What is a fixed term contract?

A fixed term contract is a popular way for many employers to fill a temporary skills or resources gap. The basic premise behind a fixed term contract is that an employer can terminate that contract at a defined, future date or completion of a set task.

Popular fixed term contracts include cover for a permanent employee’s maternity leave, covering a set period during a seasonal peak in trade and bringing in a worker with a specialist skill set to fulfil a specific task for a project.

Example: an employer may bring in additional fixed term contract staff to cover the busy Christmas period in the retail sector, or hire a specialist web designer when relaunching the company’s online site.

A fixed term contract is different to a regular contract through a recruitment agency, limited company or umbrella company where you are being paid a daily rate. It is therefore very important to understand the differences. 

For a contract to be deemed as a fixed term contract, the following conditions need to apply:

1. The employee has an employment contract with the organisation they work for, and
2. That contract ends on a specific date, or on the completion of a specific task.

More specifically, fixed-term contracts:

• last for a certain length of time,
• are set in advance,
• end when a specific task is completed,
• end when a specific event takes place,
• are paid through PAYE. 

However, a worker is not on a fixed term contract if they are:

• contracted through an agency,
• are on a work experience placement or apprenticeship scheme,
• or are a member of the armed forces.

What rights do fixed term contract employees have?

Fixed term contract employees must not be treated “less favourably than permanent employees doing the same or largely the same job, unless the employer can show that there is a good business reason to do so,” according to the UK Government. If they are, then this is known as ‘objective justification’.

Example: a permanent employee has a company car but a fixed term contract employee doing a similar role is not offered a company car. This is a clear example of the fixed term contract staff member being treated less favourably than the permanent employee.

Fixed term contract employees must also get:

• the same pay and conditions as permanent staff,
• the same benefits package,
• protection from redundancy or dismissal,
• receive information about any permanent vacancies in the organisation.

Notice periods

Fixed-term employees have the right to a minimum notice period of:

• one week, if they’ve worked continuously for the company for at least one month,
• one week for each year they’ve worked, if they’ve worked continuously for two years or more.

Example: a fixed term contract employee who has been with the company for less than one month has no notice period. A fixed term contract employee who has been with the company for one year has a notice period of one week, for two years has a notice period of two weeks, for three years has a notice period of three weeks, and so on.

These are the minimum periods. Some fixed term contracts may specify a longer notice period.

Redundancy

Anyone, including fixed term contract employees, who has worked for the same employer continuously for two years or more also has the same redundancy rights as a permanent employee.

Ending a fixed term contract

A fixed term contract ends automatically when the agreed end date is reached and the employer does not have to give any notice.

This is considered to be a dismissal but, if the fixed term contract employee has been working for the employer for more than two years, then there needs to be a “fair” reason for not renewing the contract.

After one year’s service, a fixed term contract employee also has the right to a written statement that details the reasons their contract was not renewed.

An employer who decides to end a fixed term contract ahead of the agreed end date may be in breach of contract, unless they have given the employee proper notice. Likewise, a fixed term contract employee must give the employer the proper notice if they decide to leave.

What if a fixed term contract employee works longer than the contract’s end date?

If a contract is not formally renewed, but the employee continues to work for the company, then there is an “implied agreement” by the employer that the end date has changed.

As a result, the employer organisation must give the employee the proper notice before they can dismiss them.

Can a fixed term contract be renewed?

Yes. However, if a fixed term contract employee has been with an organisation for four or more years then they will automatically become a permanent employee, unless the employer can demonstrate a good business reason not to do so.

A final word of warning

Adrian Marlowe, managing director of niche legal consultancy Lawspeed, told Contractor UK that fixed term contracts “are more of a grey area than project-based contracts and are more difficult to structure outside IR35. This is not to say it is impossible but in our opinion you are fighting an uphill battle, especially if the contract is renewed.”

“You are in a much stronger position if your contract is based on completion of defined tasks. These tasks should be written into the contract and even if it is a large project it can usually be broken down into stages or phases,” he added.

If you have a question about fixed term contracts, click here to visit the Contractors’ Questions area of ContractorUK where you can ask an expert in this field.