It ain’t over ‘til it’s over – new guidance on maximum term contracts

Posted by on Feb 27, 2018

In a case that will have major ramifications for the way employers structure their employment contracts, the Full Bench of the Fair Work Commission has held that an employee employed under a maximum term contract, that ended on the agreed expiry date, is not necessarily excluded from its unfair dismissal jurisdiction.

A maximum term contract is one where there is an end date, however it includes a termination clause with a notice period that can be exercised by either party.  This differs from a fixed term contract that also has an end date, however there is no termination clause.

Under the Fair Work Act, an employee employed on a “contract for a specified period of time” cannot bring an unfair dismissal claim when that period of time expires.   The Full Bench in Khayam v Navitas English Pty Ltd (Navitas) held that a maximum term contract is not a “contract for a specified period of time”, leaving it open for employees on maximum term contracts to claim unfair dismissal in some situations.

In Navitas, the Applicant (Mr Khayam) was initially employed as a casual teacher, but was then offered consecutive employment contracts for periods of a year or two from 2012 to 2016.  The final contract provided that “the employment will terminate automatically on the Expiry Date, unless it is terminated earlier by either party”.  In 2016 the employer was unhappy with Mr Khayam’s performance so when his final contract reached its agreed expiry date, the employer did not offer him another contract and his employment ended on the expiry date.  Mr Khayam nevertheless argued that he had been dismissed by the employer and brought an unfair dismissal claim.  In order to proceed with his claim Mr Khayam needed to demonstrate that (1) his employment had terminated at the employer’s initiative, and (2) his maximum term contract was not a contract for a specified period of time.

1.  Was the employment relationship terminated at the employer’s initiative?

The Full Bench first considered whether the expiry of a maximum term contract, such as Mr Khayam’s employment contract, meant that the employment was terminated at the employer’s initiative.

A “termination at the initiative of the employer” occurs when the employer’s action was the principle contributing factor resulting directly or consequentially in the termination of the employment.

The Full Bench identified several principles for determining whether employment was terminated on the employer’s initiative, including considering the entire employment relationship, rather than focusing on the termination of the contract that operated immediately before the employment ended, and considering if that relationship was terminated at the employer’s initiative.  Furthermore, where the terms of the contract reflect a genuine agreement that the employment will end on the expiry date then the employment will have terminated by agreement between the parties, and not at the initiative of the employer.  However, if the contract does not “in truth” represent an agreement by the parties that the employment will end on the expiry date, then the employer’s decision to not offer a further contract will be a relevant factor in deciding whether the employer’s action was the principle contributing factor to the termination of employment.

2.  Was the contract of employment for a specified period of time?

If an employee demonstrates that the employment relationship was terminated on the employer’s initiative, the next issue to consider is whether the employment contract was a contract for a specified period of time.  If the contract was for a specified period of time, the employee is barred from bringing  an unfair dismissal claim.

The majority of the Full Bench held that maximum term contracts are not contracts for a specified period of time because they include an unqualified right for the parties to terminate the contract (with notice) before the end date of the contract.  This differs from a contract of employment for a specified period of time with clearly stated dates of commencement and cessation, where the contract can only be terminated because of a breach by either side.  As Mr Khayam’s contract provided an unqualified right to terminate the contract on four weeks’ written notice or pay in lieu, his contract was not a contract for a specified period of time.  As such, he was not barred from bringing an unfair dismissal claim by virtue of the fact his maximum term contract had expired.

Key points going forward

The case was referred to the original Commissioner for re-determination.  We await to see how that Commissioner will apply the principles outlined in the Full Bench decision.  In the meantime, there are some interesting points to consider:

• While the contract of employment in this case provided that the employment (rather than merely the contract) would terminate automatically on the expiry date, the majority of the Full Bench looked beyond this wording to consider more broadly whether the employment relationship was terminated at the initiative of the employer.  It is unclear whether any contractual wording would be sufficient to convey a clear intention to end the employment relationship on the contract’s expiry date.

• This decision may have broader consequences beyond unfair dismissal. For example, an employee is similarly not entitled to redundancy pay when employed on a contract for a specified period of time. It may be open to employees on maximum term contracts to argue that they are entitled to receive redundancy pay in certain situations.

We encourage our clients to review their arrangements for fixed/maximum term contracts in light of this decision and to seek advice before implementing a decision to not offer a further contract to any employee who has been employed on consecutive contracts.  If you would like assistance with these issues, please do not hesitate to contact Magda Marciniak or Nicola Martin or another member of the Justitia team.