It is common for employers to bring on employees for limited term employment, where work may not be ongoing. Traditionally, “outer limit” contracts have allowed for the employment to end on an agreed date without a resignation or dismissal. A recent decision of the Full Bench of the Fair Work Commission may have pushed “outer limit” contracts closer to their own expiry date.

The key takeout is that if the employee does not voluntarily leave employment and the driving force causing the employment to end is a decision or act of the employer, it could be a “dismissal”, even if the employment ends on the agreed expiry date. In addition to unfair dismissal, this change could also have broader impacts, for example:

  • Does an employer have to provide notice or pay in lieu even if the employment ends on the agreed date?
  • If the contract is not renewed because there is no ongoing work, is this a redundancy?
  • If the employee does not wish keep working, is that a resignation?

Termination may now be considered dismissal

Where employment ends at the agreed expiry in an “outer limit” contract, this has traditionally been regarded as expiry due to the effluxion of time rather than a “dismissal” which could give rise to a claim under the unfair dismissal provisions of the Fair Work Act 2009. In December 2017, by majority, the Full Bench of the Commission overturned the previous authority on this point.

The majority held that expiry of an “outer limit” contract which allows for termination on notice can amount to a “dismissal”. The majority said that not every contract expiry will be a “dismissal”: this depends on a range of factors including the context of the employment. In the case considered by the full bench, the employee had been employed on a series of ‘outer limit’ contracts and was not offered a further contract due to performance concerns. The outcome may have been different if there was a single contract, with a justifiable basis for the nominated end date.

Changes to how you use “outer limit” contracts

Employers may need to consider treating decisions to end outer limit employment on the expiry date as if this was a decision to dismiss. They should also ensure that “outer limit” contracts are only used where there is a legitimate reason to do so – eg expressly linked to short term funding or role requirement and not as a routine way of engaging people, particularly where such contracts are routinely rolled-over.

An employer may also wish to ensure the employee understands the nature of the contract and the reason it is in place for a limited period of time.

Unfortunately, this change is likely to result in increased administration and costs for “outer limit” contracts, which may undermine their utility – and bring them closer to their own expiry.

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Fixed term versus “outer limit” contracts: Speaking technically, a fixed term contract locks both the employer and employee into working for the full fixed period, without the possibility of earlier termination (other than for serious misconduct or other serious breaches of the contract warranting termination without notice).

It is more common to see “outer limit” contracts, which come to an end on a specified date or event (the “outer limit” of the contract), but allow either party to terminate the contract before that date. This provides both parties with more flexibility.