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There are some important differences between a fixed-term and upper limit employment contract. If you misclassify the employment arrangement, your business may be facing unexpected termination payments and other legal issues.

If you're not sure whether an agreement if a fixed term or upper limit contract, you should contact an employment law firm.

Author: Farrah Motley, Legal Principal of Prosper Law and a workplace lawyer.

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What is a fixed-term contract?

A contract is a fixed-term contract if:

the contract terminates by the passing of time at the end of the six-month period, rather than at the initiative of the employer
the commencement and end date are unambiguous (this also applies to extensions of the fixed term)

Fixed-term contracts, by their very nature, are intended to give both parties certainty

What is an outer limit (or upper limit) contract?

A contract is not a fixed-term contract if:

the contract gives either party an unqualified right to terminate the contract on notice, or with payment in lieu of notice (regardless of whether a party exercises that right)
the commencement and end date are ambiguous (this also applies to extensions of the fixed term)
there are a series of fixed-term contract and renewal is a mere formality
the contract includes a term (i.e. 12 months) but does not state that the employment relationship will come to an end when that term expires

The court's reasoning is that ‘Fixed-term contracts, by their very nature, are intended to give both parties certainty in relation to the date of commencement, duration of the employment relationship and the completion date.

The inclusion of a termination provision within a fixed-term employment contract destabilises this certainty, which explains why the Courts and the Commission have found that the inclusion of such provisions prevents the contract being properly described as a fixed-term contract’.

There is, therefore, a distinction between:

a fixed-term contract (which contains no termination provision, except for breach of contract/default and does not get the benefit of unfair dismissal protection); and
maximum term / outer limit contracts (which contains termination on notice provisions (including probation periods), identifies the date beyond which the employment relationship will not continue and does get the benefit of unfair dismissal protection).

If you seek to terminate an employee on an outer limit contract, you must go through the same process as you would with employees who are engaged under ongoing contracts, otherwise there is exposure to an unfair dismissal claim or (if the term has run for a sufficient length of time) redundancy pay, plus potential penalties under the FWA.

Termination of fixed-term and outer limit contracts

Section 386 of the Fair Work Act 2009 (Cth) defines when a person is considered to have been ‘dismissed’ for the purpose of the unfair dismissal provisions.

A person is taken to have been dismissed if their employment has been terminated at the employer’s initiative or if a person has resigned (but was forced to do so by the employer).

However, a person has not been dismissed if the person was employed under a ‘contract of employment for a specified period of time’ (i.e. fixed term contract) and the employment has terminated at the end of the period. The rationale is that a fixed-term contract comes to an end by agreement of both parties, rather than at the initiative of the employer.

The courts have then considered in what circumstances a person will be considered to / not to have a ‘contract of employment for a specified period of time’. Below are some principles which have come out of the case law:

Topics	Fixed Term	Outer Limit
Redundancy	Not payable	Payable if term has run for a sufficient length of time
Unfair dismissal	No protection	Employee has access to unfair dismissal protections
Termination for any reason	Disallowed – termination must be for breach / default	Allowed during the probation period
Termination for breach	Allowed at any time	Allowed, but always exposed to a risk of an unfair dismissal claim
Flexibility on term	Minimal flexibility regarding term, however this can be addressed by (for example) having a six month term plus six month extension option	Greater flexibility during the probation period, however there is an exposure to an unfair dismissal claim after the first six months