The ending of a fixed-term contract by non-renewal amounts to a dismissal in UK employment law.
We outline below the implications of this and explain how employers can protect themselves from the risk of claims in this situation.
Expiry of a fixed-term contract amounts to dismissal
Despite the termination date or event of a fixed-term contract being agreed by the employer and employee in advance, the expiry of a fixed-term contract will still amount to a dismissal.
This means there is a risk that fixed-term employees with at least two years’ service will bring claims of unfair dismissal.
An employee can gain the required service for unfair dismissal by being employed under a single fixed-term contract for 2 years or longer or by being employed under successive fixed-term contracts for a period of at least 2 years.
To defend a claim of unfair dismissal, an employer must be able to demonstrate that the employee was dismissed for a substantial reason, that was reasonable in the circumstances and that they followed a fair process.
If an employer does not renew a fixed-term contract and instead employs someone else to carry out the same work, they may be vulnerable to a claim of unlawful sex or race discrimination if the new employee is of the opposite sex or a different race to the dismissed fixed-term employee.
Any fixed-term employee is entitled to bring a discrimination claim as there is no required service, so it is important that employers know the risks of not renewing a fixed-term contract when there is still work available for the employee.
Employers must consider several things prior to the expiry of the fixed-term contract to protect against the risk of such claims.
The reason for non-renewal
To avoid claims of unfair dismissal, the non-renewal must be due to a potentially fair reason, which include:
- Contravention of a statutory obligation
- Some other substantial reason
The most common reason for the expiry of fixed-term contracts is redundancy, as most will end when there is no longer work available or the relevant funding has ended.
If the reason is redundancy, the employer must be able to show that consultation occurred prior to expiry and that they made a reasonable effort to find other suitable work for the fixed-term employee.
It is also important to note that if the fixed-term employee has at least 2 years’ service, the employer will need to pay them statutory redundancy pay, like any other employee.
Some other substantial reason
If a fixed-term contract is used to engage an employee to cover the work of a permanent employee who is on sickness or maternity leave, and the contract ends upon their return to work, this will not be redundancy but may be some other substantial reason.
This will most likely be a fair reason for dismissal if the fixed-term employee was made aware from the outset that their employment would be terminated upon the return of the permanent employee.
Capability or conduct issues
If an employer does not want to renew a fixed-term contract because they are not satisfied with the employee’s capability or conduct, they must follow the organisation’s ordinary performance improvement or disciplinary procedure.
Fixed-term employees are protected by specific regulations which prevent employers from subjecting them to less favourable treatment than permanent employees.
Therefore, it is important that employers who wish to let a fixed-term contract expire for capability or conduct reasons follow the correct internal procedures so that they receive the same treatment as permanent employees.
The general rule of thumb is that the expiry of a fixed-term contract will be fair if:
- The contract was set up to fulfil a legitimate purpose
- The purpose of the contract was made clear to the employee from the outset
- This purpose no longer applies when the contract expires
The Acas Code of Practice does not apply to the non-renewal of fixed-term contracts so an employment tribunal would not be able to increase the compensation award if the Acas procedures for dismissal are not complied with.
However, employers must act fairly and reasonably when dismissing fixed-term employees; therefore it is best practice to follow the procedures set out in the Code.
It is best practice for employers to have a system in place that notifies them of the expiry dates of fixed-term contracts and any notice periods that apply.
This will allow the employer to speak informally with the employee before the contract expires so that they are aware that their employment will end, and a formal meeting can be arranged.
A letter should be sent to the employee informing them of the date on which their fixed-term contract will end and the reasons for expiry.
It should invite the employee to a meeting to discuss the expiry of the fixed-term contract and the employee should ideally be given the right to be accompanied.
The letter could also set out the ways in which the employer has informed the fixed-term employee of permanent positions in the company during their employment and refer to any relevant positions.
The meeting should be held before the termination date of the fixed-term contract.
It is important that both the employer and the employee have the opportunity to set out their views and that the employee can put forward suggestions to avoid expiry.
Following the meeting, a letter should be sent to the employee either confirming the date on which their employment will end or outlining an alternative agreement.
The employee should be given the opportunity to appeal the decision and if it is exercised, an appeal meeting should be arranged.
Following an appeal meeting, the employer should send a letter to the employee informing them of the outcome.
The timing of an appeal in this situation is important.
If the appeal meeting is held after the termination date of the fixed-term contract, the best approach would be to extend the contract for a specific length of time pending the outcome of the appeal.
If an extension is not possible, it should be made clear to the employee that their dismissal is effective from the date specified on the letter following the original meeting and is not put on hold by the appeal.
If the appeal reverses the original decision, the employee will be re-engaged with backpay, and their length of service will be calculated from the date of their dismissal following the original meeting.
Consecutive fixed-term contracts
Under the Fixed-term Employee Regulations, an employee who works under consecutive fixed-term contracts continuously for a period of at least 4 years will automatically become a permanent employee.
The only exception to this is where the employer can justify the need to keep them on a fixed-term contract.
The employee will attain permanent status on either the date on which the latest fixed-term contract is entered into or renewed, or the date on which they accrue 4 years’ service – whichever is later.
Therefore, if a fixed-term employee has 4 years’ continuous service, the employer should conduct their dismissal in the same way as a permanent employee.
Informing fixed-term employees of permanent positions
The regulations grant fixed-term employees the right to be informed of any permanent vacancies that are available in the company.
If an employer fails to make fixed-term employees aware of such positions they will breach the regulations.
Any easy way for employers to comply with this obligation is to internally advertise permanent vacancies, for example on the staff intranet, so that fixed-term employees have a reasonable chance of seeing them.
If a fixed-term contract expires on the termination date or on the occurrence of an event specified in the contract, statutory minimum notice will not apply.
Therefore, employers must consider whether they wish to give the employee statutory minimum notice in this situation, as this would be good practice, but it is not legally required.
Fixed-term contracts can contain an early termination clause that allows the employer to end the employment before the termination date, for conduct or capability reasons, without breaching the contract.
An early termination clause may set out a contractual notice period that the fixed-term employee is entitled to in this situation.
If the early termination clause does not include a notice period, the statutory minimum notice requirements will apply.
If the fixed-term contract does not contain an early termination clause and the employer ends the employment before the termination date, this will amount to wrongful dismissal.
This is because ending the employment early when it is not contractually permitted will breach the fixed-term contract.
It is important that employers do not end a fixed-term contract prematurely without an early termination clause as the employee will be entitled to payment for the remaining duration of the contract.
Extending a fixed-term contract
If an employer wishes to continue the employee’s employment after their fixed-term contract has expired, issues can arise surrounding their terms of employment.
It is common for employers to apply a short extension to the contract and continue the employment on the same terms.
If the length of the extension is not specified, it is likely that the employment will now be considered permanent rather than fixed-term and a reasonable notice period will be implied.
- Employers who employ an individual on a fixed-term contract should be aware of the termination date so that they allow themselves enough time to decide whether to renew the contract
- If an employer wants to let the contract expire, they should follow a fair dismissal process, particularly if the employee has over two years’ service
- Employers should be aware of their obligation to inform fixed-term employees of permanent vacancies in the organisation
- Employers should only end a fixed-term contract early if the contract contains an early termination clause