Employing Workers On Fixed Term Contracts – The Rules Have Changed

In the whirlwind of 2023 employment law reform, the unfettered power for employers to engage employees on indefinite rolling fixed term contracts was kicked to the curb from 6 December 2023 (although some industries may still have until 1 July 2024 before these rules apply to them).
 
A fixed term contract is an employment contract that terminates at the end of an identifiable period, for example, on a specified date or when a specific project is completed. Many businesses use these to engage workers for a two-year period, followed by a second, third, or forth two-year period (for example).
 
Since 6 December, there are limitations on the length of fixed term contracts, and limits on the number of these contracts that a worker can have. In short, the new restrictions on fixed term contracts mean that (as a general rule):

• You can’t extend the contract beyond two years; and/or
• The contract can’t be renewed or extended more than once.

In the past, our clients have utilised fixed term contracts for a range of business needs, including: to cover employees off work on extended periods of parental leave; or to cover flexible working arrangements which may be needed when someone returns from parental leave, or extended sick leave. One of the primary concerns for our clients is how to manage gaps in the workforce that fixed term contracts used to plug, following the changes in the law.

Is a useful employment arrangement gone?

The core questions our clients are asking are: 

• Do fixed term contracts still have a part to play in workplaces?; or
• Do we have to do away with them entirely?

For some businesses, this will create real challenges, especially when trying to support workplace flexibility arrangements, including those arising from parental leave or extended sick leave. However, there are several exceptions to the rules limiting contracts to two years and/or one extension. The exceptions may assist employers to continue offering fixed term contracts to meet organisational demands.
 
What role do fixed term contracts have in managing gaps caused by parental leave, sick leave, or flexible working arrangements? 
 
There is an exception to cover the “temporary absence of another employee”. This exception means that a fixed term contract can last for longer than two years where (for example) the employee is engaged to cover a period of parental leave that’s longer than this timeframe.

But How Does This Work in The Real World?

The Case
 
An employee (let’s call her Matilda) goes off work on parental leave, initially for 18 months. The employer (let’s call them Good Employer Limited) engages Kam Serr on a fixed term contract for 18 months to cover Matilda’s parental leave.
 
When it gets closer to the 18-month parental leave period finishing, Matilda indicates that she wants to return to work under a flexible working arrangement, where she works half of her contracted full-time hours while she finds her feet.
 
Matilda is a good employee that Good Employer Limited wants to accommodate and Good Employer Limited has really enjoyed having Kam Serr working for the organisation. It is wondering whether the business can accommodate Matilda’s request and offer Kam Serr another fixed term contract to cover the period that Matilda will be working part time (noting this could mean Kam Serr is engaged under a fixed term contract for more than two years, which would be unlawful, unless certain circumstances apply).

How To Make It Work

Assuming none of the other exemptions for fixed term contracts apply (detailed further below), in order to allow Kam Serr’s fixed term contract to extend longer than two years, Good Employer Limited needs to be able to show that the fixed term contract is truly to cover the ‘temporary absence’ of Matilda.
 
In practice, Good Employer Limited may need to agree to a temporary flexible working arrangement with Matilda that is reflected in writing, includes an identifiable end date and an agreed review date nearing the end of the arrangement. During the ‘review’ Good Employer Limited would determine whether that arrangement will:

1. become permanent;
2. should be varied; or
3. revert to the Matilda’s original contractual arrangements.

Kam Serr and Good Employer Limited could then agree to a fixed term contract which expires at the expiry of Matilda’s temporary flexible working arrangement period. At this point, Kam Serr’s ongoing employment with Good Employer Limited would likely depend on any arrangements made with Matilda. For example, they may:

1. be offered a permanent role;
2. be offered a new fixed term contract to align with any new temporary arrangements that are agreed to with Matilda (noting this would need to be a genuinely temporary arrangement to justify offering a new fixed term contract); or
3. have their employment terminated at the end of the fixed term contract (they may be offered another role with Good Employer Limited following termination – a coaching role, perhaps?).

Other Exceptions

Other exceptions that employers may want to consider include:

• where the employee is engaged to perform a distinct and identifiable task involving specialised skills (like working on a specific project);
• where the employee on a fixed term is paid above the high-income threshold– currently $167,500 for a full-time employee (pro rata for part time employees);
• where the employee’s position is funded by government funding (either in whole or in part), the funding is more than two years, and is unlikely to be renewed beyond this period;
• where an award applies which provides for further exceptions for fixed term contracts; and
• where the employee is engaged on a casual basis.

There may of course be other considerations for your organisation, such as the terms of an applicable enterprise agreement or custom and practice that you need to work through before your workforce will support such a change.
 
As with most employment law reform, there will be a period of uncertainty while the country navigates these new restrictions on fixed term contracts. If you have any questions about your rights, entitlements or obligations in relation to fixed term contracts please do not hesitate to contact Warwick Ryan, Partner in Workplace Relations, Employment & Safety.