Understanding fixed-term contracts

Fixed-term employment lasts for a specified length of time. Alternatively, such contracts can end with the completion of a specified task or when a particular event takes place.

For example, fixed-term employees can be brought in to cover for permanent staff on long-term sickness or maternity leave or to cope with increased seasonal demand.

The key advantage is that employers can benefit from specific skills without the cost of a longer-term commitment.

If you don’t treat fixed-term employees in accordance with their legal rights, it can lead to grievance procedures and possibly legal action through an employment tribunal.

Agency workers, apprentices and students on work placements are exempt from fixed-term employment regulations.

This guide explains how fixed-term employees are classified and how you must treat them. Seeking professional advice is also always a good idea in matters of employment law.

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What rights do fixed-term employees have?

Fixed-term employees have the right not to be treated less favourably than comparable permanent employees because they are on a fixed-term contract.

This means you must treat fixed-term employees the same as comparable permanent employees unless there are ‘objectively justifiable’ circumstances for not doing so (ie there is a genuine, necessary and appropriate business reason).

This means the same or equivalent (pro-rata) pay and conditions, benefits, pension rights and opportunity to apply for permanent positions within the business.

Under the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, employees who have been on a fixed-term contract for four years or longer will usually be legally classed as permanent if their contract is renewed or if they are re-engaged on a new fixed-term contract.

The only exemptions are when employment on a further fixed-term contract is objectively justified to achieve a legitimate business aim or when the period of four years has been lengthened under a collective or workplace agreement.

You also need to make the same tax arrangements for fixed-term employees as for permanent staff.

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How the ‘equal treatment’ principle works

Fixed-term employees have the right not to be treated less favourably than permanent employees because of their employment status.

To assess whether they are receiving equal treatment, a fixed-term employee can compare their employment conditions to that of a comparable permanent employee. This means someone working for you in the same place, doing the same or similar work. Skills and qualifications are taken into account where relevant to the job.

If no comparable permanent employee works in the same place, a fixed-term employee can choose someone working for you at another premises, but not someone working for a different employer.

An employee will not be a comparable permanent employee if his employment has ceased.

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How ‘less favourable treatment’ is defined

Less favourable treatment happens when a fixed-term employee does not receive conditions or benefits granted to a comparable permanent employee – or receives or is offered a benefit on less favourable terms.

Examples of less favourable treatment would include not being given a bonus or receiving fewer paid holidays than comparable permanent employees.

If you give training to permanent employees, you must not deny fixed-term employees access to it unless it can be objectively justified. In addition, permanent staff must not enjoy preferential treatment for promotion or redundancy, unless objectively justifiable.

If a fixed-term employee feels less favourably treated because of their employment status or believes their rights have been infringed, they can request a written statement from you detailing the reasons. You must produce this within 21 days. If you don’t believe less favourable treatment has been given, the statement should say so. The statement might be used at an employment tribunal hearing.

What is objective justification?

Less favourable treatment will be justified on objective grounds if you can show that it is necessary and appropriate to achieve a legitimate and genuine business objective.

You should consider offering fixed-term employees certain benefits (eg loans, clothing allowances, etc) on a pro-rata basis. Sometimes, the cost to you of offering certain benefits to a fixed-term employee may be disproportionate to the benefit the employee would receive. This may objectively justify different treatment.

How do employers objectively justify different conditions?

You can argue that there is objective justification for treating the fixed-term employee differently.

Alternatively, you may prove that the value of the fixed-term employee’s overall terms and conditions at least equal the value of those of the comparable permanent employee.

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Fixed-term employment benefits

Some employment benefits such as season ticket loans, health insurance or staff discounts can be offered on an annual basis or over a specified period. Where a fixed-term employee is not expected to work for this period, you might offer it in proportion to the contract duration (‘pro-rata’).

If this is not possible because the cost to you would outweigh the benefit to the employee, you can claim objective justification for not offering the benefit.

You need to consider whether less favourable treatment is objectively justified on a case-by-case basis.

Access to occupational pension schemes

You must offer fixed-term employees access to occupational pension schemes on the same basis as permanent staff.

You do not need to offer special alternative benefits (eg contributions to a private pension scheme) to fixed-term employees who decide not to join a pension scheme, unless this option is offered to comparable permanent employees.

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What redundancy rights do fixed-term employees have?

Fixed-term employees have a right to statutory redundancy pay if they have been continuously employed for two years or more.

However, if the fixed-term employee is on a contract which has not been renewed or extended since 1 October 2002, and they have signed a waiver clause on that contract, it still applies and they are not entitled to statutory redundancy pay.

If the contract was renewed or extended after this date, and the fixed-term employee has at least two years’ continuous service, they will be entitled to statutory redundancy pay and any waiver signed will not stand.

Fixed-term employees on task contracts of two years or more have a right to statutory redundancy pay if they are made redundant at the end of their contracts.

Fixed-term employees cannot be excluded from the statutory redundancy payments scheme. However, they can be excluded from contractual schemes if this is objectively justified.

Selection for redundancy

Fixed-term employees cannot be selected for redundancy simply because of their employment status. Where fixed-term employees have been brought in to complete a particular task or as cover over a peak period, you can objectively justify selecting them for redundancy at the end of their contracts.

Where length of service is the main criteria for redundancy selection, it should apply to both fixed-term and permanent employees unless there is objective justification.

Fixed-term employees should also receive the same level of redundancy pay as permanent employees.

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Changes to statutory employment rights

If an employment contract terminates when a task is completed or an event occurs or does not occur, this is legally classified as dismissal.

This gives fixed-term employees the same statutory rights as permanent employees or others on different fixed-term contracts, including the right:

• not to be unfairly dismissed (after one year’s continuous employment)
• to a written statement of reasons for dismissal (after one year)
• to statutory redundancy payments (after two years)

Employees working on task contracts lasting up to three months have the right to the same minimum notice period as permanent employees and those on longer fixed-term contracts. Notice requirements apply only when contracts are terminated before the agreed expiry date.

Employees on fixed-term task contracts of up to three months have the right to one week’s notice if their contracts are prematurely terminated after one month or more. It also means they must give you one week’s notice of termination.

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Limiting the use of successive fixed-term contracts

If fixed-term employees have their contracts renewed or if they are re-engaged on a new fixed-term contract after four or more years of continuous employment, (ie under one contract lasting in excess of four years or under a contract which, taken with an immediately previous fixed-term contract, amounts to four years or longer in length) the renewal or new contract becomes permanent.

Continuous employment usually means employment without a break, although breaks for strike action and time spent out of work appealing against unfair dismissal (if the employee is subsequently reinstated) are not counted.

The only exceptions are when employment on a fixed-term contract can be objectively justified, or if the period of four years has been lengthened under a collective or workplace agreement.

For more information on collective workplace agreements, see our guide on how to work effectively with trade unions.

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Informing fixed-term employees about permanent vacancies

You must inform fixed-term employees of permanent vacancies in your organisation, and give them the same opportunity as others to apply for such roles.

You should inform fixed-term and permanent employees of such vacancies at the same time and in the same way.

Displaying a vacancy notice where all employees can see it or emailing the vacancy to all staff members will usually enable you to do this effectively.

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