How to terminate a fixed-term contract

How to terminate a fixed-term contract

If you need to bring an employee's fixed-term contract to an end, whether on the expiry of the fixed term or on an earlier date, it's important to be aware of what the law says in this area. How should you go about terminating the contract?

Expiry of fixed-term contract

Employees on fixed-term contracts (FTCs) enjoy the same unfair dismissal protections as permanent employees. The Employment Rights Act 1996 says that the expiry of a fixed-term contract without renewal constitutes a dismissal for unfair dismissal law purposes. A limited-term contract is one that includes provision for it to terminate on the expiry of a fixed term, or the completion of a specific task or on the occurrence of an event. So, when the FTC expires without being renewed, this will still be a dismissal, and the employer will have the right to claim unfair dismissal if they have (currently) at least two years' continuous service. The usual unfair dismissal provisions will apply, i.e. you will need to: (1) show a fair reason for dismissal - usually "some other substantial reason" (SOSR) or redundancy; (2) follow a fair dismissal process; and (3) act reasonably in treating that reason as a sufficient one for dismissing the employee.

Tip. If the employee has been employed for less than two years (and do watch out here for FTCs that have previously been renewed), they don't have the general right to claim unfair dismissal so terminating their FTC is currently relatively easy - you can simply remind them in advance, preferably in writing, that it will end on its expiry date.

Early termination of fixed-term contract

If you terminate an FTC before the end of the fixed term, the employee may have a claim for wrongful dismissal unless either the FTC contains a break clause allowing for early termination or notice or they have committed gross misconduct. A wrongful dismissal claim can be costly as the employee can seek damages for loss of earnings for the remainder of the fixed term. They can also claim unfair dismissal if they have at least two years' continuous service.

Tip. Include a break clause in an FTC allowing you to terminate it early on notice.

A fair dismissal process

Start by establishing your fair reason for dismissal - you should be able to rely on SOSR if the FTC was used for a specific, non-genuine purpose, that purpose was made known to the employee and it's no longer applicable. As a minimum, you should also: (1) arrange a meeting with the employee to discuss your proposal not to renew their FTC before any decision is taken (see The next step); (2) explore alternative employment options; and (3) confirm any dismissal in writing and ideally provide a right of appeal.

Trap. Dismissal should be the last resort after you've considered all other available options.

Notice of termination of employment

If the FTC expressly provides for it to end on the expiry of the fixed term without the need for notice, it will automatically terminate at the end of the fixed term and no notice need be given. However, if the FTC is silent on notice, you will need to give the employee at least statutory minimum notice (and longer notice if that's reasonable) and so you should start the dismissal process early enough to include notice before the fixed term expires.

As employees on fixed-term contracts still enjoy unfair dismissal protection, if they've been employed for two years or more you must follow a fair procedure to terminate the contract, including meeting with them and considering alternative employment. If you're terminating the fixed-term contract early, check there's a break clause permitting this.