What Are the Differences Between Fixed and Maximum Term Employment Contracts?

In Short

• Fixed-Term Contracts: These have a set start and end date. Both employer and employee are generally committed to the entire term, with limited grounds for early termination.

• Maximum-Term Contracts: Also specify an end date but allow either party to terminate early with notice, offering more flexibility than fixed-term contracts.

• Legal Restrictions: From 6 December 2023, the Fair Work Act limits the use of these contracts, especially if the term exceeds two years or involves consecutive contracts for the same role.

Tips for Businesses

When considering fixed or maximum-term contracts, ensure they are used appropriately to avoid legal pitfalls. Fixed-term contracts should be reserved for specific projects or replacements, while maximum-term contracts offer more flexibility but still require careful management to prevent unfair dismissal claims. Always include clear termination clauses and avoid creating an expectation of ongoing employment unless intended.

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Table of Contents

• What is Fixed Term Employment?
• What is Maximum Term Employment?
• What Are the Differences Between Fixed-Term and Maximum-Term Employment Contracts?
• What Contract is Right For Your Business?
• Fixed and Maximum Term Contracts and Unfair Dismissal
• Determining Whether the Contract Has Ended
• What Are the Changes to Fixed-Term and Maximum-Term Employment Contracts Law?
• Key Takeaways
• Frequently Asked Questions

As an employer, you might be in a situation where you do not want to employ staff on an ongoing, permanent basis. Often, it will be appropriate for you to set a specific date that an employee’s contract will end. However, in early December 2022, the Federal Government passed the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (the Act). The Act significantly reformed Australia’s workplace relations system, including changes to fixed-term and maximum-term employment contracts law that will come into effect on 6 December 2023. To ensure you comply with the law when onboarding new employees, this article explains:

• the differences between fixed-term and maximum-term employment;
• the contracts that govern these employment relationships; and
• in what circumstances either option may be useful to your business consistent with the amendments to the Act.

What is Fixed Term Employment?

Employers typically hire fixed-term employees to carry out work for a set period. Additionally, a fixed-term employee must work the entire nominated period, as there are generally no provisions that allow for termination before the end date by either party.

Hence, if you want employees to carry out a specific project within an identifiable time frame, fixed-term employment is probably the most appropriate option for your business. 

What is Maximum Term Employment?

While maximum-term employment has many similarities with fixed-term employment, the key difference between the two employment relationships is that you or the maximum-term employee can terminate the relationship before the specified end date, subject to any notice period in the contract.

What Are the Differences Between Fixed-Term and Maximum-Term Employment Contracts?

The following table compares the critical components of fixed-term and maximum-term contracts.

What Contract is Right For Your Business?

A fixed-term contract may be more appropriate when you require a specific employee for a specific role and for a specific time. For example, consider you have acquired a tender with an international business and you need a multilingual executive for the period of the tender. In that case, a fixed-term contract may be useful here to ensure that the executive stays in their role until the end of the tender to complete their job. Alternatively, you may need to replace an employee who is taking long service leave.

On the other hand, a maximum-term contract may be better in situations where you wish to:

• assess the skills, experience or cultural fit of an employee and place them on probation period;
• engage the employee for a certain season but want the flexibility to end employment if the season ends early; or
• offer an apprenticeship or traineeship.

Fixed and Maximum Term Contracts and Unfair Dismissal

Historically, an employee engaged on a maximum-term contract could not bring an unfair dismissal claim when their contract expired. This was because the termination occurred in line with the date set in the contract and not at the employer’s initiative. 

However, this idea was reconsidered in December 2017 in the case of Khayam v Navitas English. The Fair Work Commission found that, in certain circumstances, engaging an employee on a series of fixed or maximum-term contracts may imply permanency or an ongoing employment relationship.

This case demonstrated that although there may be a legitimate reason why an employee is engaged on successive maximum-term contracts, it is important that an employee’s expectations of ongoing work are managed. To avoid an unfair dismissal claim,  it is critical that the employment agreement is drafted such that the employee is clear that there is no guarantee of further employment. The more times a maximum-term contract is renewed, the harder this will be to demonstrate. In this case, the court determined that the entire employment relationship will be considered, rather than just the employment contracts themselves.

Determining Whether the Contract Has Ended

Cases like Khayam highlight the importance of knowing whether a fixed or maximum-term employment contract has truly ended or not. Some points that the Fair Work Commission will consider in determining this question include:

1. Has the employment relationship ended? Does the employer no longer need the employee’s services? Is there no continued expectation of work?
2. If the employee did not agree to the termination, did the employer do anything to substantially contribute towards the termination?
3. Even if both parties agreed to terminate, was the employer actually the driving force in the termination? This may give rise to an unfair dismissal claim.
4. Even if the parties did agree to terminate the contract early, the Commission may look at additional factors, including whether:
   • the parties fully understood or comprehended the contract;
   • the contract contains all the terms agreed to by the parties; and 
   • the contract is in alignment with the terms of a relevant award or enterprise agreement.

These considerations indicate that the Commission will review the entirety of the contractual relationship when determining whether an employee on a rolling ‘term-based’ contract is entitled to bring an unfair dismissal claim.

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What Are the Changes to Fixed-Term and Maximum-Term Employment Contracts Law?

The Act seeks to restrict employers from using fixed-term and maximum-term employment contracts where:

• the contract’s term exceeds two years; 
• the contract allows for renewal that would see the term exceeding two years; or 
• there are consecutive contracts for the employee to perform the same or substantially similar work.

 Notably, there are exceptions where your business can use fixed or maximum-term contracts, such as where:

• the relevant employee earns over the high-income threshold;
• a modern award permits it;
• the employee works in a governance role; 
• the role requires specialised skills to complete specific tasks;
• you are hiring for seasonal work or to fill a temporary absence; 
• you are using government contracts; or
• the contract is part of a specific training arrangement.

Key Takeaways

As an employer, it might be the case that it is more suitable to hire an employee for a fixed period of time. In such cases, fixed and maximum-term employment contracts might be suitable options for you. Some key things to note about these types of contracts is that:

• a fixed-term contract may be suitable where you require a specific employee for a specific role and for a specific time;
• a maximum-term contract may be better in situations where you wish to maintain flexibility about engaging the employee; and 
• both contracts are based on the agreement ending on a specific date or upon a specific event.

If you need assistance understanding the difference between fixed and maximum-term employment contracts, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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