What Is A Fixed Term Contract And How Does It Work In The UK?

A fixed-term contract is a contract that specifies an end date, with no promise of renewal. While some contracts may include an end date, they might also contain clauses allowing for renewal, completion of a task, or rolling agreements.

Fixed-term contracts, however, are designed to end on a specific date. In the UK, they are commonly used in employment agreements but can also apply to other types of contracts, such as service agreements, supply agreements, and distribution agreements.

That said, fixed-term contracts aren’t always super–straightforward. When including a fixed term in your agreements, it’s crucial to ensure that the legal rights of all parties are respected. Keep reading to learn more.

What Is Meant By A Fixed Term Contract? 

A fixed-term contract is an agreement with a specified start and end date – a ‘fixed term.’

Fixed-term contracts are often beneficial for parties who prefer a defined, temporary relationship. For example, they are commonly used for contractors hired to complete a specific job, employees covering temporary absences such as maternity leave, or one-off deliveries.

The fixed term in a contract cannot be implied; it must be explicitly stated. Typically, the terms of a fixed-term contract include clauses similar to the example below:

Duration: This contract is entered into on ____ and shall continue until ____, unless terminated earlier in accordance with the provisions of this agreement. Purpose: The employment is offered on a fixed-term basis to complete [specific task/project] or to cover [reason, e.g., maternity leave, seasonal demand]. Termination: Either party may terminate this agreement prior to the end date by providing [notice period, e.g., one month’s written notice], or as otherwise specified under the termination provisions outlined in clause [X]. No Expectation of Renewal: The Employee acknowledges that this is a fixed-term contract and that there is no guarantee of renewal or extension upon its expiry.

What Happens When A Fixed Term Contract Ends?  

When a fixed-term contract ends, both parties are generally expected to go their separate ways. This means that, upon conclusion, they will have no further obligations toward one another. Final payments will be made, and the professional relationship will end (the handshake is optional). However, if both parties wish to continue their relationship, they can either enter into a new contract or renew the existing one with updated terms and dates.

If you’re an employer with a fixed-term contract nearing its end, it’s crucial to ensure you are meeting your legal obligations carefully.

What Are My Legal Obligations for Fixed Term Employee Contracts?

When a fixed-term employees contract is ending, review the contract to see what steps need to be taken. You may need to provide written notice, settle any outstanding payments, and even arrange redundancy payments.

When a fixed-term employee’s contract is nearing its end, it’s important to review the terms to determine what steps need to be taken. You may need to provide written notice, settle any outstanding payments, and, if applicable, arrange redundancy payments. Even if certain actions (like providing written notice) aren’t legally required, it’s a good practice to offer them as a courtesy to maintain goodwill and avoid potential disputes.

As an employer, your obligations to fixed-term employees don’t just apply at the end of their contract-they also extend throughout their employment.

During their employment, it’s crucial to ensure fixed-term employees are treated fairly. The Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 prohibit treating fixed-term employees less favourably than permanent employees. This includes creating a workplace free from discrimination or unfair treatment, even if such treatment comes from other employees or managers.

If you decide not to renew an employee’s contract at the end of the fixed term, this decision must be based on legitimate business reasons rather than bias or discrimination. For instance, if another employee with the same role, performance, and contract type has their contract renewed, the affected employee could potentially claim unfair dismissal. Fixed-term employees with 2 or more years of continuous service have the right to claim unfair dismissal if their contract is not renewed without valid justification, including cases where proper termination procedures are not followed.

In addition to unfair dismissal, there are other important legal considerations to keep in mind when managing fixed-term employees. These include:

• Statutory Redundancy Pay: If a fixed-term employee’s contract is not renewed due to redundancy and they’ve been employed for 2 or more years, they may be entitled to statutory redundancy pay. Ensure redundancy is handled according to UK employment laws to avoid legal disputes.
• Holiday and Benefits Entitlement: Fixed-term employees are entitled to the same benefits as permanent staff, including paid annual leave, sick pay, and access to workplace perks, unless a difference in treatment can be objectively justified.
• Consultation Period for Redundancy: If your business is ending multiple fixed-term contracts at once due to redundancy (affecting 20 or more employees), you may be required to engage in a collective consultation process to comply with redundancy laws.

Is It True Fixed Term Employees Have The Right To A Permanent Contract After Some Time? 

UK law determines that an employee that has been under a successive fixed term contract for 4 years or more may be able to automatically gain the same rights as a permanent employee – unless their employer provides a valid reason to prevent this.

However, this rule only applies to successive fixed term contracts, which are vastly different from fixed term contracts. Successive fixed term contracts are offered on an ongoing basis through a repetition of fixed terms. This means there’s some flexibility and potential for renewal. 

Typically, the terms of a successive fixed-term contract include clauses similar to the example below:

Duration and Renewal: This contract is for a fixed term starting on ____and ending on ___. Upon mutual agreement, this contract may be renewed or extended for successive fixed terms, subject to the continued needs of the business and satisfactory performance by the Employee. Notice of Renewal: The Employer shall provide written notice of intent to renew or extend this contract at least [X weeks] prior to the contract’s end date. Transition to Permanent Employment: If this contract is renewed or extended for a cumulative period of 4 years or more, the Employee may be deemed a permanent employee unless the Employer provides a valid written justification for maintaining the fixed-term arrangement. Termination: Either party may terminate this agreement during any fixed term by providing [X weeks] written notice, in accordance with clause [X].

Can You Leave A Fixed Term Contract Early In The UK?

Ending a fixed-term contract early can be tricky if you want to avoid legal consequences. The best approach is for both parties to willingly and mutually agree to terminate the contract. When doing so, it’s advisable to formalise the agreement in writing, such as through a Deed of Termination, to ensure clarity and avoid future disputes.

If mutual agreement isn’t possible, you’ll need to refer to the contract itself to check for any provisions that allow early termination. In some cases, a breach of contract by one party may justify ending the contract prematurely. However, it’s crucial not to take action on your own. Instead, consult a legal expert who can assess your situation and explain your legal options, helping you steer clear of legal issues when ending a fixed-term contract early.

Key Takeaways 

Fixed term contracts can be beneficial for both parties however, it’s important to navigate the legal considerations carefully to avoid legal consequences. To summarise what we’ve discussed: 

• A fixed-term contract specifies a start and end date, with no guarantee of renewal, commonly used in employment, service, and supply agreements 
• Fixed-term contracts require explicit terms, including duration, purpose, and termination clauses, ensuring clarity and legal compliance 
• Employers must treat fixed-term employees fairly under UK law, offering the same benefits as permanent employees unless objectively justified 
• Employees on successive fixed-term contracts for 4+ years may gain permanent status unless the employer provides valid justification 
• Employers must handle contract terminations carefully, settling final payments and arranging redundancy pay for employees with 2+ years of service 
• Ending a fixed-term contract early requires mutual agreement or adherence to specific contractual provisions; legal advice is recommended 

If you would like a consultation on fixed term contracts, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

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