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employment

When is a fixed-term contract illegal?

Key Takeaway

A fixed-term employment contract in New Zealand must have a genuine reason, based on reasonable grounds, for the employment to end at a specified time or on a specific event. This reason must be communicated to the employee in writing. If these conditions are not met, the contract is treated as indefinite, granting the employee full permanent employment rights.

Understanding Fixed-Term Employment Contracts

A fixed-term employment contract (also known as a fixed-term agreement) is an employment agreement that specifies that the employment will end on a particular date or on the occurrence of a particular event [Source: Employment Relations Act 2000, s 66(1)(a)]. Unlike permanent employment, it is not intended to be ongoing indefinitely.

When is a Fixed-Term Contract Valid?

For a fixed-term employment contract to be valid under New Zealand law, specific conditions must be met. If these conditions are not satisfied, the employment is generally treated as if it were for an indefinite period, meaning the employee has the same rights as a permanent employee [Source: Employment Relations Act 2000, s 66(4)].

Requirement for a Genuine Reason

An employer must have a genuine reason for offering employment for a fixed term [Source: Employment Relations Act 2000, s 66(1)(a)]. This means there must be reasonable grounds based on the operational requirements of the employer or some other justifiable reason for the employment to end. Examples of genuine reasons may include:

  • Work on a specific project with a defined end date.
  • Filling a temporary vacancy, such as parental leave cover or a secondment.
  • Seasonal work that is inherently temporary.
  • Specific funding for a project that has a known end date.

The genuine reason must relate to the particular nature of the employment or the particular circumstances surrounding the employment [Source: Employment Relations Act 2000, s 66(2)]. The purpose of this requirement is to prevent employers from using fixed-term contracts to avoid their obligations to permanent employees, such as notice periods or the right to challenge an unjustified dismissal.

Written Agreement and Explanation

For a fixed-term agreement to be valid, the employee must be:

  1. Advised of the genuine reason for the fixed term before or at the time the agreement is entered into [Source: Employment Relations Act 2000, s 66(3)(a)].
  2. Advised of how and when the employment will end [Source: Employment Relations Act 2000, s 66(3)(b)]. This must be clearly stated in the employment agreement.
  3. The employment agreement itself must be in writing [Source: Employment Relations Act 2000, s 66(1)(a)].

These requirements ensure transparency and that the employee understands the temporary nature of their employment and the specific reason for it. An agreement that merely states a fixed end date without a genuine reason, or without advising the employee of that reason, may not be a valid fixed-term agreement.

Consequences of an Invalid Fixed-Term Agreement

If the requirements for a valid fixed-term employment contract are not met – for example, if there was no genuine reason, or the employee was not advised of it – the employment is treated as if it were for an indefinite period [Source: Employment Relations Act 2000, s 66(4)].

This means that the employee effectively becomes a permanent employee, and their employment cannot simply end on the specified date or event without due process. If the employer attempts to terminate employment at the end of the specified term without a valid reason and without following fair process, the employee may be able to pursue a personal grievance claim for unjustified dismissal [Source: Employment Relations Act 2000, s 103].

Rights and Obligations for Employees

Employees on valid fixed-term contracts have the same rights as permanent employees during the term of their employment, including minimum wage, leave entitlements, and the right to a safe workplace [Source: Employment Relations Act 2000, Part 6A; Holidays Act 2003, s 16]. However, if the contract is genuinely fixed-term, their employment typically ends automatically on the specified date or event, without the need for notice or redundancy payments, unless the agreement specifies otherwise [Source: Employment Relations Act 2000, s 66(1)(a)].

If the fixed-term contract is found to be invalid, the employee is considered to be in indefinite employment and has the full protections of a permanent employee, including the right to challenge an unjustified dismissal [Source: Employment Relations Act 2000, s 66(4)].

Rights and Obligations for Employers

Employers offering fixed-term contracts must ensure they have a genuine reason for the fixed term and clearly communicate this, along with the end date/event, to the employee in writing [Source: Employment Relations Act 2000, s 66(1), (2), (3)]. Failure to do so can result in the employment being treated as indefinite, which carries significant implications, including the potential for unjustified dismissal claims if the employment is terminated without a fair process or justifiable reason after the intended fixed term [Source: Employment Relations Act 2000, s 66(4)]. Employers must also uphold all other employment obligations during the term of the contract.

When to Seek Independent Legal Advice

Employers or employees who are unsure about the validity of a fixed-term agreement, or who believe an employment termination may be unjustified, may benefit from seeking independent legal advice. For free legal assistance, individuals can contact a Community Law Centre or the Ministry of Business, Innovation and Employment (MBIE) for general guidance. Employers may also consider professional legal counsel from a lawyer specialising in employment law.

Key Resources