You may think that you can avoid having to deal with unfair dismissal claims by putting employees on fixed term contracts.

After all, you’re not dismissing them if their contract just comes to an end, right? If this is part of your employment strategy, you could be leading your organisation into problems, due to a recent decision of the Full Bench of the Fair Work Commission (FWC).

What is a fixed term, maximum term or outer limits contract?

A fixed term contract is an employment contract for a specified period of time.

An “outer limits” or “maximum term” contract is a fixed term contract where the employer and employee have an ability to terminate on notice during the term of the contract, but it will also come to an end automatically at the end of the specified period. A true fixed term contract will not have an ability to terminate on notice during the period of the contract.

Organisations in industries reliant on external funding (such as universities, consultancies and not-for-profits), or organisations in project-based industries (such as the construction industry) have found these contracts a useful tool for avoiding unfair dismissal liability in the past.

How could using fixed term contracts avoid unfair dismissal claims in the past?

Section 386(1) of the Fair Work Act 2009 (Cth) (the FW Act) states that a person has been dismissed if the person’s employment has been “terminated at the employer’s initiative.”

The legal position used to be that when a fixed term contract expired and was not renewed this did not amount to a termination at the employer’s initiative.1 It did not matter if an employee was offered a series of rolling fixed term contracts.

How has this changed?

In Khayam v Navitas English Pty Ltd t/as Navitas English2 the Applicant was employed on a series of “maximum term” contracts between April 2012 and May 2016. At the end of the last contract, the employer elected not to offer a further contract due to performance concerns. The employee made an unfair dismissal claim, and the employer objected on the basis that there had been no dismissal at the initiative of the employer. At first instance the Fair Work Commission applied Lunn,3 and dismissed Mr Khayam’s application.

On appeal, the Full Bench found that the correct approach in determining whether there had been a dismissal at the employer’s initiative was determined by reference to the employment relationship and not the employment contract.4 In making this determination the following factors should be taken into account:

  • Was there an action on the part of the employer that resulted in the termination?
  • Did the terms of the contract genuinely indicate that the employment relationship will not continue after a specified date?
  • Was the contract is contrary to public policy in some way?
  • Was the use of maximum term contracts appropriate in the relevant field of employment?
  • Was the maximum term contract one of a series of contracts?
  • Did the employee have an expectation of ongoing employment?
  • Were the terms of the contract inconsistent with the terms of an award or enterprise agreement?
  • Were there were any oral or written agreements that may have varied the original contract so that the time limit no longer applied?

Although the Full Bench changed the legal test, it still concluded that Mr Khayam had not been dismissed within the meaning of s386(1)(a) of the FW Act, and the appeal was dismissed.

What does this mean for your organisation?

The test in Khayam is by no means straightforward and depends on the facts of each case. There are, however, steps you can take now to maximise your chances of avoiding an unfair dismissal claim arising on the expiry of a contract.

If you use fixed term or maximum term / outer limits contracts, we recommend that you seek advice on the terms and circumstances surrounding any new contracts you are signing, and whether you should make any changes to your termination procedures.

For more information contact MV’s Employment Law specialists:

Alisa Taylor  Partner
(02) 6279 4444

William Ward  Special Counsel
(02) 6279 4444

1 Department of Justice v Lunn [2006] AIRC 756.
2 [2017] FWCFB 5162
3 Department of Justice v Lunn [2006] AIRC 756.
4 Khayam v Navitas English Pty Ltd t/as Navitas English [2017] FWCFB 5162 (8 December 2017), 72.