Maximum Term Contracts – A Quick Guide
When should I use a maximum term contract and what does it mean?
Here at CCER, we get a lot of questions about the best way to engage staff when projects or funding might not be ongoing. While maximum term contracts are popular, there are a number of things an organisation should consider before using a maximum term contract – especially if this is the second or third maximum term contract that has been offered to the same employee.
What is a maximum term contract?
A maximum term contract (sometimes also known as an ‘outer-limit’ contract) is a contract that has a set end date but also has a termination clause that allows it to be terminated before that date.
A maximum term contract is different to a permanent (ongoing) contract because it is for a set period in time. It is also different to a fixed term contract because a true fixed term contract does not have a clause allowing the contract to be terminated early.
Many employers prefer maximum term contracts to fixed term contracts because terminating a maximum term contract only requires paying the required notice, whereas terminating a fixed term contract requires paying out the remainder of the whole contract term.
Do maximum term contracts mean employees cannot make unfair dismissal claims?
Potentially, but not always. The general position is that employees on a maximum term contract that expires according to its terms cannot make an unfair dismissal claim because there has been no ‘termination at the initiative of the employer’.
However, the Fair Work Commission has made it clear that employers will not always be able to avoid unfair dismissal liability by using maximum term contracts. This was recently outlined in the case of Khayam v Navitas  FWCFB 5162 (Navitas).
The Navitas case says that a number of factors might affect whether the end of a maximum term contract is or is not a ‘termination at the initiative of the employer’. Some key factors include:
- misrepresentation or misleading conduct by the employer;
- serious mistake by the employee about contents or subject matter of the employment contract;
- unconscionable conduct, duress or coercion, no legal capacity to contract, or a sham contract;
- whether there has been a series of successive maximum term contracts; and
- whether there have been representations about renewing the employment when the present contract expires.
One of the key features of the Navitas decision was the finding that a contract of employment could end due to its terms, but the “employment relationship” might still exist because of the behaviour of the employer (particularly if there were multiple successive maximum term contracts and/or representations about renewing the employment).
Put another way, calling an employment agreement “maximum term” will not prevent the Fair Work Commission from deciding that there was an ongoing employment relationship which was unfairly terminated, such that there was an unfair dismissal.
In the Navitas case, the employer also argued that the maximum term contract could not give rise to an unfair dismissal claim because it was a contract “for a specified period of time”. The expiry of such contracts is excluded from unfair dismissal protections.
However, the Fair Work Commission disagreed with this view because of the ability to end a maximum term contract at any time by giving notice. The Fair Work Commission essentially suggested that a maximum term contract should not be seen as a contract “for a specified period of time” because only true fixed term contracts with a definite start and end date could properly be characterised this way.
Does the Navitas case mean we shouldn’t bother with maximum term contracts anymore?
Maximum term contracts are still a good tool for engaging employees, particularly if the engagement is not one you believe would be ongoing (for example for projects with a clear deliverable or where future funding is uncertain).
The Navitas case makes it clear however, that the more successive maximum term contracts you have with the one employee, the harder it might be to claim that an employee isn’t owed the same protection from unfair dismissal as a permanent employee.
It’s important before you renew the first maximum term contract that you consider whether or not the employee’s performance and conduct meets the standard required and whether any issues have been communicated to them.
Do maximum term contracts mean that the employer does not need to pay redundancy pay if the contract ends?
The Fair Work Act 2009 states that redundancy entitlements do not apply to employees employed for a “specified period of time”. The traditional view has been that an expiry of a maximum term contract would therefore not require an employer to pay redundancy pay. However the interpretation in the Navitas case of the same words (‘specified period of time’) has now cast some doubt on this view.
Courts and tribunals are increasingly looking to the reality of the employment relationship – and this may carry implications for redundancy liability as well as unfair dismissal. If you have a long term employee on multiple maximum term contracts, this raises a question of whether they were actually a permanent employee that is entitled to redundancy pay when their role is no longer required.
These cases can be tricky and will often come down to the facts in individual cases. Contact CCER if you would like further advice about a planned or potential redundancy of a maximum term position or if you want to discuss any other matters relating to maximum term contracts.
Rita Bhattacharya is an Employment Relations Specialist at CCER.
For further information or advice, do not hesitate to call CCER’s team of Employment Relations Specialists on 02 9390 5255.