Recent Fair Work decisions show fixed-term and maximum-term contracts are often more complex than they seem. Here are three situations where these arrangements can expose employers to risk – and how to avoid them in your business.

Fixed-term contracts can seem straightforward: an employee starts on a set date, finishes on a set date and the employment ends when the contract expires. But recent Fair Work decisions show the legal reality is often more complicated.

“They’re no longer as simple as they used to be, because of recent changes to the Fair Work Act, which placed limitations on fixed-term contracts,” says Michael Byrnes, Partner at law firm Swaab. “And those limitations apply not just to fixed-term contracts but to maximum-term contracts as well.”

While the terms are often used interchangeably, there is an important distinction. A fixed-term contract ends automatically on a specified date, with no right for either party to terminate the employment early except in limited circumstances. 

A maximum-term contract also has an end date, but allows either the employer or employee to end the employment before that date by giving notice. In practice, Byrnes says, maximum-term contracts are far more common because they provide employers with greater flexibility.

The rules governing both types of contract became significantly tighter following the Secure Jobs, Better Pay reforms, which introduced new restrictions on employers’ ability to engage employees on rolling fixed-term and maximum-term contracts. 

Under the new rules, employers can no longer use consecutive contracts for the same role beyond two years or more than two consecutive contracts, unless a specific exception applies.

“[There was a concern] about employer abuse of maximum-term contracts in particular,” he says. “The contract would just be rolled over on numerous occasions, so long-serving employees did not have the certainty of permanent, ongoing employment.”

The changes don’t prevent employers from using fixed-term or maximum-term contracts where there is a genuine business need. But they do mean HR teams need to think more carefully about when these arrangements are appropriate, whether they continue to reflect the reality of the employment relationship and what happens when the contract comes to an end.

Below, Byrnes outlines three scenarios where fixed-term and maximum-term contracts can create unexpected legal risk.

1. When there is no legitimate reason for a fixed-term contract

One recent FWC case demonstrates that a fixed-term contract cannot be used to disguise another reason for ending employment.

The employee in this case had worked for an organisation for more than a decade, with his contract stating that his employment would end when he turned 65 years old. When that time came, the employer ended his employment, arguing that the fixed-term arrangement had simply expired. The employee challenged the decision, arguing he had been dismissed. 

“Employers [sometimes] assume that if they’ve got a fixed-term contract or a maximum-term contract in place, it gives them absolute protection against unfair dismissal or other remedies,” says Byrnes.

But that protection is not absolute. If the arrangement is inconsistent with workplace laws or the contract is being used to avoid legal obligations, the FWC can look beyond the contract itself.

“[In this case], this term that his employment would come to an end when he turns 65 was not something to which the employee genuinely agreed. And it was also found to be a strategy to try and avoid the operation of unfair dismissal laws.”

The term was also at odds with Australia’s discrimination laws, he adds.

“To terminate someone’s employment on the basis of age is a breach of age discrimination legislation, so the Fair Work Commission is not going to give validity or credence to an arrangement of that kind.”

The FWC ultimately found that the employee had been dismissed and that the dismissal was harsh, unjust and unreasonable, awarding over $40,000 in compensation.

“The fact you’ve got a fixed-term contract does not foreclose the possibility of discriminatory conduct during the course of that contract, or other conduct which might breach the Fair Work Act. It’s not a get-out-of-jail-free card.” – Michael Byrnes, Partner, Swaab

2. When a fixed-term contract no longer reflects the employment relationship 

Another case heard by the FWC highlights the dangers of relying on rolling fixed-term contracts for work that may no longer be genuinely temporary.

The employee in this case was initially engaged on a short-term contract, but his employment was extended several times, eventually spanning months and covering dozens of projects for multiple clients. When the employer decided not to continue his employment, it argued that his contract had simply reached its expiry date.

The employee challenged that position, arguing that the repeated extensions and nature of his work meant the arrangement had effectively become ongoing employment. 

Because the employer had gone beyond the new limits on successive fixed-term contracts without satisfying an exception, the expiry clause was treated as having no effect.

The FWC therefore found that the employee had been dismissed when the employer ended the relationship.

One lesson from this case is that courts will often look beyond the wording of a contract to how the employment relationship actually operated in practice, says Byrnes.

“[In this case], going beyond the strict terms of the employment contract to the reality of the relationship, the ongoing renewal of these contracts was largely a formality, and it [may have been used] as a device to try and avoid certain obligations or deny an employee certain benefits.

“The operation of the statutory prohibition on renewing fixed-term contracts multiple times can also come into play to invalidate a purported expiry date in the contract.” 

3. When an employer mishandles the end of a fixed-term contract

Even where a fixed-term contract has been used appropriately, employers can still create legal risk if they mishandle what happens when it comes to an end.

“An employer needs to ensure that they note the day that the fixed-term contract ends,” says Byrnes. 

“Some employers make the mistake of having a fixed-term contract in place and then [allowing] employment to continue beyond that date. Then they terminate after that date and try to rely on the fixed-term contract. But by then, the employment is no longer governed by that contract, and the termination is likely at the initiative of the employer.”

Employers should also remember that they’re not exempt from their obligations under other workplace laws, such as discrimination legislation and psychosocial safety obligations, just because a fixed-term contract will ultimately expire.

“The fact you’ve got a fixed-term contract does not foreclose the possibility of discriminatory conduct during the course of that contract or other conduct which might breach the Fair Work Act,” says Byrnes. “It’s not a get-out-of-jail-free card.”

As a result, rather than treating the expiry date as the end of the conversation, HR should carefully consider any concerns an employee raises before finalising the employment relationship.

Are fixed-term contracts worth the risk?

Recent reforms have significantly narrowed the circumstances in which fixed-term and maximum-term contracts can be used. As a result, employers should think carefully about whether they remain the most appropriate option in each case.

“In my view, fixed-term contracts and maximum-term contracts are almost always overrated,” says Byrnes. 

“[It’s important to] query whether the employer has in place the administrative processes to properly implement these types of contracts, and secondly, what advantage it’s really giving the employer as opposed to an ongoing employment relationship.”

🧰 HR’s career resource toolkit

• Reading: Refresh your understanding of the different types of employment contracts.
• Learning: Understand how to navigate employment contracts with this short AHRI course on the foundations of HR Law.
• Podcast: Listen to this ER/IR Unpacked podcast episode for best practice when it comes to restructures and redundancies.

All information, content and materials available on this site are for general informational purposes only. The contents of this article do not constitute legal advice and should not be relied upon as such.