How HR can prepare for upcoming changes to fixed-term contracts

Sweeping changes to workplace laws have been made under the federal government’s Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022. Among them are new laws around fixed-term contracts, which will come into effect on December 6.

Under the new rules, workers can no longer be employed on a fixed-term contract for more than two years.

“It also prohibits contracts that can be renewed to provide for employment of more than two years,” Trent Hancock, principal at Jewell Hancock Employment Lawyers, told HRD Australia.

“So [the] initial term might only be one year, there might be an option to renew that for a further two years, for example; that would then render that a prohibited fixed-term contract. It also prohibits contracts that can be extended or renewed more than once.”

Some consecutive contracts, where there would be substantial continuity of employment, will be prohibited as well, he added.

But there are exclusions to the to the laws — they won’t cover casual employees, training arrangements or apprenticeships.

“It won't cover situations where there's a distinct and identifiable task involving specialised skills,” Hancock said.

“It won't cover essential work during a peak demand period, and it won't apply to employees who are earning above the high-income threshold as well, that currently sits at $167,500 per annum. And it also won’t apply to certain positions that are funded by government funding or governance positions that have a time limit under their governing rules.”

So how should HR teams prepare for these changes?

Penalties for terminating fixed-term contracts

In 2022, 130,000 Australians were on a fixed-term contract, according to the Australian Bureau of Statistics. But there is a distinction between a fixed-term contract and a maximum-term contract, Hancock said.

“The two are often confused,” he said. “Both have an agreed end date but a fixed-term contract has no unqualified right to terminate before the end of the term, whereas a maximum-term contract is where there is an unqualified right to terminate.

“So a fixed-term contract might say, ‘You will be employed for two years and the parties are bound by that two-year term’. [A] maximum term contract might say, ‘You will be employed for a period of two years, but either party may terminate the employment prior to the expiration of that period, upon a certain period of notice’.”

For fixed-term contracts that have no express right to terminate employment with notice before the term expires, if an employer terminates employment before the expiration date, they will be in breach of contract, Hancock said.

“That can have some fairly serious ramifications for the employer that can expose them to a claim for the income that the employee would have earned, had they been entitled to see out the term,” he said. “Or even a claim for specific performance – which is quite rare for that type of order to be granted by a court – where effectively the parties are still bound to fulfill their obligations under the contract. Ordinarily, it's a claim for damages that the employer is exposed to.”

Frustration of contracts with fixed terms

One of the reasons why a fixed-term contract could be terminated early is because of a frustration of contract. This is an unforeseeable event that makes the continued operation of the contract impossible, Hancock explained.

One example is the recent cancellation of the Commonwealth Games in Victoria. Back in July, the Victorian government announced it would cancel the sporting event after the costs were set to exceed A$6 billion.

A question might arise about whether the cancellation of the Games was reasonably foreseeable, Hancock said, adding that “perhaps it wasn’t reasonably foreseeable.”  

“[We're] talking about here events that aren't foreseeable and are not through the fault of either party that then render the discharge of that contract impossible,” Hancock said. “So if the games no longer exist, and the employee’s work is dependent on the game's existing, it makes the continued operation of their role impossible. So it's a really rare thing to occur within employment contracts.”

Frustration of contracts are not frequently encountered, Hancock added. The issue usually arises in the context of an employee dying or in times of war, where an employee may not be able to perform work in a certain country that is in combat with their home country.

What HR teams can do with fixed-term rules

Hancock said it’s really important for employers to be across these new laws before they are implemented on the sixth of December.

And to ensure HR teams are doing right by employees on fixed-term contracts – and avoid penalties if they are breached – he provided two key suggestions.

“The first thing is to only use fixed-term contracts for a legitimate purpose,” he said. “And those legitimate purposes have more or less been spelled out within these amendments, insofar as we have those exclusions to the prohibition on fixed-term contracts. So HR teams, the very first thing they should be doing is turning their mind to whether this person is only genuinely needed for a fixed term or not. [If] the answer to that question is no, they shouldn't even be discussing the idea of a fixed-term contract.

“Second thing they should then be considering – if they do believe that the person is only required for a genuine fixed-term – is working out the length of that term and whether it's going to fall within the prohibition of the two years or a contract that allows for an extension beyond the two years.”

If they do require that person for two years or more, they should consider whether they fall within any of the exclusions in the new laws, he added.