Fixed-term contracts: A risky business for global employers?

Author: Ro Carracedo Lopez

Multinational organisations are constantly in need of highly skilled staff and may consider fixed-term contracts as a strategic and flexible tool when hiring in a new market. 

Depending on the country at hand, fixed-term contracts may be a popular choice or an exceptional resource. But are they the right choice for your organisation?

What are fixed-term contracts and what can they offer employers?

Fixed-term contracts are generally understood as a contract for a limited period that can be renewed or extended depending on commercial requirements. An organisation may need a fixed-term employee for periods ranging from a few weeks to several years.

Such contracts can be useful for project work, to manage seasonal demand or a temporary increase in the volume of work, when launching an activity of uncertain duration or to cover absent employees.

Additional benefits of such contracts for employers include allowing them to evaluate individuals' performance and suitability for permanent roles, avoiding unnecessary long-term costs, filling crucial staffing gaps and accessing specialised skills.

How do countries regulate fixed-term contracts?

Around 85% of countries listed on the Employment Protection Legislation Database (EPLex) maintained by the International Labour Organization (ILO) regulate the use of fixed-term contracts. But national legislation differs widely and there may be specific rules on:

• what constitutes a fixed-term contract;
• the reasons that justify the use or renewal of a fixed-term contract;
• the circumstances in which fixed-term contracts cannot be used;
• the maximum duration of a fixed-term contract;
• the maximum total duration of successive fixed-term contracts;
• the maximum number of renewals of fixed-term contracts; and
• how many fixed-term employees are allowed to work at an organisation.

Statutory rules on the maximum duration of fixed-term contracts

What are the potential risks of using fixed-term contracts? 

Fixed-term contracts present organisations with a complex web of legal, operational and jurisdictional considerations. The improper use of a fixed-term contract can expose the employer to various risks, liabilities and costs, so it is critical for global employers and HR teams to consider a number of factors.

Employee rights

Generally, an employee with a fixed-term employment contract has the same rights as a comparable employee on an open-ended contract permanent in relation to conditions of employment. But there may be circumstances where differences in treatment can be justified on objective grounds.

On the one hand, it is common for certain employment law entitlements, such as parental leave, annual leave and redundancy pay, to apply only to employees with a minimum length of service with their employer. Employees on short fixed-term contracts may therefore not qualify for these entitlements. On the other hand, employees employed on a succession of fixed-term contracts with no breaks or short breaks between contracts may be considered to have been employed continuously for the purposes of calculating service-related employment entitlements. It is important that employers understand what their employees are entitled to and act accordingly.

In some countries, employers may be required to inform fixed-term employees about any relevant vacancies for open-ended jobs that arise in the company or, when hiring for an indefinite term contract, they may need to prioritise fixed-term employees.

Formalities

Some countries mandate that fixed-term contracts must be in writing and contain essential terms of employment, such as the end date or the expected end date of the contract, the justification for specifying a fixed term, the conditions and duration of probationary periods and any terms relating to renewals. There may be cases where the fixed-term contract needs to state its minimum duration (eg where the contract does not specify an expiry date). However, others do not set out specific requirements.

Termination of fixed-term contracts

Fixed-term contracts generally end on the expiry of their term, on completion of the task or project concerned, or on the return to work of a temporarily absent employee. However, in some countries, termination of fixed-term contracts is subject to specific rules, for example the employer may be required to notify the employee in advance of the contract's expiry date and/or make a severance payment.

Conversion to a permanent contract

In some countries, the law may consider a fixed-term contract to have converted into a permanent contract if the total duration of successive fixed-term contracts or the number of renewals exceeds statutory thresholds.

Even in countries that do not have statutory limits on the duration of fixed-term contracts or the number of successive contracts, the existence of long or multiple contracts may indicate that there is no legal justification for using a fixed-term contract or that the contract can be deemed an open-ended one. Violating the rules on the form of the contract or using a fixed-term contract to circumvent statutory rules that protect employees may also result in the contract becoming an open-ended one. This can have serious legal and financial repercussions for organisations; therefore, it is important for employers to manage their compliance obligations carefully to avoid legal disputes.

How can Brightmine help?

When starting new employment relationships, HR will need to conduct research to understand what the most appropriate contracts or arrangements are for their business purposes. To help employers navigate this tricky area, Brightmine has produced a global guide for employers focusing on the wide range of working arrangements available, including fixed-term contracts. This provides practical insights to help employers make informed decisions, manage people risk and create working solutions that support both compliance and organisational growth.