often used when the work is for a specific project which has an expected start and finishing date or when the work is funded by an external source for a defined period. The difference between the two concepts is important as the non-renewal of a genuine contract for a “specified period of time” will still most likely be exempt from the unfair dismissal legislation. The Navitas decision is relevant to the non-renewal of “time-limited” contracts.

Factors employers should consider

The Navitas decision does not provide absolute guidance as to whether an employee will be able to claim unfair dismissal in circumstances where a “time-limited” contract is not renewed. The decision discusses the difference between the concepts of the employment relationship and the contract of employment. The decision outlines five factors employers should consider when assessing whether an employee may be able to make a claim for unfair dismissal if a time-limited contract is not renewed beyond its expiry date. Those factors can be broadly summarised as follows:

1.       Consideration should be given to the entire employment relationship, not just the terms of the final contract, especially in situations where there may have been a sequence of rolling time-limited contracts.

2.       In circumstances where the employment relationship is not left voluntarily by the employee, the Commission will focus on whether an action on the part of the employer was the “principal contributing factor which results, directly or consequentially, in the termination of the employment”.  

3.       In circumstances where the parties to a time-limited contract have agreed the contract will expire on a specified date but have not agreed on the termination of their employment relationship, it may be the case that the termination of employment is effected by the expiry of the contract, but that does not exclude the possibility that the termination of employment relationship occurred at the initiative of the employer.       

4.       Where the terms of a time-limited contract reflect a genuine agreement on the part of the employer and employee that the employment relationship will not continue after a specified date and the employment relationship comes to an end on the specified date then unless there is a vitiating factor which renders the contract void, the employment relationship will have been terminated by reason of the agreement between the parties and there will be no termination at the initiative of the employer.

The time-limited contract itself may be vitiated by one of the recognised categories by which the law excuses parties from performance of a contract, such as:

[1] [2017] FWCFB 5162 

  • the employee entered into the contract as a result of misrepresentation or misleading conduct by the employer;
  • the employee entered into the contract as a result of a serious mistake about its contents or subject matter;
  • there has been unconscionable conduct associated with the making of the contract, which may relevantly include that the employer took advantage of a disability affecting the employee such as lack of education, lack of information, lack of independent advice or illiteracy;
  • the employment contract was entered into by the employee under duress or coercion resulting from illegitimate pressure on the part of the employer;
  • the employee lacked the legal capacity to make the contract; or
  • the contract was a sham in the sense that it was not intended by the parties to give legal effect to its apparent terms.

Lessons

In sum, the Navitas decision provides employees more scope to claim unfair dismissal in circumstances where a limited-term contract has not been renewed beyond its expiry date. The decision highlights the complexities between the contract of employment and the employment relationship. That is, the employment relationship may continue even though the contract of employment has ended. In such a circumstance an employee may have the right to claim unfair dismissal. At the outset of the employment relationship it is important employers carefully consider the possible implications of engaging employees on limited-term contracts. Similarly employers should seek advice when not renewing the employment of an employee engaged on a time-limited contract.  

 

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