An employer's guide to fixed-term contracts

Employees working on a fixed-term contract are subject to the Fixed-Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 (the Regulations). These Regulations provide that a fixed-term contract is one which states it will terminate:

• On the expiry of a fixed-term;
• On the completion of a specific task; or
• On the occurrence or non-occurrence of a specific even; for example, a contract dependent on the existence of specific funding and which will terminate when that funding comes to an end.

The Regulations apply to all employees working on fixed-term contracts except students, apprentices, agency workers, members of the armed forces and employees in government or institution funded or supported training, work experience or temporary work schemes.

Download our model fixed-term contract document.

Equal Treatment

A fixed-term worker has the right to be treated no less favourably than a comparable permanent employee with regard to the terms of their contract or by being subject to any other detriment by an act, or a deliberate failure to act, by their employer. The Regulations specifically indicate that these rights apply to:

• Any period of service qualification relating to any particular condition of service, for example, entitlement to receive company sick pay;
• The opportunity to receive training; and
• The opportunity to obtain permanent employment at the establishment.

In considering whether or not there has been less favourable treatment, a fixed-term employee must compare their terms and conditions with a comparable permanent employee. A comparable permanent employee is one who is working for the same employer, in the same establishment, doing similar or broadly similar work. Where there is no comparable employee at a particular establishment, the fixed- term worker may look at other employees of the employer, employed at different establishment. They cannot, however, compare himself with employee of an associated company of their employer, former employees or hypothetical comparators.

Less favourable treatment occurs when a fixed-term employee is given different contractual terms to a permanent employee or where a particular benefit is given to permanent employees but not fixed-term employees, whether or not this is a contractual benefit. Fixed-term employees should not be subject to disadvantages on the basis of their fixed-term status, for example, being selected for redundancy or not being considered for promotion on the basis of their status as fixed-term employees. Less favourable treatment can also include a failure to act, for example, where permanent employees are given an annual appraisal, but fixed-term employees are not.

A failure to extend a fixed-term contract does not in itself amount to less favourable treatment, but it may result in an unfair dismissal (see below).

Regulation 3(5) of the Regulations states that in determining whether a fixed-term employee has been treated less favourably than a comparable permanent employee, the pro-rata principle shall be applied unless it is inappropriate in the circumstances. This means that a fixed-term employee is entitled to such proportion of pay and benefits available to permanent employees as is reasonable having regard to the length of the fixed-term contract and the terms upon which the benefit is provided. For example, if an employer gives permanent employees an annual bonus, then an employee on a six month contract should receive 50% of this, unless the employer can demonstrate that this would be inappropriate. The same would apply to benefits such as private health insurance, loans for season tickets, or subsidised gym membership.

Objective Justification

For the Regulations to be breached, the less favourable treatment must be on the grounds of the fixed-term contract. To defend such a claim, either the employer would have to show that the less favourable treatment was not because of the fixed-term status or, where the treatment was for that reason, it can be objectively justified. 

The treatment may be objectively justified if the terms of the fixed-term contract, taken as a whole, are at least as favourable as the terms of the comparable permanent employee’s contract of employment. The Department for Business, Innovation and Skills (BIS) guidance to the Regulations (now archived) suggests that the employer should consider whether there is a good reason for treating a particular employee, or group of employees, less favourably, giving due regard to the rights of the individual and trying to balance these with the business objective. 

To establish objective justification, the employer will need to show that the treatment in question:

• is to achieve a legitimate aim;
• is necessary to achieve that aim; and
• is an appropriate way to achieve that aim.

How can an employer objectively justify different terms of employment? 

There are two ways that an employer can do this. One involves justifying individual terms separately (the 'term-by-term approach) and the other involves looking at the overall value of the employee’s employment package (the package approach).

For the 'term-by-term' approach, the employer will have to demonstrate a good business reason for the different treatment and that it has acted proportionately. The BIS guidance recognises that the cost of providing a particular benefit may be disproportionate to the benefit enjoyed by the employee. For example, the cost of supplying a company car to an employee may be very expensive and there may be other ways of providing equivalent travel facilities for the employee.

For the package approach, the employer has to demonstrate that the total value of the fixed-term employee’s package is at least of equal value to that of the permanent comparator. The employer must compensate the employee for the loss of a specific benefit by paying the fixed term-employee more or providing some alternative benefit of equivalent value. The employer should look to the objective monetary value of these benefits in deciding whether the overall packages are equivalent.

Employers can also objectively justify a less favourable overall package if the difference derives from the withdrawal of a benefit which can in itself be withheld on an objectively justified basis. For example, where an employee on a three month fixed-term contract does not receive a company car where permanent equivalent employees do, the justification would be that the cost of supplying a car for a short period would be disproportionate and that costs of travel can be met in other ways. 

An employer may also point to differences in the jobs that the fixed-term employee and their chosen comparators do. The two jobs have to be “broadly similar” for a claim to be brought. An employment tribunal will take into account job differences in assessing whether objective justification has been established.

If an employee believes that they are not being treated equally, the employee can write to the employer asking for an explanation as to the reason for the treatment.  The employer’s response can be used as evidence at an employment tribunal. If the employer fails to provide a response, or provides an evasive response, the Tribunal can draw an adverse inference from this. If you receive such a request you should contact your HR Rely advisor as soon as possible.

Successive Fixed-Term Contracts

The Regulations provide that when there are successive fixed-term contracts lasting for four years or more, then the employee is automatically deemed to be a permanent employee. This is unless the employer can objectively justify the requirement for the contract to remain on a fixed-term basis. An employee in these circumstances can write to the employer asking for confirmation that they are now on a permanent contract of employment. The employer has 21 days to respond to the request either confirming the change in employment status, or providing full reasons for asserting that the employee remains on a fixed-term contract. If the employer fails to respond, either at all or within a 21 day deadline, a tribunal can draw whatever inference it thinks appropriate and make an order confirming the employee’s permanent employment status.

Breach of the Regulations

An employee can make a claim at the employment tribunal for any breach of the Regulations within three months of the act complained of. This includes claims for detriment, where an employee has been subject to detrimental treatment as a result of seeking to assert their rights under the regulations. A detriment may be made out if a reasonable worker would or might take the view that he had been disadvantaged in the circumstances in which he had to work. If the detriment suffered by the employee is dismissal, this would amount to an automatically unfair dismissal and there is no minimum service requirement to bring a claim.

There is no limit to the compensation which can be awarded for less favourable treatment under the Regulations, but the sum should be 'just and equitable' and bear some connection to the losses suffered by the claimant. 

Expiry of a Fixed-Term Contract

The expiry of a fixed-term contract is considered to be dismissal and is subject to the usual principles of unfair dismissal law. Assuming that the reason for the dismissal is not due to the employee’s fixed-term status (as this would amount to an automatically unfair dismissal) any fixed-term employee who has the requisite service can bring a claim for ordinary unfair dismissal. Additionally, if the employee has two years’ or more service, they may also claim a redundancy payment, if applicable.

If the contract has subsisted for the requisite period to bring an unfair dismissal claim, or if there have been a series of contracts which have lasted for that period, the employer must be able to establish a potentially fair reason for the dismissal. The potentially fair reasons are capability, conduct, redundancy, some other substantial reason or contravention of a statutory obligation. The employer must establish a fair reason prior to the end of the contract and follow a fair procedure, appropriate to the reason for dismissal established. If an employer is not sure how to treat the end of a fixed-term contract, they should contact their HR Rely advisor for further guidance.

Most commonly, the reason for dismissal on expiry of a fixed-term contract will be some other substantial reason or, potentially, redundancy. If the reason is redundancy, the employer will need to show that it went through a process of consultation with the employee and sought alternative employment. It may also have had to look at the issue of 'pooling' (i.e., identifying a group of employees at risk of redundancy). If the departing employee is to be replaced, it may be very difficult to rely on redundancy as the reason for the dismissal. In many cases, it will be easier to select 'some other substantial reason' as the reason for dismissal. If you need any guidance on this issue, please contact your HR Rely advisor. Whatever the reason that applies, a proper procedure still needs to be followed. See Legal guidelines for a fair dismissal.

Notice

Although the contract will have a fixed termination date, this does not mean that an employer is not required to give notice to terminate the contract. Whether or not notice is required will depend on the wording of the contract and the reason for the termination.

It is advisable for fixed-term contracts to state that it will terminate on a given date without the need for notice to be served. Employers should also consider whether to include a right in the contract for the parties to terminate prior to the expiry of the fixed term. This would allow an employer to terminate the contract early, for example, in the case of poor performance or a downturn in work. The employer would still need to follow the appropriate procedures, but this would prevent the employer having to pay the employee for the balance of the fixed-term contract due to early termination.

Procedure for Terminating a Fixed Term Contract

Employers should ensure that systems are in place to flag-up that a fixed-term contract is about to terminate and what, if any, notice requirements there are.

The following steps should be applied when terminating a fixed term contract:

• Prior to the expiration of the contract send the employee a letter giving the date the contract is due to end, explaining why the fixed-term contract is coming to an end and include a list of all vacancies (suitable or otherwise) with the letter. If there is a notice provision in the fixed term contract, make sure this letter is sent sufficiently in advance to allow for the proper notice to be given.
• Invite the employee to a meeting to discuss the termination of the contract.  The employee may be accompanied at the meeting by a work colleague or trade union representative.
• At the meeting, explain the reason for the termination of the contract and the potentially fair reason for dismissal. This will usually be redundancy or some other substantial reason (SOSR). Case law suggests that, where it can be shown that a fixed-term contract has been adopted for a specific and genuine purpose, that purpose was known to the employee and the purpose for which the contract was adopted has ceased to be applicable, an SOSR dismissal will arise.
• If termination is confirmed, offer the employee the right of appeal.

Vacancies

Under the Regulations, fixed-term employees have the right to be informed of all permanent vacancies and be given the same opportunity as permanent employees to apply for the positions. Details of vacancies can be provided on a notice board or via email provided that the employee has a reasonable opportunity of seeing them.