The use of fixed-term contracts as a perks-busting measure seems to be on the wane, as new laws and different attitudes take hold, says Nic Paton
The days when employers used fixed-term contracts as a way of driving down their benefits bill appear to be, if not completely eradicated, certainly numbered.
The Fixed Term Employees (Prevention of Less Favourable Treatment) Regulations 2002 may not exactly roll off the tongue but the laws, which after a four-year run-in came into effect from July last year, have had significant ramifications for employers when deciding on what terms to take on an employee.
The biggest change is that workers who have been employed on successive fixed-term contracts for four years or more with the same employer are now entitled to be moved to permanent status, unless the employer can objectively justify a decision to renew or extend their fixed-term contract.
When it comes to benefits, unless employers can come up with a seriously good reason, fixed-term employees must now be treated in the same way, and offered the same benefits package, as a permanent member of staff.
This means that they must be offered the same comparable pay and conditions, the same general benefits, the same access to an occupational pension scheme – although there is some leeway when it comes to shorter contracts, normally less than two years long – and the right to be informed about permanent employment opportunities within the organisation.
One loophole is that employers can offer fixed-term workers different benefits or pay as long their overall terms and conditions are either as good as, or better, than those of a permanent employee. For example, employers can provide a fixed-term worker with less generous pension rights in return for better pay. On top of the new laws, terminating a fixed-term contract, even if it has just come to its natural end, now technically counts as a dismissal. This means fixed-term staff, who have been employed continuously for two years’ or more, unless they signed a waiver before 1 October 2002, have full rights to a redundancy package and, after a year’s continuous service, unfair dismissal rights.
Richard Linskell, a partner at employment law firm Dawsons, explains that, since 2002, this has meant that the vast majority of employers have been moving away from fixed-term to permanent contracts, with the process speeding up sharply since last summer.
Industries where fixed-term contracts have been popular in the past include construction, catering and hospitality, engineering, manufacturing, oil and gas, and higher education (see case study box right). Such contracts are also still commonly used in situations such as maternity leave cover which, inevitably, tend to be one-offs and are therefore unlikely to need to be renewed.
He adds that the new laws were brought in for a reason, not simply to add to employer red tape. The notion that some organisations used fixed-term contracts as a way of managing their workforce more cheaply and creating a climate of insecurity was not a myth.
“We used to have some clients that would always use twoto three-year fixed-term contracts and then either renew them, promote the people or get rid of them. But that has now largely disappeared,” says Linskell.
One distinction that needs to be made is between employees on fixed-term contracts and contractors, agency or temporary staff on short-term contracts, which are still commonplace in many industries, such as IT.
Whereas fixed-term employees are actually employed by the company, contractors are simply hired on a commercial contract, often at a higher rate of pay to permanent employees but without access to the organisation’s benefits package provided to its own staff. The new laws solely apply to fixed-term contracts and not contractors.
The advantages of offering a thinner benefits package to employees on fixed-term contracts are now so outweighed by the potential legal risks of doing so that most organisations now prefer to offer completely comparable terms.
Sheila Gunn, head of employment at law firm Shepherd and Wedderburn, says: “The main impact of these laws is that they have effectively undermined any benefit that employers have from employing people on fixed-term contracts.”
She adds that it used to be much more common for organisations to take staff on for a fixed period of say three-to-five years. “I cannot remember the last time we were instructed to draft a fixed-term contract. In the past, they were used to control costs, including benefits. But fixed-term contracts were never supposed to be a way of living, of leaving people insecure, or thinking that they could be got rid of easily,” Gunn says.
Where these contracts do exist, simply terminating them prior to employees completing a full year’s service can leave employers on dodgy ground. Whatever the length of service, a fixed-term employee could potentially bring a claim against an organisation if they felt they were treated less favourably than permanent staff in any respect, including the benefits they were offered.
Even no longer offering benefits which are often considered a significant part of the reward package for permanent employees, such as income protection, can land employers in trouble.
The age discrimination laws which came into effect in October last year have also had an impact, in that any employer making a fixed-term contract worker redundant needs to be able to justify that their reasons for doing so are not age related.
One legal grey area in all this, however, is whether a break between one fixed-term contract and another technically constitutes a break in the continuity of employment.
Peter Schofield, director of employment and legal affairs at the engineering and manufacturers’ organisation the EEF, says: “If we were asked, we would now probably never advise an employer to use them, you do not need them. It is better to take [someone] on as a permanent and then give them their notice when the time comes round.
“There is really next to no advantage, in terms of benefits, in employing someone on a fixed-term contract. In engineering and manufacturing some people are still brought in for fixed-term projects, but more often than not they will now be brought in as contractors.
“If not, they are now normally hired as a short-term permanent [employee], even if the notice is given almost as soon as they arrive,” adds Schofield.
- Employers can still employ staff on fixed-term contracts but, in reality, changes to the law mean most of the cost benefits of doing so are now increasingly outweighed by legal risks.
- More and more employers are either offering fixed-term contracts with a completely comparable benefits package, or taking workers on permanently and then making them redundant or giving notice at a fixed date.
- Terminating a fixed-term contract, even if it has simply run its course, is now technically a dismissal. And terminating it just to ensure a worker does not receive the benefits of being a permanent employee, even before a year’s continuous service is up, may still land employers with a legal claim.
CASE STUDY: Bristol University rethinks term times
The shift from fixed-term to permanent contracts can clearly be seen by the experience of Bristol University.
Just over two years ago around 99% of its 1,100 research staff were on short-term deals. Now this figure is around 48%, according to the personnel manager for policy development Christian Carter. Fixed-term contracts have traditionally been used in academia where research is being carried out, normally to a finite, fixed budget and on a fixed timescale.
“Typically, it will be a three-year contract, led by a principal investigator, who will normally be a permanent senior academic, and a team of researchers on fixed-term contracts,” Carter explains.
At termination, these researchers then often move on to another project.
Most universities, Bristol included, have been moving towards fixed-term contracts with comparable benefits for staff for some time. “[Employees] get the same material benefits, the same sick pay entitlement, the same entitlement to join the pension scheme, sports clubs and so on. All that is different is that their contract has a defined end date and, at some point, they will be made redundant. But they knew that when they started,” he says.
The university has drawn up a fixed-term contracts procedure to ensure that these are now made or renewed in line with carefully defined criteria. “We have wanted to move to a culture where fixed-term contracts are the exception rather than the rule,” adds Carter.