Whether you’re expanding offshore or simply growing your local operations, hiring new employees represents a key moment for your business. Not only does it enable you to connect with fresh talent, but it also provides a platform to build an engaged workforce; one that gives your business a competitive advantage in new markets.
When hiring employees, it’s important that you first assess the pros and cons of fixed-term employment contracts against indefinite-term employment contracts. Depending on your industry, the size of your business, and the person you’re hiring, it’s likely that one form of contract will ultimately be best for you and your employee.
In this article, we highlight what a fixed-term contract is, why you need to know the difference between fixed-term contracts and indefinite-term contracts, and which contract type may be most appropriate for your business.
Note: This article provides general information on employment contracts as they operate internationally. To assess your specific situation, it is recommended you seek professional legal advice in your location.
Key Takeaways
1. Fixed-term contracts, also known as limited-term contracts, establish a start and end date for an employment agreement.
1. Usually, neither an employer nor an employee can terminate a fixed-term employment contract without proper cause.
3. Fixed-term employment contracts give employers the ability to cover a certain period when a company may be short of staff or busier than normal.
4. Because fixed-term employment offers employees less long-term job security, these roles can be more challenging to fill.
5. Employees still working for the employer after the term period has lapsed are usually classified as permanent employees, under law.
What is the definition of a fixed-term employment contract?
A fixed-term employment contract is defined as a contract where an enterprise or company hires an employee for a specific time period. Fixed-term contracts, also known as limited-term contracts, establish a start and end date for an employment agreement.
Fixed-term employees are often hired as a cover for an absent employee, to fill a human resources gap, or to staff a large project. In a majority of instances, a fixed-term employment contract is drafted for the period of several months to one year.
Generally speaking, an employer or employee cannot terminate a fixed-term agreement early.
Once a contract has expired, a company can either renew, extend, or terminate the contract. However, in the case of contract renewals, companies need to be mindful of in-country workplace regulations. This is because many countries stipulate limitations on the frequency an employment contract can be renewed — which is seen as a means of protecting its citizens from unfair dismissals, potential abuses, and stemming the cycle of short-term work.
How does a fixed-term employment contract work?
The main feature of a fixed-term labor contract is that employment ends on a particular date, or at the completion of a specific task. Employees are not defined as “fixed-term” if they are contracted through an agency, are on work experience, or are an apprentice. Likewise, they are not defined as a fixed-term employee if they are employed through an independent contractor agreement.
Neither an employer, Employer of Record, nor an employee can terminate the contract without proper cause. Furthermore, there must be an agreement between both parties to maintain the employment arrangement for the duration of the contract term. This may only be changed if the reasons for termination enable the parties to end the contract early.
Under the applicable industrial regulations, fixed-term employees typically have the same rights as permanent employees (such as comparative benefits and bonuses). The one exception is if an employer has a valid reason to justify not giving a fixed-term employee a particular benefit (such as travel allowance when the employee works from home).
What is an indefinite employment contract?
An indefinite employment contract is different from an offer of employment. An employment offer comes before the employment contract, can be conditional or unconditional, and lays out the basic employment details. An employee should know from the employment offer if the employment contract will be fixed-term or indefinite.
The most common employment contract is an indefinite (or permanent) contract. Indefinite employment contracts specify an employee’s agreed hours and have no predetermined end date. That is, they have a continuous, ‘indefinite’ period.
While indefinite-contract employees have better long-term job security than fixed-term employees, they can still have their employment terminated through lawful termination.
The other ways that indefinite employment can end is if an employee resigns or retires, or if a business shuts down.
For an employee, the benefits of an indefinite contract are more certainty and stability regarding their role. Most notably, there is greater protection in the form of international labor laws (such as severance pay). For employers, they are likely to see more loyalty from their indefinite-contract employees.
For companies that are scaling their operations by expanding a particular team, establishing an entity in a new location, or filling a gap due to a shortage of staff, indefinite-employment contracts provide greater flexibility than fixed-term contracts.
What are an employee’s rights in a fixed-term employment contract?
- Employees on a fixed-term employment contract generally have the right not to be treated less favorably than comparable permanent employees.
- An employee who has been employed for four or more years on successive fixed-term contracts may automatically become a permanent employee. The only exemption is if an employer can highlight a justifiable reason not to do so or there is a collective agreement that removes this right.
- Fixed-term employees who have worked continually for two or more years may be entitled to a redundancy payment – if the reason for the non-renewal is redundancy.
- Fixed-term employees have the right to be informed by their employer of available vacancies in the enterprise they work in.
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What are the benefits of a fixed-term employment contract?
A fixed-term employment contract has several key advantages for employers. Firstly, an employer is not required to go through the usual termination or dismissal periods, which means they do not need to take into account relevant notice periods and notice prohibitions (unless a premature termination is involved). This makes fixed-term employees a flexible option as part of a businesses’s ‘contingent workforce‘.
Fixed-term employment contracts automatically expire — or are renewed — when the term outlined in the employment contract has expired. Because of this reason, fixed-term labor contracts can be adopted as a form of ‘trial contract’ (so long as there are not consecutive fixed-term contracts). In contrast, trial periods for indefinite contracts are generally capped at a maximum of two months.
For employers who feel a two-month trial period is not long enough, they can opt to first enter into a fixed-term contract with their employee. This allows an employer to assess whether an employee is suitable for a long-term role.
Another advantage of fixed-term employment contracts is the ability to cover a certain period when a company may be short of staff or busier than normal. An example could be a beach hotel or a ski resort — both of these businesses are seasonal and have predictable surges throughout the year. In these instances, a fixed-term labor contract enables a company to gain extra staff to help meet that demand. Once the demand has subsided, the company would not need to keep the employee on your payroll. Hence, the benefit of a short-term contract.
Fixed-term employees can also bring new skills and experiences that a company’s current team does not possess. If there is a certain project that would complement the growth of a business, a fixed-term employee can join a company’s team and work until that project’s completion. This is particularly beneficial if a company does not have the existing workforce with the skills to perform that project (for instance, if the project is niche or technical).
What are the risks of a fixed-term employment contract?
One of the major drawbacks of a fixed-term contract is that it can be hard to recruit. This is because candidates may not find the prospect of a short contract as attractive as an indefinite or permanent option.
Because an employee’s contract is time-limited, it can also be more challenging to build a cohesive team. This can result in significant turnover which can hurt a company’s bottom line.
Additionally, if a fixed-term employee isn’t the right fit, an employer may want to terminate the contract early. However, if the contract has been drafted to disallow early termination, an employer would potentially need to pay the employee for the time left in their contract.
The one exception would be if the employee had committed a gross act of misconduct.
How to renegotiate a fixed-term employment contract
During the life of a contract of employment, some of its terms and conditions may change. This can happen for various reasons including the length of employment, changes in technology and pay increases. Any proposed change or variation to a fixed-term labor contract should be negotiated between the employer and employee. That is, one party cannot legally change the contract without the consent of the other party. Just because an employer wants to change the contract does not mean an employee has to accept the change. They are entitled to say “no” to a proposed change.
Employers are unable to continually renew or extend a fixed-term contract to the point that renewal becomes just a formality.
Employees still working for the employer after the term period has lapsed are permanent employees, under law. Employers will have to treat them as a permanent employee, with the same conditions as their old contract, but without the term limitations. To renew or extend the employees fixed term contract, a new contract with a new specified time period or task will need to be agreed upon.
Conclusion
Fixed-term employment contracts are ideal for specific tasks or projects — such as seasonal work. The contract operates for a certain period which is agreed upon by both the employer and employee. When the end date of the employment contract is reached, the contract automatically expires without the need for the employer or employee to terminate it.
Accordingly, fixed term contracts are generally utilized in circumstances where the nature of the work is a set duration only, or it’s linked to the conclusion of a project.
While fixed-term employment contracts allow a company to cover for a certain time period, they can be harder to fill than indefinite-term contracts. This is because they offer less long-term job security to prospective employees.
At Horizons, our team of legal and HR experts help you recruit and onboard in more 180+ countries. Our employment contracts – which can include fixed-term contracts – are drafted in full compliance with country-specific rules and regulations.
Frequently asked questions
Yes, in most jurisdictions. However, it is important to check which limitations (such as time limits) might apply to fixed-term employment contracts in some jurisdictions.
It depends on the jurisdiction. For example, in the UK, a fixed-term employee automatically becomes a permanent or indefinite employee after four years of fixed term contracts.
