Employers who use fixed term employment agreements must ensure that they understand and comply with their corresponding legal requirements.
A fixed term employment agreement must comply with section 66 of the Employment Relations Act 2000 (‘the Act’). This section of the Act states a fixed term employment agreement can only be used where the parties agree that the employment will end:
- At the close of specified date, or period;
- On the occurrence of a specified event;
- At the conclusion of a specified project.
There is also a legal requirement for the employer to comply with the following:
- Have ‘genuine reasons based on reasonable grounds’ for specifying that the employment of the employee is to end in the specified way; and
- Advise the employee when and how their employment will end and the reasons for their employment ending in that way.
An employer must have a good reason for using a fixed term employment agreement, and the reason must be based on the legitimate needs of their business. Fixed term employment agreements cannot be used to circumvent usual employment law protections & processes.
The Act makes it clear that fixed term employment agreements cannot be used for any of the following reasons:
- To exclude or limit the rights of an employee under the Act;
- To establish the suitability of an employee for permanent employment;
- To exclude or limit the rights of an employee under the Holidays Act 2003.
Failure to comply with the legal requirements associated with fixed term employment agreements may result in claims that the agreement is invalid and the employee being employed on a permanent basis, along with things like arrears claims for not paying holiday pay correctly.
Common situations where a fixed term employment agreement is appropriate to use include:
- To cover an employee taking a period of parental leave, or to provide cover while an employee is injured and needs time off to recover;
- Seasonal work such as fruit picking;
- A peak period of work such as seen in the retail sector over the Christmas holiday period.
Common situations where it is not advisable to use a fixed term employment agreement:
- To test the commercial viability of a role since this has been held by the employment institutions to be an ‘ordinary business risk’. To that end, an employer can simply offer permanent employment in this situation and go through a normal restructuring/redundancy process if the role is subsequently not commercially viable;
- Tied to the temporary work status of an employee on a work visa because this is associated with an employee’s legal ability to work for an employer – rather than a genuine reason associated with the employer’s business and commercial requirements. To that end, an employer can simply offer permanent employment and implement a formal termination process based on an employee’s inability to legally work for the employer if their visa expires, or is cancelled;
- To test the suitability of an employee for permanent employment;
- Situations where a fixed term employment agreement is regularly extended, or ‘rolled over’ for reasons unrelated to the original specified reason, or where the original specified reason for the fixed term is flawed.
Outside of a valid 90 Day Trial Period, if an employer wants to terminate the employment of an employee who is employed on a fixed term employment agreement, then it will need to deal with the issue(s) the same as a permanent employee. Namely, manage any concerns the employer has with the employee appropriately and implement the correct employment process, e.g. performance management, disciplinary process, medical disengagement process, etc. A careful document and thorough process is essential here.
Employers that utilise fixed term employment agreements must ensure that they understand their legal requirements and comply with them. It is essential that an employer completes a level of due diligence when using fixed term employment agreements that includes careful consideration of the reason to support the fixed term period and that agreement itself is adequately drafted.
Where employers fail to comply with the law regarding fixed terms agreements, then this can lead to claims that the employee has defaulted to a permanent employment relationship, arrears claims for failing to pay holiday pay correctly and in certain circumstances successful unjustified dismissal claims.