Fixed-term contracts: the ultimate guide

July 26, 2022

Employment contracts come in all shapes and sizes. One of these is a fixed-term contract. 

But what is a fixed-term contract, and how does it compare to other types of HR contracts? Stay tuned to find out. 

What is a fixed-term contract?

A fixed-term contract is an employment agreement between an employee and an employer that lasts for a specified period or the duration of a set project

In other words, fixed-term employment contracts are used when businesses wish to provide individuals with temporary or short-term employment, rather than permanent roles. 

But how do they actually work? Let’s find out. 

How do fixed-term employment contracts work?

Fixed-term employment contracts work in the same way as most HR contracts. However, fixed-term employment contracts differ from permanent employment contracts in that they have a pre-determined end. 

This means that the contract will usually describe the event that will trigger the end of the contract. These triggers usually come in three forms:

1. End dates

To ensure that an employment contract is only temporary, fixed-term contracts usually have a pre-determined end date. By setting an end date within the contract, the employee knows when their contract is due to end, and the contract’s duration is clearly defined. 

How long this period of employment is will depend on the terms negotiated by the employer and employee. However, the contract duration is usually fairly short since there are laws in place that entitle employees to have a permanent contract if their fixed-term contract(s) last long enough. We’ll explore that in more detail later, though.  

2. Specific events

Another way that fixed-term employment contracts work is by outlining a specific event that will end the employment contract, rather than a date. For example, a startup may only employ an individual up until the company’s funding has run out. 

Although there is no set date provided, the fixed-term contract may still be valid if this event is specified clearly and in enough detail. It must also meet the usual requirements for a contract - of course. 

3. Project completions 

The final way that fixed-term contracts can work is by establishing that the contract will end once a specific task has been completed. For instance, if you’re paying a contractor to complete a specific project for you, a fixed-term contract will finish once this work has been completed, not by a specific date. 

This approach is useful when it’s difficult to predict how long a project will take to complete. 

By comparison, a permanent contract will continue to operate until it has been terminated or breached.

When do employers use fixed-term contracts?

One instance when employers use fixed-term contracts is if they require support on a particular project. For example, if a business is working on a project that requires more manpower or certain expertise, it can hire additional employees to meet these demands.

However, once this project has been completed, the additional headcount may be unnecessary, so it makes sense for the employees’ contracts to end. A fixed-term contract enables businesses to employ people for specific projects without needing to commit to hiring them permanently. 

Another situation where fixed-term employment contracts are common is seasonal work. A great example of this is when retail stores hire temporary staff during the run-up to Christmas. They do this to meet increased demand, as stores are typically much busier during this period.

But when the festive season ends, so do these fixed-term contracts. Again, a fixed-term employment contract empowers employers to only hire individuals temporarily when there is increased demand. 

Another common example of fixed-term employment contracts being used is when companies need to cover certain positions. This happens when a permanent employee is off sick for a set period or has gone on maternity leave. 

As is true of the other examples we’ve just discussed, using a fixed-term contract enables employers to hire and release employees flexibly to meet the company’s changing needs.

Find out more about employment law for in-house counsel.

What is the law on fixed-term employment contracts?

So long as they meet the basic requirements of a contract, a fixed-term employment contract will be legally binding - just like any other contract. But the legal implications of a fixed-term contract don’t end there. 

Fixed-term contracts are subject to regulation right across the globe. The main goal of this legislation is to ensure that employees still have access to basic labor rights, regardless of how long their contract lasts. 

One of the most common rules across jurisdictions is that a fixed-term contract can only last (or be extended until) a certain period before the employee is entitled to a permanent contract. 

Within the UK, the rule is that any employee on fixed-term contracts for more than four years is automatically classed as a permanent employee. Similarly, German law says that fixed-term contracts can’t be extended more than three times, and they cannot exceed the maximum period of two years. 

Employment laws also give employees the right to receive the same treatment as their colleagues on permanent contracts. For example, the Fixed Term Employees Regulations 2002 says that fixed-term employees are entitled to the same benefits, compensation, and opportunities as permanent staff. 

This is true unless the business can provide a good reason not to treat them as equals. 

Can fixed-term contracts become permanent?

As we discussed a moment ago, it is certainly possible for a fixed-term contract to transition into a permanent one. This can happen in two ways:

  1. If an employee has had successive fixed-term contracts with the company and, under the law, qualifies for a permanent contract now instead. 
  1. If a permanent vacancy becomes available and an employee on a fixed-term employment contract is chosen to fill this vacancy. At this point, they will replace their fixed-term contract with a new, permanent contract. 

Can fixed-term contracts be terminated early? 

Just as fixed-term contracts can become permanent, they can also be terminated early. Don’t worry, though. There are still a few rules around when this can happen and how it should be handled by employers and employees. 

What these rules are will vary depending on where you’re based and the laws that govern that area. Let’s explore an example of how this works in the UK for now. 

Can fixed-term contracts be terminated early in the UK?

Put simply, an employer can end a fixed-term contract early within the UK. 

However, if the employment contract doesn’t discuss the possibility of the agreement being ended early, premature termination could result in a breach of contract. Even if the contract does discuss the possibility of ending the fixed-term contract early, the employer must still give the employee sufficient notice when doing so. 

The minimum notice period for fixed-term employees is a week if they’re worked continuously for at least a month. If they’ve worked continuously for two years or more, they are entitled to at least one weeks worth of notice for each year they have worked. 

If the contract itself promises a longer notice period, then this will be the period that applies. 

What happens when a fixed-term contract ends?

If a fixed-term contract ends at the agreed finishing point, both parties will be released from the agreement without the need for notice. This should still be handled professionally, and the dismissal process must be fair. 

Are fixed-term contracts good?

To recap: we’ve discussed what a fixed-term contract is, why they’re used and what the legal implications of one are. What we haven’t discussed yet, is how ‘good’ they are. 

But unfortunately, it’s not as simple as fixed-term contracts being ‘good’ or ‘bad’. Fixed-term contracts can be a great option for certain individuals and businesses. However, they aren’t without their flaws. 

Let’s explore the pros and cons of a fixed-term contract in a bit more detail now. 

Advantages of fixed-term employment contracts

✅ Opportunity to evaluate employees: Fixed-term contracts allow employers to assess how suitable an employee is for a role without committing to their employment indefinitely. Employees also have a similar opportunity to evaluate the employer and role during this time. 

✅ Greater flexibility: Another obvious advantage of fixed-term employment contracts for employers is that they have the flexibility to employ staff temporarily to meet increased demand. A by-product of this is greater efficiency, as it eliminates the potentially unnecessary cost of employing that individual during less busy periods. 

Disadvantages of fixed-term employment contracts

Job insecurity: One of the most obvious drawbacks of fixed-term employment contracts is that they create job insecurity. This is because they don’t provide long-term employment for individuals, only short-term work. 

More difficult to recruit for: Due to the reason we just discussed, fixed-term employment positions are also more difficult to fill. This is because job security is important to a lot of people, so they will naturally gravitate towards roles that promise indefinite and permanent employment instead. 

Team-building is challenging: Since their time within a company or role is limited, it can be challenging for the employee to settle into the team. This can hinder team cohesion. 

Regular renewals require admin work: Since fixed-term contracts only last for a short period, they need to be renewed more frequently than ordinary contracts. This can involve a lot of administrative work if there’s no process in place to manage renewals.

How to manage fixed-term contract renewals 

If managed properly, fixed-term contracts can be extremely useful for businesses. Many businesses will even choose to renew fixed-term contracts. But, as we just described, frequent contract renewals can involve a lot of administrative work. 

But they don’t have to. 

By adopting a contract automation tool like Juro, you can remove friction when managing upcoming contract renewals. This is achieved in a few ways. 

One of the best ways that Juro enables users to manage fixed-term contract renewals is through automated contract reminders. Contracts built-in Juro are tagged automatically, and important values like the contract’s effective date and end date can be used to set automated contract reminders. 

These reminders are fully customizable and will notify you of any upcoming contract renewal deadlines ahead of time. This notice gives you more time to evaluate the success of a fixed-term contract and decide whether to renew it or not. 

If you do decide to renew the contract, you can also track the progress of this renewal with ease. Juro’s kanban view contract dashboard enables you to see where all of your contracts are in the contract lifecycle at any point. This helps to quickly identify any blockers and get fixed-term contracts over the line faster.

Need help managing employment contracts?

Fixed-term employment contracts aren’t much different from any other HR contracts in that they need to be managed effectively.

The best way to do this is by establishing an effective contract workflow, or by adopting contract automation software like Juro. Juro’s all-in-one contract automation software enables HR teams to refresh HR documents at scale, spend 75% less time on paperwork and deliver a great hiring experience for candidates. 

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