The restrictions on using fixed term contracts that every employer needs to understand
Near the end of 2023, significant restrictions on fixed term employment contracts came into force. The changes limit the ability of employers to offer fixed term contracts that extend beyond 2 years and limit extensions to a fixed term arrangement, unless an exception applies.
The rules apply to both fixed term contracts (a contract that ends on a specified date) and maximum term contracts (a contract that ends on a specified date or an earlier date if either party gives notice of termination) – for simplicity we have referred to both as fixed term contracts in this article.
The rules have caused a headache for many sectors that routinely use fixed term contracts for a range of reasons – but it is important to note there are some exceptions to the rules which are helpful if certain criteria are met.
So, what exactly are the changes? Below we answer some frequently asked questions.
What has changed?
It is an offence for an employer to engage an employee on the following types of fixed term contracts, unless an exception applies:
(a) Single fixed-term contracts
- that operate for a fixed or maximum period that exceeds two years;
- that allow the contract to be extended or renewed such that the total period may exceed two years; OR
- that provide for an option or right to extend or renew the contract more than once.
(b) Consecutive fixed term contracts
Where a new fixed term contract involves the performance of the same or substantially similar work as the prior contract and there is substantial continuity of the employment relationship between the new and prior contracts, AND:
- the total duration of the new and prior fixed term contracts exceeds two years; OR
- the current contract contains an option for renewal or extension; OR
- the prior contract contained an option for extension that has been exercised; OR
- the employee has previously been engaged under two consecutive fixed term contracts (and the criteria relating to similar work and substantial continuity are met with respect to them).
Additionally, there are anti-avoidance provisions that mean that it is an offence for an employer to take any action for the purpose of avoiding any of the limitations listed above.
Are there any exceptions to the rules?
There are a range of exceptions to the rules – some of which are ongoing, and others temporary.
The ongoing exceptions include:
- the employer is engaging an employee to cover a temporary absence of another employee (e.g. parental leave; long service leave);
- the employee earns over the high income threshold ($175,000 as at the date of this article) for the first year of the contract (note: specific rules apply in respect of part time staff);
- the employee has specialised skills that the employer does not have, but needs, to complete a specific and identifiable task;
- the employer is reliant on government funding to directly finance the employee’s position and there are no reasonable prospects that the funding will be renewed (note: there are specific rules around the length of the funding);
- the employee is engaged as part of a training arrangement;
- the employer needs additional workers to do essential work during a peak period;
- the employer needs additional staff members during emergency circumstances;
- the employee is appointed under governance rules of a corporation or other association and those rules specify a length of time that the appointment can be in place (such as a term of office of three years); or
- the employer is permitted to enter into the fixed term contract by a term specified in a modern award that covers the employee.
In addition to the ongoing exceptions, there are temporary exceptions that apply in limited circumstances, including in respect of higher education staff, the live performance industry, organised sporting bodies, staff supporting events for high performance sport, and where contracts are funded by a philanthropic entity.
The onus is on the employer to prove that one or more of the above exceptions applies –so you should retain evidence that an exception applies.
Do the rules impact existing fixed term contracts?
The rules only apply to fixed term contracts (including extensions) entered into after 6 December 2023.
What should I do if I want to issue a full-time fixed term contract to a new employee to take effect for a period of three years?
The changes mean that you must offer this employee an employment contract on a permanent ongoing basis rather than on a fixed term basis – unless an exception applies.
Another option may be to engage the new hire for a maximum term of two years.
What can we do as a business in light of these changes?
Here are some steps that employers can take when considering the use of fixed term contracts:
- Review hiring processes and make determinations about whether or not an employee should be engaged on a fixed term or on a permanent basis.
- Update your fixed term contract templates to ensure they are compliant with the new rules and to make provision for specifying that an exception applies (where applicable).
- Start factoring in the costs of permanent employment (e.g. payment in lieu of notice and redundancy pay) when setting salaries for new employees that should be engaged on a permanent basis.
- Review your performance management processes and procedures. Some businesses will need to rely more heavily on these processes to manage employee expectations (rather than the use of fixed term contracts).
- If your business falls within one of the exceptions to the changes and wishes to continue offering fixed term contracts, make sure you retain evidence of the exception that applies
The team at Justitia would be delighted to assist you with understanding how the fixed term contract rules impact your business and the best path forward. Please feel free to get in touch with any one of our team!
This is general information only, is current as at 10 October 2024 and may not be applicable to your organisation or situation. It is not a substitute for legal advice and it is important that you obtain specific advice.