What is a Fixed Term Contract?

Organizations prefer to hire employees under fixed-term contracts as they serve the company for a project and fixed time with complete enthusiasm. Employers terminate a fixed-term contract at a pre-determined date. These employees are also not on the payroll of the organization, thereby saving quite a bit of change. 

In this article, we’ll take you through the definition of fixed-term contracts, their pros, and cons along with the unique situations they may be used in.

What is a Fixed-Term Employment Contract?

In a fixed-term contract, the organization employs an employee for a fixed tenure. The organization hires employees for a pre-decided duration under a fixed-term contract. Usually, employers hire fixed-term employees for a year, and their employment ends at the end of the contract.

Employees governed by a fixed-term contract are not on the payroll of the organization. 

Key Features of Fixed-Term Contracts

• Length of Employment

A primary feature of a fixed-term contract is the length of employment. Fixed-term employees are not permanent employees of an organization. They are appointed for a specific time and dismissed when the predefined term ends. It is short-term employment. The period of employment may vary according to the nature of the work and the organizational requirements. Generally, fixed-term contracts are for one year.

• Salary

Fixed-term employees have a fixed salary determined by organizations. It remains the same for the entire period of employment. Employers cannot change the remuneration before the expiry of the contract. As fixed-term employees are not permanent employees of an organization, they are not on the organizational payroll.

• Notice

For fixed-term positions, the employer does not give any notice period to the employees. The contractual relationship between an employer and a fixed-term employee ends after the expiry of the contract tenure. 

• Renewal of Fixed-term Employment Agreement

Employers can renew fixed-term contracts. Both parties should be willing to continue the relationship. If a fixed-term employee continues to work after the expiry of the defined period, the contract renews. However, if the employer fails to terminate the contract after the defined term, the fixed-term employee becomes permanent.

Suitability of Fixed-Term Contracts

Fixed-term contracts are best suited for the following kinds of work.

• Seasonal Work

Business organizations may require an additional workforce during the peak season. They prefer to hire fixed-term employees in such conditions as it provides flexibility and meets their needs during high season. For instance, hotels may require additional staff during the summer holidays to attend to the onslaught of visitors. Therefore, they may hire fixed-term employees during peak season and terminate them after the season.

• Project Work

Organizations prefer fixed-term employment when they have a project that requires a specific skill. The employer may not need a specialist once the project concludes. Therefore, they would hire employees on a fixed-term basis in such cases.

• Maternity Cover

Business enterprises hire fixed-term employees to fill in a temporary gap when a permanent employee goes on maternity leave. The fixed-term employee takes care of the duties of the employee on leave. They work till the employee on leave returns. 

At-will Employment vs Contract-based Employment

At-will employment means that there is no written contract between the employer and the employee. The employer and employee are free to leave the job without any prior notice. Further, the employer can terminate the employee whenever they wish to. Similarly, the employee can also leave the job whenever they want to. 

Both the parties work together as per their will. For that reason, it is a no-term agreement between both parties. The employer cannot force the employee to work for them. In the same way, the employee also can not bind the employer to hire them. Both parties have equal rights to terminate the contract.

Fixed-term Employee vs Contractor

Fixed-term employees are like regular employees of an organization. They work for a specified duration with the organization but are not contractors. Contractors work independently and render their services to the organization for a predetermined period. They have the autonomy to decide their working style and are not under the control of the organization. Further, contractors can have a flexible work schedule if they want. 

However, fixed-term employees are under the total control of the organization. They cannot work according to their whims and fancies. Fixed-term contracts, like contractors’ contracts, are for a definite period. Still, the nature of the relationship between the two is different. In fixed-term contracts, there is an employee-employer relationship between the parties. On the other hand, in contractors’ contracts, it is a business-to-business relationship.

Fixed-term Contracts and Pregnancy

Employers should have knowledge regarding employees’ rights in fixed-term contracts. Fixed-term employees have the right to avail of maternity leave. Employers pay the fixed-term employee on maternity leave in the same way as they pay the permanent employees. In some cases, the employee qualifies for statutory maternity pay during the tenure of their fixed-term contract. If so, they continue to receive the statutory maternity pay even if their tenure has ended. It would be unjust if the fixed-term contract is not renewed owing to pregnancy or maternity leave.

Fixed-Term Contract and Redundancy

It is crucial to understand what is fixed-term contract redundancy, and what are the rights of fixed-term employees regarding claiming redundancy benefits. Fixed-term employees are entitled to receive redundancy benefits since they are like the regular employees of the organization. Entitlement to redundancy pay depends on the length of the service period. If a fixed-term employee works for an organization for more than two consecutive years, they become a permanent employee. In such cases, they can claim redundancy benefits. Organizations must pay fixed-term employees redundancy benefits if they have served the organization for more than two years.

Advantages of Fixed-Term Contracts

• Flexibility

A fixed-term employment contract benefits both parties. It offers enhanced flexibility to the organization and the employees. The organization can easily meet its requirement for additional staff during peak periods by hiring fixed-term employees.

• Cost-savings

Fixed-term employment also leads to increased cost savings. It allows companies to hire when required. Organizations dismiss the employees once the project finishes and the requirement ends. Further, the firm does not needlessly bear the burden of employees. Fixed-term employment is beneficial when the job is seasonal or for a definite period. It does not alter the budget of the organization.

• Provides Maternity Leave Cover

Fixed-term employment is used to hire an employee to work in place of a permanent employee on maternity leave. Companies recruit a fixed-term employee for a specified duration to take care of the responsibilities undertaken by the employee on leave. It is an effective tool in such circumstances, and organizations use it to their advantage. 

• The Benefit of Special Skill

With the help of fixed-term contracts, the organization can take advantage of the unique skills of an employee for the desired period. Organizations prefer hiring fixed-term employees for projects that require specialized knowledge and skill. It is not feasible to recruit permanent employees for such jobs as they are not recurring in nature.

Fixed-Term Policy

Organizations should understand the critical factors involved in fixed-term contracts to avoid legal hassles. The regulations governing fixed-term employment may differ in different countries. Therefore, firms should draft the fixed-term policy, keeping in mind these regulations. The HR department should understand and implement the following mandates.

• Reason for Fixed-term Employment

In certain countries, organizations can hire fixed-term employees only for a justified reason. For example, the Peruvian government allows fixed-term contracts only in the establishment phases, emergencies, or seasonal jobs. 

• The Proportion of Fixed-term Employees

Certain countries restrict the number of fixed-term employees to the total workforce. Organizations can not hire fixed-term employees more than the sanctioned limit. For instance, in Lithuania, fixed-term contracts cannot exceed more than 20% of the total employment contracts.

• Duration of Fixed-term Contract

Many countries determine the length of fixed-term contracts and the number of times they can be extended for an employee. In Greece, the total duration of fixed-term contracts cannot be more than 24 months, including four renewals. Further, in Germany, the aggregate duration can not exceed 24 months, including three renewals.

• Written Contract

Employers must draft a fixed-term contract with utmost care and diligence. It must be a written contract stating all the terms and conditions clearly. Both the parties should agree to the terms of the contract and abide by the same. Moreover, both parties should sign the contract.

• Discrimination

In certain countries like Japan, there is no discrimination between fixed-term and permanent employees. Organizations are required to treat fixed-term employees the same as permanent employees. 

• Working after the Expiry of Contract

If a fixed-term employee works after the expiry of the defined term, it may result in an indefinite-period employment contract. In countries like Canada, if fixed-term employees continue to work after their term expires, they are deemed permanent employees of the organization. Their contract is considered to be renewed automatically for an indefinite period.

Are Fixed Term Contracts Better? 

Business organizations prefer fixed-term contracts over indefinite-term contracts because they provide for easy termination of employees. However, organizations should draft fixed-term agreements carefully because they are subject to local regulations. It might lead to legal complications and litigation. Hence, organizations must understand and comply with the requirements of fixed-term contracts.