Navigating the seas of change: New rules for fixed-term employment contracts

Fixed-term contracts have seemed a sensible risk management approach and have been especially popular because it’s usually awkward terminating the employment of a staff member, and employers fear the legal consequences of unfair dismissals. Using a fixed-term contract, at least in the perception of the employer, seemed prudent because unless there is an active renewal of the employment contract, the relationship is terminated when the contract expires. Many employers feel less awkward to allow an employment contract to simply expire that to go through a process of actively terminating an employment relationship.

Anecdotally, we had had feedback that suggests that many employers also feel that in the period before expiry/ renewal of the fixed-term contract, there is an improvement in employee productivity and performance.

However, from 6 December 2023 the rules regarding fixed-term contracts have changed dramatically, and in most cases it is no longer possible to have fixed-term contracts which repeatedly rollover each year.

Key takeaways of the new rules from 6 December 2023

• A fixed-term contract can’t be for longer than 2 years, including extensions and renewals.
• A fixed-term contract can’t be renewed more than once.
• Over the above limits, consecutive renewals of fixed-term contracts can’t be offered for the same work unless there has been a substantial break in the employment relationship.
• Some exceptions apply to allow longer fixed-term contracts, and renewals and extensions in specific circumstances.
• Employers must provide an employee with a Fixed-Term Contract Information Statement.

What is a fixed-term employment contract?

A fixed-term employment contract is a contract that terminates at the end of a specific period.

What are the new rules?

1. 2 year time limit – fixed-term employment contracts, including extensions and renewals, can’t be more than 2 years.
   Example – ABC Financial Planning Pty Ltd cannot enter into a fixed-term employment contract to employ Jason a paraplanner for 3 years, unless an exception listed below applies.
2. Renewal limit – fixed-term employment contracts cannot have an option to extend or renew the contract so the employment period is longer than 2 years, or extend or renew the contract more than once, regardless of the employment period.
   Example – ABC Financial Planning cannot contract with Jason for 2 years with an option to renew for another 2 years because the term of the contract including the option to renew is more than 2 years.
   Example – ABC Financial Planning offers a fixed-term employment contract to Sally for 6 months. At the end of 6 months, they offer her another contract for 6 months. At the end of that 6 month term, they decide they like Sally so much they will offer her a 12 month contract. As the contract has already been renewed once, the new 12 month contract is in breach of the new rules.
3. Consecutive contract limits – Employers cannot employ someone on a new fixed-term employment contract if:

• the new contract is for mainly the same, or substantially similar, work as an earlier fixed-term employment contract;
• there isn’t a substantial break in the employment relationship between the previous and current contracts; and
• any of the following apply:  
  • the total period of employment for the previous contract and the new fixed-term employment contract is more than 2 years,
  • or the new fixed-term employment contract can be renewed or extended, or
  • the previous fixed-term employment contract was extended, or
  • the employer had previously engaged the employee on 2 consecutive contracts for the same or similar work, the employer cannot use a third (or more) fixed-term contract if there is substantial continuity between all three or more of the contracts.

Exceptions to the new rules

There are exceptions to the new rules including where the employee brings necessary specialised skills, apprenticeships, temporary replacements, or where the employee earns more than the high-income threshold for a full-time employee, which is $167,500 from 1 July 2023. (If the employee is part-time or is employed for less than a year, this applies pro-rata.)
Example – Jack is employed under a 6-month contract as a locum responsible manager. Jack is paid $90,000 for the 6-month period, which is higher than the pro-rated high-income threshold. The new rules do not apply to Jack, so his employer can keep using fixed-term contracts for him.

Special Fair Work Statement to be provided

Employers must provide a Fixed-Term Contract Information Statement when engaging any employees under a fixed-term employment contract from 6 December 2023. The Fixed-Term Contract Information Statement can be obtained from the Fair Work website from 6 December 2023 (The requirement to provide a Fixed-Term Contract Information Statement is in addition to the existing requirement to give a new employee a Fair Work Information Statement).

What happens to employees currently on a fixed-term contract?

The new rules apply to contracts entered into on or after 6 December 2023, which includes new contracts and renewal of existing contracts.

However, where employees are on an existing fixed-term contract which began before 6 December 2023, you can let that contract run until it ends.

What to do now?

Employers should:

• Review current employment relationships with staff on fixed-term contracts, and especially consider previous extensions or renewals. Determine which staff are excluded from any further fixed-term contracts, and consider the performance of those staff.
• Consider and possibly remove references to extending or renewing the term in any fixed-term contract templates.
• If you rely on one of the exceptions, consider documenting that exception in any new fixed-term contract.
• Consider your workforce requirements going forward – should you take the opportunity on expiry of a contract to terminate the employment relationship?
• If you have relied on fixed-term contracts, thinking it will mean that if a staff member is not performing you can easily not renew their contract, you should revise your approach. Consider if staff members are a good fit with your organisation earlier in their employment relationship with you, and especially within the probation period. Many employers allow probation periods to expire without taking the necessary (unpleasant and awkward) steps to terminate an employment relationship early.

The new rules reduce flexibility for employers but are part of the current Federal Government’s policy of increasing job security for employees.

Fiona Halsey, director of Halsey Legal Services