Last week, in what is a decision with potentially significant implications, the Fair Work Commission Full Bench has overturned the legal principle underpinning the widespread use of maximum term contracts. These contracts are a common mode of employment in Australia given they provide employers with the security of a set expiry date and the flexibility to terminate earlier with notice.
A maximum term employment contract, also known as an ‘outer limit’ contract, is an employment contract that includes a nominated expiry date, but that also provides the parties with the right to terminate the contract with notice during the term.
THE POSITION PRE-NAVITAS
Before the decision in Saeid Khayam v Navitas English Pty Ltd t/a Navitas English  FWCFB 5162 (Navitas), the expiry of a maximum term contract at its nominated date meant that the employee had not been ‘dismissed’. This was because the termination of employment was not at the initiative of the employer. The employee’s employment simply ended at the pre-agreed time. This meant that there was no jurisdiction for an employee to bring dismissal-based claims, such as an unfair dismissal application under the Fair Work Act 2009 (FW Act), based on the contract’s expiry. This had been affirmed by the Fair Work Commission (and its predecessors, in cases such as Department of Justice v Lunn (2006) 158 IR 410 (Lunn)) as a legitimate employment strategy.
THE DECISION IN NAVITAS
In Navitas, the employee had been employed on a series of maximum term contracts between April 2012 and May 2016. At the expiration of the last contract, Navitas did not offer the employee a further contract because of concerns with his performance. At first instance, the Commission considered itself bound by the Lunn principle and concluded that there had been no dismissal at the initiative of the employer. However, following a series of other recent cases, where concerns have been raised about the correctness of the Lunn principle, the Full Bench granted permission to the employee to appeal.
The Full Bench in Navitas held that the Lunn principle was incorrect and not applicable to the FW Act. It held that the correct approach for determining whether the expiry of a maximum term contract is a ‘dismissal’ is determined by reference to the employment relationship, rather than the termination of the maximum term contract of employment.
This means that in the case of an employment relationship made up of a sequence of time-limited contracts, the analysis will require consideration of the circumstances of the entire employment relationship. The focus of the inquiry is whether an action on the part of the employer is the principal contributing factor resulting in the termination of the employment. This invites consideration of (for example):
- whether the contract may have been varied or replaced by way of a separate oral or written agreement such that the time limit no longer applies; or
- whether the maximum term contract is one of a series of standard-form contracts operated for administrative convenience and does not represent the reality or totality of the terms of the employment relationship.
Importantly, where the terms of the maximum term contract reflect a genuine agreement that the employment relationship will not continue after a specified date, then there will still be no termination at the initiative of the employer, assuming there are no other actions the employer has taken to end the employment relationship. Further, a decision in these circumstances not to offer another contract of employment, will not be relevant to the question of whether there was a termination of employment at the initiative of the employer.
Navitas also confirmed that maximum term contracts are not ‘contracts for a specified period of time’ under the FW Act, because they include a right for the parties to terminate the contract (and employment) with notice during the term of the contract.
THE POST NAVITAS LANDSCAPE
The decision in Navitas means that there is now less certainty for employers who use maximum term contracts. Employees now have more scope to argue their entitlement to bring an unfair dismissal claim.
For those public sector employers required under statute to use maximum term contracts for certain classes of employee (e.g. senior executives in local government), this factor will be relevant but certainly not determinative. The employer will still need to show that the employee has agreed that the employment relationship, as well as the contract will end on the expiry date, and this is what has brought the relationship to an end.
For all employers, conversations with employees when offering a maximum term contract, and equally when deciding not to offer a fresh contact upon expiry, will be mission critical.
Further decisions which apply the Navitas case will shed more light on the impact this decision will have on the use of maximum term contracts. However, employers who offer multiple maximum term contracts to employees as part of their employment arrangements should obtain advice as soon as possible and review their maximum term employment contracts.