Insights

Employment Contracts

March 31, 2022

Types of Employment Contract

Recruiting and retaining staff is difficult for growing small and medium sized enterprises (“SME’s“) (particularly for the hospitality industry). SME’s need to attract the right talent on the right basis. Often flexibility is crucial for SME’s as they try to ensure they have the people to do the work without placing an undue burden on the permanent wage bill. Potential employees are often concerned about job security which can make fixed term or seasonal work less attractive. It is a difficult balance to get right. Different types of employment contract – whether that be permanent, fixed term, temporary or ‘zero-hours’ – will be appropriate for different types of role. It is crucial that proper thought is given to the nature of the proposed engagement and that an appropriate contract is prepared which provides clarity to all parties.

Permanent Contracts

Where a full-time, year-round, permanent role exists then an employee should usually be recruited on the basis of a permanent contract of employment. This means that the contract has no expiration date and the employer and the employee will remain bound by its terms until the contract is terminated. A permanent employee will need a permanent contract of employment or statement of terms. Permanent employees will (usually after successful completion of a probation period) gain access to any benefits on offer by the employer.

A permanent contract of employment gives the employee the greatest degree of job security. Permanent contracts can also be beneficial to employers; those engaged on permanent contracts are likely to have greater loyalty to the company, particularly in roles where they can see a clear career path. Permanent employees are likely be a longer term resource, maintaining and developing their skills over a longer period and keeping those skills within the business. The downsides for an employer are that: (1) depending on recruitment method, the recruitment of permanent employees can be significantly more expensive then the alternatives; and (2) permanent employees will almost certainly have stronger employment rights which means that if things don’t work out terminating their employment can be more time-consuming and expensive.

Fixed Term Contracts

A fixed term contract is one under which an employee is engaged for a specified period of time. This can mean that the employment will terminate on a specified date or on the occurrence of a specified event (such as the completion of a particular project). The principal benefit of a fixed term contract as opposed to a permanent contract is the flexibility they provide to both employers and employees. Fixed term contracts are particularly beneficial to those seeking or offering work on a seasonal or casual basis (such as in the hospitality sector, or in agriculture, or tourism). Fixed term contracts can also be useful when there is a need for a specialist employee for a particular project, or where cover is required during a period of staff absence, such as during a period of parental leave.

Whilst a fixed term contract does not provide the same protections or carry with it the same benefits as a permanent role, there are still rules which apply and which all parties should be aware of. These include:

  • There is generally no legal obligation to give notice to an employee who is employed under a fixed term contract, unless: (1) a fixed term contract is for 4 weeks or less but continues for 13 weeks or more; or (2) in the instance where an employee is hired for a project which is expected to last for no more than 12 weeks but the employee continues to be employed for more than 13 weeks.
  • Fixed term employees are entitled to paid leave calculated on a pro-rated basis.
  • The longer the term of the contract, the more entitlements apply. Therefore, employers should be wary of employing a person on a succession of fixed term employment contracts.
  • The non-renewal of a fixed term contract amounts to dismissal, which means that employees may bring a claim for unfair dismissal if they have the requisite continuous service.
  • Two or more fixed term contracts with the same employer, separated by a period of not more than 26 weeks, will count as continuous employment. The break in between is not counted when determining the length of continuous employment.
  • Fixed term employees who have been employed under a series of fixed term contracts can also accrue the requisite 2 years’ service to be eligible for statutory redundancy pay if they are dismissed by reason of redundancy.

Temporary Contracts

Temporary contracts are basically the same as a fixed term contact; they are there to enable the employment of personnel to meet a particular need or complete a particular project but without any intention that the role will be a permanent one. The principal difference is generally thought to be that a ‘temporary’ contract is one where the precise end date is unknown or where there is some uncertainty as to the precise nature of the conditions or event that will bring the contract to a close. A temporary contract usually allows for any end date to be more readily changed. The advantages and disadvantages of temporary contracts are very similar to those of fixed term contracts; in effect, the employer or employee gains greater flexibility at the expense of long term job security.

‘Zero-hours’ Contracts

Much in the news over the last few years, a ‘zero-hours’ contract is one in which the employer and the employee define the terms upon which the employee will provide services but the employer is under no obligation to provide any work to the employee. These types of arrangements are useful where the particular skills of an individual are needed by the employer, but the quantity and timing of the need is difficult to establish. The benefit of such an arrangement for an employer is that there is a high degree of flexibility and the employee is only paid for work actually done. The downside is that the employee has no obligation to accept work when asked so the employer might find itself with work needing to be done and no one available to do it.

Key Takeaways

It is important for both employees and employers to think carefully about what they want to achieve out of an employment relationship. The answer to that fundamental question will determine which type of employment contract is the most appropriate in the particular circumstances. If the role is permanent it is really important for both parties to use the probation period to assess whether the relationship is really going to work. If the role is a temporary one it is vital that everyone is clear from the outset what the nature and extent of the role is, what the parties are undertaking to do, and when and how the role will come to an end. It is also important to consider whether there is justification to renew or extend an engagement on a fixed term basis or whether the role should migrate to a permanent one; each case should be assessed individually.

 

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