By Hannah Hurst

Ever wondered what the difference is between fixed and maximum-term contracts?

Choosing the correct employment contract can be a confusing process for any employer – there is no magic one-size-fits-all solution. An employment contract needs to carefully reflect the agreement between you and your employee. We understand employment contracts are tricky, but that’s why we provide free resources to help you understand why it’s a good idea to have them in place.

In this article, I focus on fixed-term and maximum-term employment contracts and explain what each contract is, the differences between both and how and when to use them.

1.What is a fixed-term employment contract?

A fixed-term contract refers to a contractual agreement between an employee and employer that lasts for a specified period or task, and there is no ability for the parties to terminate the agreement early. Fixed-term employees differ from permanent employment relationships because fixed-term employment is for a limited period of time.

2. What is a maximum-term employment contract?

Maximum-term or outer limit employment contracts refer to employment agreements that include a nominated expiry date (which may be expressed as a specified period or task), but also provides the parties with the right to terminate the contract early, usually with notice.

These types of contracts are commonly used when there’s a specific project that requires more staff, businesses enter busy trade periods such as Christmas for retailers, or for parental leave covers.

3. What is the difference between fixed and maximum-term contracts?

The key difference is that maximum-term contracts contain a termination clause which allows either party to end the agreement upon the provision of notice, whereas a fixed-term contract doesn’t permit early termination: it for a guaranteed period of time. An attempt by a party to terminate a fixed-term contract could result in the other party being able to bring a claim against them for the full value of the remainder of the contract: for an employee, this could mean that they are entitled to their full salary until the specified end date.

4. When should I use maximum-term contracts?

Maximum-term contracts are generally favoured by employers over fixed-term contracts because of their flexibility in allowing for early termination if the employment relationship doesn’t work out, or if there is otherwise a need to end the employment prior to the specified expiry date.

However, maximum-term contracts bear some risk, because they have previously been found by the Courts not to be an agreement for a “specified period” within section 386(b)(ii) of the Fair Work Act 2009 (Cth) (FW Act) because of the ability to terminate early on the provision of notice. This is relevant for determining an employee’s access to unfair dismissal protections, because section 386(b)(ii) provides that a person cannot be deemed to have been ‘dismissed’ if their employment was for a specified period. If this exemption is not triggered (for example, if the employee was under a maximum-term contract, the employee may still be able to make a claim for unfair dismissal.

This was explored in the case of White v Sydney College of English Pty Ltd, where it was found that the unqualified right to terminate an agreement meant that the agreement wasn’t a contract for a specified period within the meaning of s 386(b)(ii) in the FW Act and as such, may have given rise to the employee having access to unfair dismissal provisions if the agreement was terminated early. This was because the termination clause in the agreement meant that the contract was for an indeterminate period, and the cessation date merely recorded the outer limit of a period beyond which the contract of employment would not run.

This risk is not present in fixed-term contracts, which have been consistently found to be agreements for a “specified period”, and therefore the termination of employment on the expiry of a fixed-term contract prevents access to unfair dismissal claims.

5. What is a repetitive renewal in a fixed-term or maximum-term contract?

It is common practice in many industries to “roll-over” or “repetitively renew” fixed-term or maximum-term contracts, such as for consecutive 6- or 12-month periods.

While this is convenient, it is not always legally sound. Where employers continually renew or extend fixed-term or maximum-term contracts to the point where renewal becomes a mere formality, this may be found by the Court or the Fair Work Commission (FWC) to constitute permanent employment. This analysis may lead to the conclusion that the employee has been incorrectly engaged on a fixed-term basis to suit the employer’s convenience, as opposed to appropriate engagement as a permanent employee.

There is no specific threshold at which this may occur, so we encourage employers to use caution when rolling over fixed-term or maximum-term contracts, and where possible, engage in specific negotiations with the employee for a new contract rather than a renewal of the existing agreement.

6. So, which contract should you use?

Fixed-term contracts can be effective in circumstances where an individual’s employment is only required for a certain amount of time. This can include covering for periods of another employee’s parental or long-service leave or hiring an employee for the exact duration of a particular project. Where there hasn’t been any ongoing renewals, fixed-term contracts also provide employers with the ability to elect not to renew an employment contract upon its nominated expiry date, without suffering the complexities associated with performance management, disciplinary procedures, or the risks related to unfair dismissal claims .

Maximum-term contracts do share some similarities with fixed-term contracts, but they retain the ability for an employer or employee to terminate the agreement earlier if required, which may provide much-needed flexibility to much parties. An expiry date for the contract is agreed upon which will cause the employment to automatically end on that date. However, this expiry date is identified as the maximum contract duration, rather than a definitive term, thus either party withholds the ability to terminate the employment relationship before this date, if necessary.

Advantages and disadvantages exist for using both fixed-term and maximum-term contract agreements. When engaging employees, an employer should carefully consider their circumstances and use the contract that is appropriate for the employee and the desired purpose.

For help in determining what contract will best benefit you, please contact our HR Assured team today.

For more information on fixed and maximum-term contracts and what this means for you, clients should contact the HR Assured team at our 24/7 Telephone Advisory Service.

If you’d like more information about the benefits of becoming an HR Assured client contact us today for a confidential, no-obligation complimentary call.

Hannah Hurst is a Workplace Relations Consultant at FCB Group and HR Assured. She regularly provides advice to a wide range of businesses in respect to compliance with workplace laws and has a special interest in the retail industry. Hannah is also a fourth-year law and commerce student at Macquarie University.