Employers across a variety of industry sectors use fixed term contractors to enable maximum flexibility in the employment relationship. Practical examples include employees doing so-called "seasonal" or "casual" work who may have contracts for a short period of time or for a defined task. It is also common in the public and voluntary sectors for fixed term contracts to be used where funding is being provided by external sources and is linked to specific projects or for a limited period of time.

In 2002 the DTI estimated that there were between 1.1 and 1.3 million employees working on fixed term contracts in the UK and this figure is increasing all the time. Many employers still believe that no liabilities attach to fixed term employees and that this group can be excluded from the contractual benefits offered to permanent colleagues. This is not necessarily the case and great care needs to be taken in managing these employees. Employers should remember that the statutory dismissal and disciplinary procedures must be followed on the expiry of a fixed-term contract, irrespective of the length of service of the fixed term employee.

Under the Regulations issued in 2002, a fixed term employee who has four or more years of continuous employment and who has their contract renewed will be deemed to be employed on a permanent contract, unless a further fixed term contract can be objectively justified.  This is known as the "Four Year Rule" and will apply:

  1. where an individual has a single fixed term contract renewed or,
  2. where an individual has a number of successive fixed term contracts and continuity of employment has been preserved.

Only service since 10 July 2002 counts towards the calculation of the four years' continuous service, and so fixed term employees may start to gain permanent status from 10 July 2006. The Four Year Rule does not mean that an employee on a fixed-term contract that lasts for 5 years will automatically become a permanent employee on the expiry of the fourth year; but he may become permanent in the event that the fixed-term contract is renewed.

Any fixed-term employee has the same rights to unfair dismissal protection and redundancy payments as a permanent employee, subject to the same qualification periods of one and two years' service respectively. The significance of the Four Year Rule is that if a fixed-term employee converts to being a permanent employee, then the employer will find it more difficult to dismiss that employee for a fair reason.

The notion of being a fixed term employee dissolves under the Four Year Rule, unless the continuation of the fixed-term status can be objectively justified.  The expiry of a fixed term contract enables an employer to advance redundancy as the reason for dismissal, but that would not necessarily succeed if a true redundancy situation did not exist.

An employer can objectively justify continuing fixed term contractual status if it is:-

  • to achieve a legitimate objective
  • is necessary to achieve that objective
  • an appropriate way to achieve that objective

An example of this is most likely to arise in situations where funding for a particular post is such that it will run on for a set period beyond the four years.

A fixed term employee who believes that the renewal of their contract triggers their conversion to a permanent employee can request in writing from his employer a statement of variation of their contract in order to reflect the change in status. An employer must respond to such a request within twenty-one days, providing either the statement of variation as requested or a statement giving reasons as to why the contract remains fixed term. From 11 July 2006, employers will therefore be required to objectively justify the further use of a fixed term contract after four years continuous service.

A collective agreement or workforce agreement may modify the application of the Regulations. It can either increase or decrease the four-year period, and can agree a list of permissible objective reasons for justifying renewals. This potentially adds a further layer of complexity for employers with such agreements in place.

Until case law evolves on the interpretation of objective justification and the application of the Four Year Rule, employers need to be wary of the risk of using the approach of objective justification in renewing fixed-term contracts after four years of service. It is recommended that employers implement a system for monitoring the operation of fixed term contracts, so that there is an awareness of renewal dates. 

The restricting of the maximum duration of a fixed term employment contract or a series of such contracts is one of the more controversial aspects of the 2002 Regulations. The effect is such that it may now be rare for successive fixed term contracts to last for more than four years, as employers look to manage the risks that they present post 10 July 2006.

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