Fixed-term employees can be a great way to get extra resources for any kind of project or additional work from small jobs lasting one week to big projects taking months to complete. At the end of a fixed-term agreement, you don’t have any legal obligation to offer a permanent position but many employers offer permanent roles as the business expands.
This article explains your responsibilities and some of the legal pitfalls to avoid.
On this page:
- What is a fixed-term agreement?
- When could you use a fixed-term employee?
- Pitfalls to avoid
- Rights of employees on fixed-term agreements
A fixed-term agreement is an agreement between an employer and employee that a particular job will be for a set time period (such as three months) or until a certain event occurs or work is completed (such as all the fruit is picked or a portfolio is completed).
To hire an employee on a fixed-term basis, there needs to be a genuine reason for the work being fixed term and the employer needs to explain those reasons to a prospective employee before the work begins.
After the contract finishes or the work is completed, there is no legal obligation for the employer to retain the employee in any capacity. This can make it easier to budget for certain projects or contracts as a business can calculate exactly how long they will need to pay wages or salary until the job is finished.
Fixed-term agreements are generally used for short or medium-term employment agreements and rarely last longer than one year.
A fixed-term employee can be used in a variety of situations. Some genuine uses for fixed-term agreements include:
- Covering maternity leave or other staff leave, such as study leave or overseas travel.
- Covering projects or contracts that have a clear end date or agreement.
- Seasonal work (to cover fruit harvesting, or busy Christmas and New Year periods).
Example case study:
David owns a busy painting business that is steadily taking on more work and bigger jobs. He wins the bid to paint two large office buildings, requiring three employees to complete the work over a period of two months.
David doesn’t have enough existing employees to complete the contract, so he hires three employees on a fixed-term basis for two months or until the work is complete. He clearly explains the contract and the reason why the position is fixed term to his new employees and also documents it in writing as part of their individual contracts. From the outset, each employee knows that David cannot guarantee a permanent contract, or any additional work after the fixed-term contract has expired.
This is the correct approach because:
- David has justification for the position being fixed term because the position is for a set amount of time to complete a particular task.
- David has made it clear to the employees both in writing and verbally that the position is fixed term and will end at two months or when the work has finished with no guarantee of additional work.
When the work is finished, David can choose to offer his employees permanent roles if he feels there is enough work to justify it, but he has no legal obligations to retain the employees for longer than the fixed-term contract.
Fixed-term agreements can be tricky to negotiate correctly – especially for new or inexperienced employers. The key is maintaining a good level of communication with your employees and being aware of some important rules and obligations for fixed-term employees.
Here are the most important issues you’ll need to avoid when hiring employees on a fixed-term basis.
- Fixed-term employees aren’t on trial unless agreed. You need to follow the correct processes and have a good reason if you want to dismiss a fixed term employee. Even though a fixed-term employee isn’t a permanent staff member, you will need to follow the same disciplinary and dismissal processes as other employees. If an employer decides to retain an employee after the fixed-term contract ends, they can’t be subject to a 90-day trial period as trials are for new employees only.
- Put everything in writing. If you don’t explain why the role is fixed term in writing, the fixed term could be considered legally void and the employee considered permanent. Clearly explain in your employee’s individual contract why the role is fixed term and how it will end and when.
- Finish the agreement at the agreed time. If you continue to employ the person past the agreed end date, you may end up having a permanent employee. It is important to monitor the dates and either extend the agreement for a valid reason, enter into a new fixed term agreement for a specified time, or bring it to an end.
Example case study:
Wendy owns a retail store in a busy suburban mall. She’s hired some shop assistants in the past that proved to be unreliable, so she is wary of taking on a permanent employee who is unsuitable for the role. She decides to hire a new shop assistant on a fixed-term contract for a period of three months just in case things don’t work out.
This is an incorrect approach because:
- She is using the fixed-term arrangement as a way of avoiding potential problems with an employee rather than having a valid reason for the job being fixed term.
- This action could give rise to a personal grievance and could be taken to the Employment Relations Authority (ERA), where it may be decided that the employee is actually a permanent employee.
To resolve the problem, Wendy could hire an employee on a permanent contract but include a 90-day trial or probation clause that enables her to legally dismiss an employee during the first 90 days of employment.
For more information, consult our Trials and probations page or visit the Ministry of Business Innovation and Employment – Labour’s Employment Relations Portal.
Employees on fixed-term agreements are covered by the Employment Relations Act (2000) and the Holidays Act (2003), which means employees are entitled to paid annual leave, bereavement and sick leave, as well as paid and unpaid parental leave.
The entitlement to a full four weeks’ paid holiday after 12 months’ service isn’t relevant for short employment relationships, but employees will still accrue annual leave. Where a fixed-term agreement is for less than 12 months, an employee may agree to the employer adding 8% to their gross weekly earnings in lieu of annual holidays or in lieu of getting an accumulated 8% at the end of the fixed term.
For more information about fixed-term employee rights, see the Ministry of Business Innovation and Employment – Labour’s Employment Relations page, search the Ministry of Business Innovation and Employment – Labour FAQ page or call their Contact Centre on 0800 20 90 20 during business hours. Business hours are 8.30am–5.00pm, Monday to Friday, excluding public holidays.