Businesses commonly make frequent use of fixed term contracts with a view to rotating those members of staff in and out of the business before they acquire unfair dismissal rights after completing two years’ continuous service.
*** all change ***
• It is a common assumption that the expiry of a fixed term contract does not mean that someone has been dismissed; it does – non-renewal of a fixed term contract is legally a dismissal.
• From 1 January 2027 the qualifying service needed to bring a claim of unfair dismissal will decrease from two years’ service to a mere six months.
• All fixed term contracts of more than six months will qualify for unfair dismissal protection.
• This means that a fair process must be followed to bring these fixed term contracts to an end.
• This has retrospective effect so all employees with six months’ service by 1 January 2027 will have protection.
Why does the change matter?
At present, an employee whose fixed-term contract expires is treated in law as having been dismissed. This is the case even if the employee knew that their employment was going to be for a fixed, temporary period. However, because employees currently need two years’ service to bring an ordinary unfair dismissal claim, the majority of fixed-term contracts end before that threshold is reached, meaning that relatively few fixed-term employees had sufficient service to challenge the dismissal.
The reduction of the qualifying period to six months changes that position dramatically.
From 1 January 2027, a far greater proportion of employees on fixed-term contracts will qualify for unfair dismissal protection before their contract comes to an end. Combined with the proposed removal of the cap on compensatory awards, employers who simply allow contracts to expire without careful planning could face a much greater litigation risk than they do today.
What does this mean for employers?
It means that where the fixed-term employee has six months’ service, employers can no longer bring a fixed-term contract to an end by serving notice, as many employers have been doing whilst the qualifying period has been two years (as there was no risk of an unfair dismissal claim).
In the same way as in any dismissal where the employee has requisite service to bring an unfair dismissal claim, the employer will need to establish:
• the principal reason for the dismissal;
• that the reason falls within one of the potentially fair statutory categories; and
• that dismissal was reasonable, including that an appropriate procedure was followed.
The principal reason for the dismissal will often be related to the fixed-term contract coming to an end, for example because funding has ended, a project has completed or in cases where a contract is used to cover maternity or other family leave, where the parent returns to work.
In most cases, it will be appropriate for the employer to rely on redundancy as the fair reason for the dismissal, but the correct reason will depend on why the fixed-term contract was created and why the employee’s services are no longer required.
How to conduct a fair process to end a fixed term contract
For a dismissal to be fair overall, the employer must follow a fair process. Again, this is fact-specific but, in general:
• the employer should send a letter to the affected employee specifying the date on which the fixed term contract is due to expire, reminding them of the reason why the fixed term contract has been used and informing them of the reason for the expiry/non-renewal;
• the letter should also invite the employee to a meeting to discuss the expiry/non-renewal and, as a matter of good practice, permit them to be accompanied to this meeting;
• at the meeting with the employee, the employer should recap the background to the situation and ask for the employee’s comments. This should be a constructive forum in which the issues can be discussed openly, with a particular focus on alternatives to dismissal, such as suitable alternative employment;
• a second letter should be sent to the employee confirming the outcome of the meeting (either the date on which the fixed term contract will expire and their employment will terminate, or the alternative decision that has been reached). In either event, the employer should offer the right to appeal.
What to consider before 1 January 2027
As always, the key to staying ahead of the changes is preparation. For that reason and ahead of the changes, we would recommend that you:
1. consider issuing only fixed-term contracts that are shorter than six months in duration (including any notice period), as there will be no impact as a result of the change to the qualifying period. However, in many roles, the disruption to the business will outweigh the benefit of avoiding the legal risk;
2. review your use of fixed-term contracts and update documentation, making expressly clear within offer letters and contracts the intended purpose, duration and the circumstances in which the fixed-term contract will come to an end;
3. consider your current fixed-term contracts. Are there any that you wish to bring to an end before the change in the law on 1 January 2027?
4. for those fixed-term contracts that will expire on or after 1 January 2027, ensure that you have identified the process that you will follow in plenty of time before the expiry date;
5. document expiry dates for fixed-term contracts and consider implementing an approvals process for renewals and extensions in an attempt to reduce the risk;
6. raise awareness so managers are aware of the changes and the implications.
In a nutshell, once the new reforms come into effect, it’s going to be much riskier to dismiss employees. We appreciate that this is a complex area to navigate, so please do get in touch if you need any further advice.
Email nicola.goodridge@goodhr.co.uk or call +44 7917 878384
