As an employer, you will occasionally need to hire staff for a specific period. For example, you might need to cover a permanent employee’s temporary absence while they are on parental leave. In this instance, you might engage an employee using a fixed-term or maximum-term employment contract. Nevertheless, from 6 December 2023, the Fair Work Act (‘FWA’) will limit how employers use maximum and fixed-term contracts. As such, you should think carefully as to whether it is appropriate to engage an employee in this manner. This article will explain:
- what are fixed-term and maximum-term contracts;
- when you should use these contracts; and
- what terms you should include in these contracts.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
What Are Fixed-Term and Maximum-Term Contracts?
Fixed-term or maximum-term employment contracts are relevant when employers are only looking to hire staff for a specific period. The critical difference between fixed-term and permanent contracts is in how you can terminate employees.
Under a permanent contract, you must give adequate notice to your employee upon termination. At the same time, the employee must also give adequate notice if they wish to resign. Further, you will ordinarily need to:
- have a valid reason for termination; and
- ensure the process of termination is fair to avoid an unfair dismissal claim.
However, under a fixed or maximum-term contract, the employment will simply end on the prescribed date with no required notice period or further reasoning. In reality, this means that:
- you can remind the employee that they will be finishing up shortly; and
- your employee no longer turns up to work after the end date.
What is the Difference Between Fixed-Term and Maximum-Term Contracts?
The primary difference between a fixed-term contract and a maximum-term contract lies in the requirements surrounding termination. During a maximum-term contract, either you or your employee can terminate the employment with notice prior to the prescribed end date. This approach increases flexibility and is the preferred method for many employers.
However, in a fixed-term contract, both parties can expect employment for the duration of the specified term. This means that you are not able to terminate the employment relationship prior to the agreed end date, except in exceptional circumstances.
In certain instances, you can legitimately terminate an employee’s role based on their employment contract. The most common reasons for the termination will be:
- redundancy; or
- breach of contract.
When Can Employers Use Maximum-Term and Fixed-term Contracts?
From 6 December 2023, the FWA will limit how employers use maximum and fixed-term contracts. As a result, you cannot use these contracts where the:
- term of the contract is longer than two years;
- contract allows a renewal or extension that would extend the term of the contract to a period longer than two years; or
- 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.
Further, the law 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);
- 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;
- 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; or
- the contract is part of a specific training arrangement.
How to Draft Termination Clauses in Fixed-Term Contracts
Termination clauses in employment contracts specify how you or your employee can end the employment relationship. When providing a fixed or maximum-term contract, you should carefully consider how to word the termination clause.
First, you need to consider whether you wish to engage a fixed-term or maximum-term employee. A maximum-term employment contract gives you more flexibility to end your engagement with the employee if the working relationship is unsuccessful.
Additionally, there are specific minimum notice periods that allow you to terminate employees where appropriate. However, you may increase the notice period to allow you more time to find a replacement and perform proper handovers. This will be particularly relevant for more senior employees. The minimum notice periods are as follows:
| Period of Continuous Employment | Minimum Notice Period |
| One year or less | One week |
| One year to three years | Two weeks |
| Three years to five years | Three weeks |
| Over five years | Four weeks |
Further, you must provide employees over 45 years old who have been employed for two years with an additional week of notice. If you plan to extend the employment of a fixed or maximum-term employee, you must either:
- issue the employee with a new employment contract; or
- vary the terms of the original fixed or maximum term agreement by agreement with the employee.
How Long Are Probation Periods?
In regular permanent employment contracts, a probation period is a time when both you and your employee can assess the success of the new working relationship. It generally gives both parties the right to terminate their employment with less notice than is required after the probation period.
You are less likely to need a probation period within fixed-term and maximum-term contracts, especially where the length of the employment is relatively short. You should keep in mind that you are still able to terminate a maximum term agreement prior to the end date, even where a probation period clause is excluded from the agreement.
Key Takeaways
If you are considering hiring an employee for a specific period, you must ensure you use the most appropriate employment contract. This may be either a fixed-term or maximum-term employment contract. However, you should note that from 6 December 2023, the FWA will limit how employers use maximum and fixed-term contracts. As a result, you cannot use these contracts where the:
- term of the contract is longer than two years;
- contract allows a renewal or extension that would extend the term of the contract to a period longer than two years; or
- 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.
If you need assistance preparing employment contracts or determining whether an exception applies, 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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