Best practice for handling fixed-term agreements in New Zealand

'The devil is definitely in the detail of how you fill in the fixed-term clause of the employment agreement,' lawyer says

Best practice for handling fixed-term agreements in New Zealand

Earlier this month, the Employment Relations Authority dealt with a case where a worker claimed he was unjustifiably dismissed from his role as a full-time principal pastor.

The employer – a church trust board – argued that he was a fixed-term employee whose employment had expired.

A clause in the worker’s employment agreement said an end period for his role was “from 2nd September 2019 to 31st March 2022.”

However, the worker argued that there had been no mutual agreement about an end date for his employment. He said an agreement had been prepared using a template, and the end date clause was never discussed or brought to his attention.

Did fixed-term employment expire?

The employer decided to stop paying the worker’s salary on 20 April 2022, claiming that his fixed-term employment had expired. The worker argued that this amounted to a dismissal, as he was contractually entitled to be paid for the work he performed.

The ERA concluded that the worker was a permanent employee who was unjustifiably dismissed. 

“The absence of a legitimate reason for dismissing [the worker] or of a fair and proper process, along with the breaches of good faith that occurred, fundamentally undermined the [employer’s] ability to justify [the worker’s] dismissal or alternatively, the unjustified disadvantage he suffered because he was not paid for the work he did,” the Authority said.

As a result, the employer was ordered to pay the worker lost remuneration for the work he had done but was not paid for, from 1 April 2022 onwards. And the worker was reinstated to his permanent role.

So what is best practice for employers to approach fixed-term contracts?

Fixed term contacts

Jodi Sharman, partner at Hesketh Henry, described what employers need to consider when it comes to creating a fixed-term employment agreement.

“The employment of the employee has to end under three different categories or one of the three,” she told HRD New Zealand. “At the close of a specified date or period; on the occurrence of a specified event; or at the conclusion of a specified project.

“The employment agreement has to say the way in which the employment’s ending and the reasons why – and obviously tell the employee those reasons. And there has to be a genuine reason in the agreement as well.”

Sharman highlighted why there could be challenges that stem from the end date employers use for employees in the fixed-term agreement.

She used the example of a company installing a new IT system and they have a fixed-term employment agreement for someone to install it. Once the system is up and running, that role is no longer required and comes to an end when the project is complete.

“In the employment agreement, you should be linking the genuine reason with the ending and how you know it has come to an end,” Sharman said.

Because there could be flexibility in the date in which a particular project gets done, Sharman warned that you can’t always rely on an end date. Should a particular project exceed the designated date the contract ends, an employer and employee could work on a variation.

“Sometimes, at the beginning when you enter into the fixed-term agreement, the genuine reason and the end date might all be valid and good,” she said. “And then as employment goes on, during the fixed-term, things change, which means that what you originally agreed whilst it was fine then, is no longer fine now. So you need to then renegotiate or introduce a new agreement at that point, which might be a permanent employment agreement instead of a fixed-term one.”

Repercussions for employers

There are unlawful or not genuine reasons for having a fixed-term agreement, Sharman said. For example, you can't have a fixed-term agreement that excludes the rights of an employee under the Employment Relations Act 2000 or the Holidays Act, or if it is used to establish the suitability of an employee for permanent employment.

“It is really important for employers to focus on why they want a fixed-term agreement [and] if it's genuine… to try to fit with that legislative criteria,” she said.

If an employer relies on an end date that is not valid, justified or reasonable – and they use it to end the employment of an employee – that employee could raise a personal grievance for unjustified dismissal, said Sharman.

“If the employee who's been dismissed wants their job back, that could be a remedy they seek or lost remuneration or compensation for hurt they suffered.”

Templates for fixed-term agreements

Sharman emphasised that employers have genuine reasons for having a fixed-term agreement. And when creating them, they can use a template.

“It's definitely fine to have a template for fixed-term employment agreements but the devil is definitely in the detail of how you fill in the fixed-term clause of the employment agreement,” she said.

“[It’s about] making sure you put in that genuine reason, making sure you advise the employees how and when their employment will end — and that ending has to be linked to the genuine reason to start with. And that has to be the project, the date or the event. We often find even with template employment agreements, HR practitioners or directors are filling them in incorrectly, and that will invalidate the whole term.”

And for companies that may often use fixed-term agreements, having a template also means they can be tweaked for different projects, Sharman added.

In addition, Sharman highlighted the importance of seeking legal advice, “not particularly on the whole employment agreement but specifically on that fixed-term clause to make sure it records exactly what you needed to record to satisfy the legal Employment Relations Act section,” she said.

“And to make sure it's valid and enforceable and can be relied on to end employment at the end of that fixed term.”  

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