Employment Law: Avoiding a flimsy fixed term

A recent Employment Court decision casts light on the high threshold for justifying a fixedterm employment agreement and the consequences for employers when they get it wrong.

Long fixed-term employment agreements are frequently used by employers to employ someone for a finite period. However, these agreements must strictly comply with section 66 of the Employment Relations Act 2000. Under that section, parties may agree that the employee's employment will end at the close of a specified date or period; on the occurrence of a specific event; or at the conclusion of a specified project. The employer must have "genuine reasons based on reasonable grounds" and advise the employee of those reasons and when or how the employment will end. The section states that "genuine reasons" are not to exclude or limit the rights of the employee under the Act; to establish the suitability of the employee for permanent employment; or to exclude or limit the rights of an employee under the Holidays Act 2003. If these statutory requirements are not complied with, the employee can elect at any time to treat the fixed term as ineffective (including post-employment), in which case the employer is unable to rely on the fixed term to end the employee's employment.

Morgan v Tranzit Coachlines Wairarapa Ltd demonstrates the dangers of engaging employees on a fixed-term basis under the justification of generic financial uncertainty. This case concerned a school bus driver who had been employed by Tranzit on a series of fixed-term employment agreements over 18 years. As part of its decision, the Court looked at the employee's two most recent fixed terms, which were for three years each. The reasons for the fixed terms were that Tranzit's school bus contract with the Ministry of Education was due to expire at the end of the term and there was a risk that Tranzit would not secure a renewal of the contract and that this would affect its capacity to retain the employee.

The Court accepted that there was a risk that the contract would not be renewed, and that non-renewal would affect Tranzit's financial circumstances, but the Court ultimately held that these reasons were not enough to satisfy the requirements of section 66 for a fixed term. First the risk of non-renewal was speculative, particularly given the pattern of contractual stability over the previous 18 years. Secondly, there was no evidence supporting the extent of the financial loss created by a non-renewal. Thirdly, the redundancy provisions of the employee's contract dealt with the situation of a "financial downturn in our business". These provisions strongly undermined the claim that the fixed term was both genuine and reasonable. Fourthly, the Court noted that the employee's work was not a discrete project of limited duration, but rather his role was an ongoing part of Tranzit's wider business operation. In addition, the Court stated that, even if there was sufficient justification for previous fixed terms, every new term must be for genuine reasons based on reasonable grounds. The result of this is that, as long as there is a genuine reason based on reasonable grounds for each term, the mere existence of multiple rolling fixed terms does not give rise to ineffectiveness.

The Court noted that section 66 is intended to protect employees from employers seeking to avoid their employment law obligations.

Accordingly, it was relevant to consider whether a fixed-term agreement is the option that least infringes on the rights of the employee.

The Court held that financial uncertainty is something all businesses face and, therefore, it cannot, of itself, constitute a genuine reason based on reasonable grounds to justify a fixed-term employment agreement. The Court also held that even if the employer genuinely believes there is a financial risk that reason is insufficient if that belief is not based on reasonable grounds. In the case of Tranzit, the potential loss of revenue stream was an ordinary business risk and not a genuine reason based on reasonable grounds to end the employee's employment. On this finding, the Court held that both fixed-term agreements were ineffective and the employee was entitled to be treated as a permanent employee for the full period of employment of those terms, for example, in respect of leave entitlements owing to him and a shortfall in holiday pay.

Top tips for preventing an ineffective fixed term

• Consider what other suitable alternatives are available (casual employment, permanent employment, restructuring and redundancy, contractor arrangement).

• Remember the reasons must include two elements – genuineness and reasonableness.

• Include the reasons in the employment agreement.

• Comply with the terms of the fixed term.

• Employing an employee beyond the term enables the employee to treat the fixed term as ineffective.

• Before expiry, re-evaluate the reason for the fixed term if you want to re-engage an employee after the term expires.

Sarah Cates is a Senior Associate at Cullen – The Employment Law Firm. Sarah advises clients from a range of industries and sectors on their legal rights and obligations in respect of contentious and non-contentious employment matters. In addition to being a lawyer, Sarah also works as a mediator to resolve employment disputes.