This is a common misconception. If an employer decides, for whatever reason, not to renew the fixed term contract of an employee when it comes to an end, this amounts to a dismissal. The employee may be able to claim unfair dismissal, although will normally need at least 2 years’ service in order to do so. Simply saying ‘goodbye’ to the employee once their contract ends could expose you to an employment tribunal claim. If the fixed term contractor is a worker, rather than an employee, the position is better as workers do not have the right to bring unfair dismissal claims.
Deciding not to offer an employee a further contract or extend their old one does not necessarily mean that the dismissal will be unfair. The question of fairness will be judged in the normal way. The employer must be able to identify and rely on one of the potentially fair reasons for dismissal, have followed a fair procedure and be able to show that dismissal is a reasonable response in the circumstances.
There are five potentially fair reasons you can rely on if you elect not to renew the contract of an employee engaged on a fixed term contract. These are:
1 The employee’s behaviour was inappropriate - misconduct.
2 The employee could not undertake the work either due to lack of ability or illness - capability.
3 There was less need for the employee to undertake the work s/he was engaged to do – redundancy.
4 Continuing to employ the employee would contravene other relevant laws – illegality.
5 Some other substantial reason – this can encompass a number of different reasons not otherwise covered, such as where the contract was entered into to cover maternity absence and the employee is returning to work, or where funding for the role has been withdrawn.
You must also follow a fair procedure before dismissing the employee. If conduct or capability is the reason relied on, a tribunal would expect to see some warnings prior to dismissal, unless the misconduct is so serious as to amount to gross misconduct. In all cases you should have met with the employee to discuss the issues before deciding whether or not to review the contract. You should also offer the employee a right to appeal against their dismissal.
If the reason you do not wish to renew the contract is due to redundancy, you must treat the fixed term employee in exactly the same way as you would any other member of staff you put at risk. You will also have to pay a redundancy payment if they have been employed for 2 years or more.
If the reason you don’t want to renew the contract is because of the employee’s age, sex, disability or any other protected reason, s/he will be able to bring a discrimination claim against you.
Although we have concentrated on the expiry of fixed term contracts, you should follow this advice if you are dealing with other limited term contracts, such as a contract that ends once a specific task has been completed.
It is also worth mentioning that if you do renew the contract, it does not have to be on exactly the same terms and conditions as the employee enjoyed previously. Generally, the contract will be treated as having been renewed (and there will be no dismissal) unless the changes are so significant they can be said to go to the root of the contract. So, changing the term of the agreement from say 2 years to 1 year will probably be okay, but substantially reducing the amount of pay will not. If the changes are significant there will be a new contract and the termination of the old one may amount to a dismissal.