I need to cut costs at my company, and I am thinking about introducing fixed-term contracts for new staff. Some of these will be working on a specific project, but for the rest, I just want to be able to let them go after a fixed period of time if I can't afford to keep them on. Can I do this?

Your company can offer new employees a fixed-term contract of employment (FTC) under which the term of their employment is fixed either by reference to a specific project or by a specific period. However, introducing FTCs for new staff will not necessarily cut costs for your company. Indeed, you may find that any benefits of using a FTC are outweighed by the headaches they cause you!

If you "let an employee on a FTC go" after a fixed period of time or after the completion of a specific project, this will constitute a dismissal in law and any of the dismissed employees who have at least year of service will have the right to bring an unfair dismissal claim against your company. You will only be able to successfully defend an unfair dismissal claim if you have one of the prescribed potentially fair reasons for the dismissal (eg conduct, capability, redundancy, some other substantial reason etc) and have followed a fair procedure (which would normally include a right of appeal).

When you come to dismiss the FTC employees, either because the specific project they were engaged on is complete, or for cost reasons, it may well be that the reason for the dismissal will amount to redundancy. Although redundancy is a potentially fair reason for dismissal, for the dismissal to be fair you will need to follow a fair redundancy procedure, which may require you to "pool" the employee on the FTC with other employees doing the same or similar work (whether or not permanent), apply objective selection criteria to select the potentially redundant employee and look for suitable alternative work. If the employee on the FTC is selected for redundancy, you will need to pay them in lieu of notice and, if they have completed two or more years' service, you will also need to pay them a statutory redundancy payment.

Any savings to be had by your company during employment from using FTCs are also limited. This is because you are not permitted to treat employees on FTCs less favourably, for example as regards the terms of their contract or subjecting them to any other detriment, than comparable permanent employees, unless the difference in treatment is objectively justified. You would, however, be able to justify a less favourable term if the terms of the fixed-term employee's contract, taken as a whole, are at least as favourable as the terms of the comparable permanent employee's contract. You will also have the additional burden of keeping your employees on FTCs informed of any permanent vacancies.

You also need to be aware that fixed-term employees will also automatically become permanent employees on the later of either attaining four years' service or having their contract renewed, unless you can objectively justify their continued fixed-term status - a high hurdle to overcome.

Why, then, do employers use FTCs? If you have funding from an external source for a specific project, a need for maternity or absence cover or a clearly identifiable task or project that needs completing, the use of FTCs can be helpful in managing your and your employees' expectations and ensuring that a fair dismissal is relatively straightforward to achieve. Also, if your employees' expectations are met - ie the reason for their dismissal is what they expected at the start of the employment - then it is unlikely that a claim from the employees will materialise. However, if - as it seems - you want to use FTCs as a way of trying to make it easier to dismiss an employee (by seeking to take advantage of the "end of the contract" argument), then difficulties can arise, as such dismissals often occur without proper reason and without a fair procedure having been followed. As a result, a finding of unfair dismissal becomes much easier for an employee to secure and you will be left wondering where it all went wrong.

Key tips for fixed-term contracts

  • Clearly state in the FTC the term for which the individual is employed and the notice provisions both during and at the end of the fixed term.
  • Remember that terminating a FTC during its term or at the natural expiry of its term constitutes a dismissal in law and employers need a fair reason for dismissal and need to follow a fair procedure.
  • Ensure that fixed-term employees are treated no less favourably than comparable permanent employees because of their fixed-term status without objective justification.
  • Keep fixed-term employees informed of permanent vacancies at their workplace.
  • Diarise when any fixed-term employees could attain permanent status and assess in advance of this date whether or not keeping them on a FTC past this date is objectively justified. 

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