As an employer, you might need to hire staff for a specified period. A maximum-term contract is a type of employment contract that specifies the employment start and end date. This gives employers the flexibility to hire workers depending on their business’ needs. However, from 6 December 2023, the Fair Work Act (‘FWA’) will restrict when employers can use maximum-term contracts. This article will explain:
- what a maximum-term contract is;
- the legal restrictions around the use of these contracts; and
- the benefits and disadvantages of these contracts.
What Are Maximum-Term Contracts?
A maximum-term employment contract refers to an employment arrangement that operates for a specified term. Typically, the contract will specify the start and end date of the employment relationship.
There are a number of reasons why a contract might operate for a specific term rather than on an ongoing basis. For example, there may be a:
- lack of funding that makes it difficult to commit to an ongoing project;
- gap in human resources; or
- big project that needs an extra set of hands.
What Rights Do Employees Have Under Maximum-Term Contracts?
Maximum-term contract employees enjoy the same rights as permanent employees. This includes the rights to:
- minimum wages per the relevant award or the National Employment Standard;
- annual leave entitlements;
- paid carer’s leave; and
- public holiday pay.
When Can Employers Use Maximum-Term Contracts?
From 6 December 2023, the FWA will limit how employers use maximum-term contracts. As a result, you cannot use these contracts where:
- the term of the contract is longer than two years;
- the contract allows a renewal or extension that would extend the term of the contract to a period longer than two years; or
- the employee performs the same or similar work under two or more consecutive contracts and, between the initial contract terminating and the new contract coming into effect, there is substantial continuity of the employment relationship.
The FWA also prohibits employers from taking any measures to avoid these rules applying to the contract. For example, an employer cannot terminate employment for a short period before engaging the employee to perform the same or similar duties.
However, there are some exceptions to the limits the law imposes. In other words, the limits do not apply if:
- the relevant employee earns over the high-income threshold (which is $167,500 as of the 2024 financial year);
- the role requires specialised skills to complete specific tasks;
- a modern award permits it;
- you are hiring for seasonal work or to fill a temporary absence;
- the employee works in a governance role;
- the contract is part of a specific training arrangement; or
- the government wholly or partly funds the role, which is payable for more than two years with no reasonable prospects to continue after such time.
What Are the Benefits of Using Maximum-Term Contracts?
Although maximum-term contracts are inherently less secure than ongoing contracts, there are several benefits to a contract with a specified term that can make it attractive to both employers and employees. Some of these are outlined below:
1. Less Commitment
The main benefit of maximum-term contracts to an employer is that there is less commitment required than permanent contracts. This can make it easier to decide:
- who to hire;
- their role in the business; and
- the business’ capacity to uphold their employment.
Where you must adhere to a strict budget, maximum-term contracts can make it much easier to predict payroll costs.
2. Quick Hiring Processes
With less long-term commitment, the hiring process for a maximum-term employee can be much quicker. Therefore, this is ideal for employers looking to fill a position quickly and with as few recruitment steps as necessary. This will be particularly appealing if you hire many seasonal employees each year.
3. More Appealing to Employees
Maximum-term contracts are more appealing to employees than casual work. This is because they offer more security with working hours. Unlike casual work, this provides employees with a guaranteed work period, as well as benefits such as paid leave entitlements, ensuring you have a range of suitable applicants to choose from.
What Are the Disadvantages of Using Maximum-Term Contracts?
Whilst there are several benefits of maximum term agreements, there are also a number of disadvantages that can make these contracts off-putting for some employers (and employees).
1. Smaller Applicant Pool
A key thing to consider when advertising for a maximum-term position is that a number of applicants might be deterred from applying. This is because maximum-term contracts are less secure than ongoing contracts, putting off potential candidates. In particular, if you are hiring for specialised or skilled roles, this might make it challenging to find a suitable candidate.
2. Difficult to Monitor
Maximum-term contracts can be difficult to manage, particularly with keeping an eye on their expiry and renewal. This is especially the case for shorter-term agreements that require frequent renewal. Overall, this has the potential to result in administrative difficulties, making it more costly and burdensome in the long run, particularly for larger businesses.
Further, the amendments to the FWA will require businesses to monitor the length of each employee’s service with the company under maximum-term agreements.
3. Tricky to Draft
Carefully drafting the provisions of a maximum-term contract is essential, although it can be difficult to navigate. The difficulty with negotiating and drafting maximum-term contracts will be particularly unappealing to employers with few administrative resources. If you are drafting a maximum-term contract, you should seek legal advice to avoid any complications.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
Maximum-term contracts are one type of employment agreement that an employee might be hired under. These contracts specify the:
- start and end date of the employment relationship, which can range from several months to several years; and
- rights of maximum-term employees, which are primarily the same as that of a permanent employee.
If you need assistance implementing maximum-term 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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