Person signing fixed term contract

What is a fixed term contract?

June 28, 2021

Fixed term contracts are one of the most common types of employment contract in the UK. You’ve likely heard of them, but how might they impact you?

If you're a prospective employee and have been offered a job on a fixed term contract, you may be wondering what this means and whether you should accept it, or hold out for a permanent role.

If you are an employer, fixed term contracts are a great way to fill a labour shortage or to provide short-term cover for a work absence. However, you'll need to follow certain legislation, designed to protect employees.

In this guide we will look at what a fixed term contract is, the rights and regulations for employees, key things employers and employees need to know while using fixed term contracts, and what happens when the contract ends.

What is a fixed term contract?

A fixed term contract is a contractual agreement between an employee and employer that covers a specific period of time. Unlike a standard employment contract that continues until one of the parties ends the working relationship, fixed term contracts have an agreed end date, unless a new agreement is reached.

Fixed term contracts can be really useful if you're an employer looking to fill a short-term vacancy, or an employee who doesn't want to commit long-term to a company or job role.

Let's dive straight in, and explore fixed term contracts in further detail.

How do fixed term contracts work?

As fixed term contracts only last a set amount of time, they usually end:

  • on an agreed date (e.g. 12 months from the date the contract is signed)
  • on completion of a specific task (to cover the launch of a product or end of a project)
  • when a specific event takes place (funding runs out)

Examples of roles you will usually see advertised as fixed term contracts include:

  • maternity cover positions (9 month contract which will end when the employee on maternity leave returns to their role)
  • a specialist employed for a specific project (such as a software developer employed to work on the migration of a website)
  • a seasonal employee taken on to help with a busy period during the year (for up to 6 months)

It is important to note that you can only be employed on a fixed term contract if you have an employment contract with the company or organisation you work for. This excludes workers who:

  • have a contract through an agency and not directly with the company
  • are apprentices or students on a work experience placement
  • are a member of the armed forces.

Employee Rights and Regulations in fixed term contracts

Employers and employees should both be aware of the Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002, before hiring staff or accepting a fixed term contract position.

This legislation was created to protect employees on fixed term contracts from being treated less favourably than comparable permanent employees, unless the difference in treatment can be objectively justified. What this means is that employees have the right to:

  • the same pay and conditions (pension scheme, holidays, annual salary review)
  • the same benefits (gym membership or employee discounts)
  • appraisals and staff reviews
  • be kept informed of any suitable permanent employment opportunities within the company
  • redundancy payment and unfair dismissal rights, if they have worked for the company for two years of continuous service

What happens when a fixed term contract ends?

When a fixed term contract comes to an end the termination of that contract is treated as a dismissal. An employee with two years' continuous service is able to make a claim for unfair dismissal, so it's important for employers to follow all necessary guidelines to show that there is a fair reason not to renew a contract.

Reasons for fair dismissal include:

  • the use of a fixed term contract was genuine
  • the specific project has completed
  • funding for the role has ceased

Employers should ensure that employees on fixed term contracts are aware of any/all of the aforementioned that apply to them.

Typically, both employer and employee will be aware when they sign a contract of employment when it is due to end. Unlike with permanent contracts, there is no obligation for the employer to provide notice. With that being said, it is good practice to clearly communicate either in writing, or in a face to face meeting, that their employment is ending, and set out the reasons why.

The details of the meeting should be confirmed in writing, as well as setting out the options of how to appeal the decision. Any employee with one year or more of service whose contract is not renewed is entitled by right to receive a written statement outlining the reasons why.

If the reason an employee's contract is not being renewed is because there is no longer a requirement to carry out the work and the role will not be re-filled, then redundancy rules may apply. An employee with two years' continuous service in this situation will be entitled to a statutory redundancy payment.

Early termination

If a contract is ended early by an employer, and the contract does not include any agreement about being able to do so, then an employee has a case for wrongful dismissal, providing the reason they are not being terminated is due to gross misconduct. This could result in an employer being liable to pay monies due for the remainder of the employees contract up until the expiry date.

Working past the contract end date

Circumstances and events change, and this might be the case for an employer when recruiting someone on a fixed term contract. Work on a project might have fallen behind or the deadline been extended, or a staff member whose absence is being covered may need to take more time off from work.

If this happens, an employer can choose to extend the terms of the end date or renew the contract. It may even be the case that the end date comes and goes without extending or renewing any terms. In this case there is an implied agreement between both parties that the contract has been extended, and the employer must still confirm an official notice period.

If an employee has been on successive fixed term contracts for four years or more, they will automatically be entitled to permanent employment status, unless there is a justifiable business reason not to do so.

Employees and fixed term contracts

Job hunters may be wary of applying for, or accepting, a fixed term contract position, but there can be advantages compared to a standard permanent role. Fixed term positions often arise due to an urgent need from a business to cover a shortfall in staff, or to recruit for a time-sensitive, highly specialised role. If you are prepared to forsake long-term security, you may be able to earn more money than an equivalent position as a permanent member of staff.

Not everyone wants or needs permanent employment and fixed term contracts can provide employees with a greater degree of flexibility. Accepting short-term fixed contract positions gives employees the opportunity to try out different companies and industries, and the flexibility to move easily from job to job. If you do like the role and the company, and you are doing a good job, your contract may be extended or you might be offered a permanent position.

If you do accept a role with a fixed term contract, it's important to be aware that apart from the fixed end date you should not be treated any differently to permanent employees doing the same job. You are entitled to the same pay, conditions, benefits and job opportunities as other staff members. If you have worked for one month or longer, you are also entitled to receive a weeks' notice period from your employer.

There is nothing stopping you from accepting a fixed term contract and applying for permanent roles within the business, but you should be aware that your chances of progression could be more limited as you may only be with the company for a short amount of time.

Employers and fixed term contracts

Employers shouldn't fear hiring staff on fixed term contracts. They can be a great way to cover periods of absence, or to recruit qualified workers to help with urgent or time-sensitive projects. For businesses with limited budgets or fixed funding rounds, hiring staff on fixed term contracts can be an effective way to forecast and budget for the fiscal year.

Employers can also use these contracts as a probationary period to evaluate the performance of staff. If you hire an individual on a 6 month fixed term contract it doesn't mean that you lose that employee when the 6 months are up. Employees can have their fixed term contract extended when it is nearing completion, or be offered a permanent role at any point during the contract.

One potential drawback to advertising a role on a fixed term contract is that you may have a limited pool of applicants. While some job hunters like the flexibility it allows, others could be put off by the lack of job security, especially if they are already in a permanent role.

As an employer, you must be aware of the legislation in place to protect employees on fixed term contracts. You should provide the same working conditions, pay and benefits as received by permanent members of staff. You should also follow the correct guidelines and processes when a fixed term contract ends, and follow a fair dismissal process.

When hiring staff, be fully aware of the conditions set out in the contract, especially if the contract is dealt with by a separate team or HR department. Unless clearly stated in the terms of the fixed term contract, you can't just terminate or end employment early. If you are worried about funding running out, or are unsure when an employee will return from a period of absence, then you must plan for these eventualities at the start of the hiring process.

What are the key points to take away?

  • Protection: Employees are protected by legislation against less favourable treatment. Employers must ensure they follow these guidelines.
  • Flexibility: For employees who don't like to stay in one place for a long time or employers who need to recruit quickly; fixed term contracts can be an ideal choice.
  • Read the contract: This applies to both employers and employees. Clearly set out the terms in advance and know what you are committing to.
  • Weigh up the pros and cons: Decide what is right for you or your business.

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Daniel Hogan

Daniel is a Deloitte-trained, fully qualified Chartered Accountant with experience in the finance software space. It was during his tenure managing a finance system in the UK that he grew dissatisfied with the lack of synergy and automation in the space, compelling him to co-found Ember.