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The hidden dangers in Employment Contracts

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The hidden dangers in Employment Contracts

In the lead up to mid-year salary and performance reviews it is timely for employers to take stock of arrangements under employment contracts.  In particular, employers should consider whether their employees are engaged under a fixed term or an ongoing (permanent) contract of employment.

Some employers may be considering employing workers on fixed term contracts. Contracts of employment are generally of two types – those which terminate with the effluxion of time (fixed term contracts) and those which terminate by the giving of notice.

A fixed term contract is for a specific time period, for example, from 1 July 2017 to 30 June 2018, but it can be for any specified term. Contracts for two or three year’s duration are quite common.

The advantage of a fixed term contract is that there is no need to give notice of the end of the contract and a redundancy payment is not applicable.  The contract simply ends on the specified date.  However, the difficulty with a fixed term contract is that circumstances may and often do change during its term.  At common law, an employer who wishes to end the contract before the specified end date, will be required to make a payment to the employee equivalent to what would be payable for the balance of the term of the contract. If this is not done, the employee may be entitled to damages (with interest and costs) for income lost or to make an unfair dismissal application seeking reinstatement or compensation. On the flip side, an employee may also be liable in damages to their employer should they terminate a fixed term contract before it expires.

Another disadvantage of a fixed term contract is that it cannot be extended beyond its original term without changing the nature of the employment relationship from temporary (with no expectation of a continuing relationship) to permanent. A series of fixed term contracts entered consecutively overtime will evolve into a permanent employment relationship giving rise to a legitimate expectation by employees of continuity.  If this happens, the employer will be liable for accrued entitlements including redundancy pay and payments in lieu of notice of termination.

An early termination clause can be inserted into a fixed term contract, allowing it to be terminated by notice before the end date. This can help to overcome the pitfalls we have identified. A hybrid contract allows the employee to be employed “up to” the end date specified in the contract. Providing the full term is worked, there is no need for notice of termination and the employee has no statutory unfair dismissal rights or redundancy pay rights at the end of the contract.

The benefit of a hybrid contract is that it can be terminated at an earlier date by the employer without having to pay the full balance of the contract. A potential drawback to such a clause is that the employee may have statutory unfair dismissal rights and an entitlement to redundancy pay if they have served the required minimum employment period under legislation.  There is also the possibility that an employee might claim damages for breach of contract, arguing that the parties intended that early termination was only to occur in exceptional circumstances. In addition, unless the hybrid arrangement is clearly stated, there is a danger that a court or tribunal will view the inclusion of a notice provision as changing the very nature of the employment relationship from a temporary to permanent.

The “take home” message is that employer’s need to exercise caution in the preparing employment contracts. Fixed term or hybrid contracts should not be used to avoid or replace permanent employment and associated obligations. Where there is a finite or temporary demand for employees in your workplace, casual, fixed task or seasonal employees should be considered.  Where fixed term contracts or hybrid contracts are used, expiry dates must be properly diarised, managed and reviewed where necessary.

If you are reviewing your employment contracts, you would be wise to seek professional advice. Our solicitors at Just Us Lawyers have had many years of experience in assisting both employers and employees with employment law advice. Call or email Just Us Lawyers for assistance in drafting your employment contract today!

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