Most of us (and especially lawyers) like certainty. Experience tells us however that there is nothing as uncertain as a sure thing. Frequently, we speak to employers that are tempted to use fixed term employment agreements to provide certainty for both parties as to when the employment relationship will come to an end. However, in striving for certainty, the employer is unwittingly heading towards potential dispute. Under New Zealand law, the use of fixed term employment agreements is regulated. This means that fixed term agreements can be tricky, and if used incorrectly, can result in a significant employment relationship problem.
The starting point is permissive. An employer and employee can agree that employment will end:
- On a date, or at the end of a specified period;
- On the occurrence of an event; or
- At the conclusion of a specified project.
The employer must have genuine reasons based on reasonable grounds for specifying that the employment of the employee will end in that way, and those reasons must be in the employment agreement, together with the way employment will come to an end.
When fixed term agreements are not OK
Employers cannot use a fixed term agreement to exclude or limit the rights of an employee under the Employment Relations Act 2000 (the Act), establish the suitability of the employee for permanent employment, or avoid Holidays Act 2003 entitlements.
If there are no genuine reasons, they are not in the employment agreement, or the reasons don’t ‘link’ to the way the employment is specified to come to an end, the employee can elect to treat the fixed term as being ineffective – in other words, the employee can operate on the basis that the employment is permanent and ongoing. If an employer then seeks to bring the employment to an end, the termination will need to be justified as a dismissal in the ordinary way.
When fixed term agreements are OK
Generally, a genuine reason will involve a specific project or piece of work that will have a defined beginning and end. Classic reasons might be the introduction of a particular piece of software or technology, the completion of a piece of client work, or covering for another employee who is on a period of leave (e.g. parental leave). It is important with a fixed term agreement that specifies a period of time or an end date that the reasons for the agreement being fixed term, correspond with the time period/end date. As an example, an employer needs to be able to explain why the agreement is for exactly one year, as opposed to 11 months, or 15 months. Usually where there are genuine reasons for a fixed term agreement these will result in employment ending because of a project or an event rather than on a specific date.
What about a fixed term agreement based on funding?
There can be a temptation for businesses to link fixed term employment to external funding – for example a particular contract, or a government grant.
An Employment Court decision from earlier this year, Morgan v Tranzit Coachlines Wairarapa Limited illustrates the particular difficulty when relying on external funding as the reason for the fixed term.
Mr Morgan, a school bus driver, had been employed by Tranzit for 18 years, on a series of fixed term agreements. Tranzit argued that its revenue was dependent on a funding agreement with the Ministry of Education. It said that it had no certainty, from one funding agreement to another, whether it would retain the school bus contract. Mr Morgan argued that after 18 years of (effectively) continuous employment, it was not reasonable for the company to use a fixed term, and furthermore, that the two specific agreements at issue did not comply with the requirements of the Act.
The Court put the nub of the issue (and the answer) very succinctly:
Is there a risk that the pattern of contract renewal [between Tranzit and the Ministry of Education] in the present case will break at some point? Yes. Would that impact on the company’s financial circumstances? Very likely. Is this sufficient to satisfy s 66(2)(a)? No.
In reaching this decision, the Court found that it was very speculative to suggest that the Ministry of Education funding would come to an end (given that it had consistently been renewed for 18 years), and that there was no specific evidence provided as to how the loss of this contract would impact the company financially.
The Court also noted that
It should not be forgotten that financial uncertainty is something all businesses face to a greater or lesser degree. The mere fact of financial uncertainty cannot, of itself, suffice in terms of the threshold requirements of s 66(2)(a). If it were otherwise, virtually every employment agreement could lawfully proceed on a fixed-term basis. That is plainly not what Parliament intended in enacting s 66.
Accordingly, even though the company may have genuinely held the belief that it had good reasons for a fixed term, in this case the reason was not based on reasonable grounds. The Court concluded that Mr Morgan’s work was not directed at a discrete project of anticipated limited duration, but rather was a part of Tranzit’s wider ordinary business operation.
What is the upshot?
The Court gave some useful ‘takeaway’ messages:
- The fact that a fixed term agreement has rolled over, even on multiple occasions, does not automatically mean that it is not a genuine fixed term. However, it is a red flag that might attract the Court’s attention and scrutiny.
- It is relevant to consider if the reasons for the fixed term were sincerely held (at the time the Agreement was entered into), but also if those reasons were reasonable, and for proper purposes.
- Where the financial uncertainty relates to ordinary business risk (potential risk of a revenue stream) this may not constitute a genuine reason based on reasonable grounds to enter into a fixed term agreement.
It is really important to spend time considering whether a fixed term agreement is necessary, what reasons support fixed term employment and then to check that those reasons are properly explained in the employment agreement.