Employers will be turning their attention to the new rules that apply from 6 December 2023 under the Fair Work Act 2009 (Cth) for engaging employees on fixed term contracts.
A contract of employment must not include a term that provides the contract will terminate at the end of an identifiable period if:
- (a) the period is greater than 2 years; or
- (b) the contract can be renewed so that the employee is employed for more than 2 years; or
- (c) in certain circumstances, the employee is employed under consecutive contracts
A fixed term contract must not provide and option to extend or renew the fixed term contract more than once.
What is a ‘fixed term contract’?
Fixed term contracts include any employment contract with an employee that provides for the termination of the employment at the end of an identifiable period, whether or not the contract also includes other terms that provide for circumstances in which it may be terminated before the end of that period e.g. by notice or summary dismissal. This includes employment sometimes referred to as temporary, maximum term and for a specified task or period.
What are the limitations?
(1) A fixed term contract can’t have an option to:
(a) extend or renew the contract so that employment period (including the extension or renewal period) is longer than 2 years, or
(b) extend or renew the contract more than once.
(2) An employer can’t employ someone on a new fixed term contract if:
(a) the contract is for mainly the same work as a previous fixed term contract, and
(b) there isn’t a substantial break in the employment relationship between the previous and new contracts, and any of the following apply:
- the total period of employment for the previous contract and the new fixed term contract is more than 2 years, or
- the new fixed term contract can be renewed or extended, or
- the previous fixed term contract was extended, or
- there was an initial fixed term contract in place (before the previous contract) that:
- was for mainly the same work, and
- there was continuity of the employment relationship from the period of time (if any) between the initial contract and the previous contract.
The limitations do not apply to casual employees and where an award provides for longer periods or arrangements. There are also some further exceptions to the rule (discussed below)
Limitation (2) has major implications for businesses that currently employ staff for fixed terms of employment as they are not permitted to enter into a further fixed term if the current contract period has been for 2 years or more.
The following exceptions apply to the fixed term contract limitations:
(a) a contract of an employee engaged to perform only a distinct and identifiable task involving specialist skills
(b) a trainee or apprentice
(c) an employee engaged in essential work during peak demand periods
(d) an employee undertaking work during emergency or temporary absence of another employee
(e) a High Income employee i.e. yearly earnings in excess of $167, 500
(f) employee position relates to performance of work that is:
(i) funded by government, and
(ii) funding is for more than 2 years, and
(iii) there is no reasonable prospect the funding will be renewed
(g) Governance positions such as Board member or Director
(h) a modern award covering an employee permit contracts period of more than 2 years, renewals and consecutive contracts
(i) the contract is of a kind prescribed by regulations as an exception
While the exceptions to the rule such as for trainees, apprentices, high income earners and governance positions are clear, the application to the specialist skills, peak or seasonal demand jobs and especially employment related to government funded work, is less clear. The Fair Work Ombudsman has published examples to guide employers, however the Act does not define jobs that would require specialist skills, or essential work during peak demand periods. Government funded positions are even more problematic in so far as ‘..no reasonable prospect the funding will be renewed‘ is not specified. Most government funded programs delivered by non-government entitles are invariably renewed or extended unless there is substantial changes to government policy or the organisation does not fulfil the expectations of the funding agency.
What happens if the employment contract contravenes the limitations?
Where a fixed term employment contract contravenes these provisions, the employee would not be deprived of their employment. Rather, the employment contract would continue as if the fixed termination date has no effect, and the employee would be entitled to notice of termination and redundancy pay under the Act and qualify for an unfair dismissal.
The Fair Work Commission may conciliate disputes relating to fixed term contracts and resolve them by consent arbitration. The parties may further apply to the Magistrates’ Court or the Federal Circuit and Family Court under their small claims jurisdiction, for a determination as to their rights under the contract. Employers may be subjected to financial penalties for contraventions of between $18,780 for individuals and $93,900 for corporations.
Next Steps for Employers
The new law only applies to fixed term contracts of employment entered into after the commencement date i.e. 6 December 2023. However, employers that wish to extend or enter into fixed term contracts with employees that are currently engaged on a fixed term and continue to be employed in substantially the same work, cannot do so if the current fixed term has been for 2 or more years.
It is extremely important that employers review the contractual arrangements with any employees engaged for fixed or limited periods. If they fit any of the exceptions listed under the Act, then it may be reasonable to extend or offer further periods of employment with a clearly defined expiry, at least for the next 2 years.
If the circumstances of your employees do not fit any of the exceptions listed, fixed term contracts must only be offered for a total of 2 years.
Contact us for further advice