An HR guide to fixed-term contracts

For small and medium-sized enterprises (SMEs), flexibility is often the key to success. This can mean adapting quickly to new projects, seasonal demands or temporary staffing needs. One of the most effective tools for achieving this flexibility is the fixed-term contract. While they offer a host of advantages, it’s important to ensure fair treatment for employees. 

This guide will walk you through what fixed-term contracts are, why your business might benefit from them, the legal rights and protections for employees, and the potential pitfalls you need to avoid.  

What is a fixed-term contract?

At its core, a fixed-term contract is an employment agreement with a specified end date. This differs from a permanent contract, which has no predetermined end. Fixed-term contracts are most commonly used for temporary roles, such as: 

• Maternity or long-term sick leave cover 

• A specific project with a defined timeline 

• Meeting increased workload during peak periods 

The defining feature is that the contract automatically ends on a specific date, or upon the completion of a specific task. 

Should my business consider fixed-term contracts? 

Fixed-term contracts have a host of benefits for SMEs. These include: 

• Allowing you to manage your budget effectively by hiring for specific, temporary needs without the long-term financial commitment of a permanent employee 

• Accessing specialist skills for a particular project that might otherwise be unaffordable 

• Providing a structured way to test a new role and assess whether a position is truly necessary

• Ensuring that a specific task or project is completed within a set timeframe which can keep teams focused and motivated to meet a strict deadline

What are the rights and protections for employees?

The Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 outline the legal rights and protections afforded to employees.

From their first day of employment, an employee on a fixed-term contract has the right not to be treated less favourably than a comparable permanent employee. This includes:

• Receiving the same rate of pay and be subject to the same working conditions

• Entitlement to the same training and development opportunities

• Accessing the same benefits, such as bonuses, company pensions and private health insurance

It’s important to note that some benefits may be offered on a pro rata basis. For example, a bonus that is typically paid annually may be pro rata for a six month contract. You don’t have to offer every single benefit, like a company car if it is a very short-term hire, but you must be able to justify any differences and ensure the overall package is of equal value.

After four years of successive fixed-term contracts, an employee may automatically become a permanent member of staff, unless you can demonstrate a strong business reason for not doing so. You are also required to notify fixed-term employees of suitable permanent roles that become available within the business.

Situations that require careful management 

Fixed-term contracts can present some tricky scenarios that require consideration: 

Ending the contract

It’s a common misconception that a fixed-term contract simply expires. Legally, the non-renewal of a fixed-term contract is still considered a dismissal. For employees with two or more years of service, you must have a fair reason for this dismissal. This is typically due to redundancy or some other substantial reason (SOSR) such as the return of the employee they were covering. Simply letting the contract end without a fair process could lead to a claim for unfair dismissal. 

Early termination

Unless the contract explicitly includes an early termination clause with a specified notice period, ending the contract before the agreed date could be considered a wrongful dismissal. It’s important to ensure your fixed-term contracts are carefully drafted to include clear terms for early termination to protect your business. 

Funding uncertainty

Many small businesses rely on external funding for projects. If this is the case, you might be tempted to continually use fixed-term contracts. While this can be a valid justification, you must be prepared to defend it at an Employment Tribunal. It is crucial to be able to demonstrate a direct link between the funding and the temporary nature of the role. 

Making it permanent

If a fixed-term role is made permanent, the fixed-term employee should be given the opportunity to apply for the vacancy. If you decide not to offer them the permanent role, you must be able to justify your decision based on a fair and objective selection process. To further mitigate risk, try to make the permanent role as different as possible from the temporary one. 

Pregnancy or maternity leave

Not renewing a fixed-term contract during an employee’s pregnancy or maternity leave is not automatically unlawful. However, any decision must be based on genuine business needs and not on the pregnancy itself. You should also offer priority access to other suitable vacancies and provide a clear, written reason for the dismissal. Failure to do so could lead to a claim of discrimination.

The role of settlement agreements

In certain situations, particularly when there is a risk of a dispute, a settlement agreement can be a useful tool. A settlement agreement is a legally binding contract between an employer and an employee, where the employee agrees to waive their right to bring a claim against the employer in exchange for a sum of money.  

How Sapphire HR can help

As discussed, although fixed-term contracts may appear straightforward, certain scenarios can make navigating them more complex. Making a mistake, such as failing to provide pro-rata benefits or a fair reason for non-renewal, can lead to costly tribunal claims and damage your business’s reputation. 

At Sapphire HR, we specialise in providing tailored, practical HR support to small businesses. We can help you: 

• Draft compliant fixed-term contracts that protect your business and clearly define the terms of employment 

• Develop transparent processes for managing fixed-term employees, from recruitment to non-renewal 

• Take a proactive and compliant approach to tricky situations like early termination, funding issues or the legal rights of pregnant employees 

• Resolve disputes effectively and efficiently with the use of settlement agreements  

Fixed-term contracts can be a valuable tool for any small business looking to stay agile and responsive to business demands and seasonal changes. By understanding employment law and taking a fair, transparent approach, you can harness their benefits while staying compliant and avoiding costly claims. For peace of mind and expert guidance, consider partnering with Sapphire HR.