Why Use a Fixed-Term Contract?

Fixed-term contracts are still surprisingly popular, and are seen as a way of avoiding the risk of a claim for unfair dismissal. However, the non-renewal of a fixed term contract is still a dismissal, and if the employee has the requisite length of service, they will still have the right to bring a claim for unfair dismissal.

It is not fully appreciated, but I regularly advise my clients to use a fixed-term contract only where it  is absolutely necessary. Otherwise, as an employer, you are creating a rod for your own back if you need to terminate the contract early.

On rare occasions, it is necessary to offer a fixed-term contract to ensure you secure the services of a valuable employee. Professional footballers and football managers for example, are often employed on 3 or 5 year fixed-term contracts. However, this is because the players command a transfer fee and the contract protects their value, and football clubs do not want their managers leaving earlier than they would like. The difference is, football clubs understand that when they terminate the employee’s contract early, they will be forced to pay hundreds of thousands, if not millions of pounds in compensation – this happens on a regular basis.

One of the most striking examples of this was the recent case involving Henning Berg and Blackburn Rovers. Mr Berg signed a fixed-term contract as the manager of Blackburn Rovers from 16 November 2012 until 30 June 2015. Blackburn Rovers terminated the contract on 27 December 2012 – 57 days into the contract. Mr Berg claimed £2.25 million in compensation representing the balance of the contract.

The matter went to Court, where Blackburn sought to dispute Mr Berg’s entitlement to the payment based on two arguments. Firstly, the club suggested that the money was not due to Mr Berg because a particular clause in the contract amounted to a penalty clause. The Judge dismissed this argument holding “in a fixed term contract a party is either entitled to terminate before expiry of the fixed term or it is not. Here it is. Once that is understood the law relating to penalty clauses is entirely immaterial”.

Blackburn’s second defence to the claim, was that the contract was not binding because the contract was offered and signed by the club’s Managing Director, Mr Shaw - who they alleged did not have authority to bind the club. The Judge also dismissed this argument and Mr Berg was awarded £2.25m!

Obviously, the Berg case is an extreme example. However, my advice is for all employers to think seriously about whether it is absolutely necessary to offer a fixed-term contract before doing so. Just because the period of employment is only likely to last for a limited duration i.e. to cover maternity leave or to coincide with the completion of a project, it does not necessarily follow that a fixed-term contract should be offered. My preferred approach is to offer employment at will i.e. on the ordinary basis and terminable on agreed notice. The offer letter can explain that the period of employment is only likely to last for a limited duration, but should clearly state that it is not a fixed-term contract.

If you are in the practice of offering fixed-term contracts to cover maternity leave, the next time the situation arises, consider engaging the employee at will. If the relationship is not working, you will have the right to terminate the period of employment on notice without paying the balance of a 9 or 12 month contract. Alternatively, if come the end of 9 months, the mother returns from maternity leave, you will still have the right to terminate the covering employee’s employment by reason of redundancy. The employee will not be entitled to a redundancy payment because they have not been employed for two years.

The message to take from this article, is that as an employer, you should apply considerable thought before offering a fixed-term contract, and know that there are viable alternatives even when employment is envisaged to last for a limited duration.

For more information on employment law, please contact James Twine on 01752 292351 or email jtwine@wolferstans.com