Room for uncertainty: a new approach to fixed term contracts?

Since 2006, employers had significant comfort in the Federal Commission’s view that they “are entitled to structure their affairs, including the contracts they offer to employees, in the way that they think best suits their interests” (Department of Justice v Lunn [2006] AIRC 756).

As such, employers could chose to offer employees outer-limit contracts (contracts with an agreed end date unless terminated earlier on notice). When the contract ended at the agreed end date, it would not be a dismissal. No unfair dismissal claim could successfully be made against the employer.

Well, following the Full Bench decision in Khayam v Navitas English Pty Ltd t/a Navitas English [2017] FWCFB 5162 (8 December 2017) there is no longer that comfort and certainty for business. There is more room for challenge.

In this bulletin, we examine the Navitas decision and what it means for business.

The simple facts

Mr Khayam was employed by Navitas as a casual teacher from 2005 to 2012.

In April 2012 Mr Khayam was offered employment as a “fixed-term teacher” until 30 June 2013. The letter provided that either party could terminate the employment earlier by giving 4 weeks’ notice (an outer-limit contract).

After the completion of that period of employment, Mr Khayam was offered and accepted employment on the same terms for the period from 1 July 2013 to 30 June 2014. In June 2014, Mr Khayam was told his contract would not be “renewed” because his administrative work had been unsatisfactory. However, after further discussions, Mr Khayam was offered, and accepted, another contract to 30 June 2016.

On 31 May 2016, Mr Khayam was informed that he would not be offered a further contract based on an assessment of his performance and disciplinary record. His employment ended on 30 June 2016.

The legislation

The Commission can hear an unfair dismissal claim if “the person has been dismissed”.

Section 386(1) of the Fair Work Act 2009 (FW Act) provides that a person has been dismissed if “the person's employment with [their] employer has been terminated on the employer's initiative”. An exception to that definition includes if “the person was employed under a contract of employment for a specified period of time …, and the employment has terminated at the end of the period…”: s 386(2)(a) of the FW Act.

The arguments

Mr Khayam argued he had continuous and ongoing employment, and Navitas ended his employment at its initiative.

Navitas argued the agreed terms of the contract brought the employment to an end. As the High Court of Australia said in Victoria v The Commonwealth [1996] HCA 56, “as a matter of ordinary language, an employer does not terminate an employee's employment when his or her term of employment expires. Rather, employment comes to an end by agreement”.

The Full Bench decision

In a 2:1 decision, the majority of the Full Bench found Mr Khayam could bring an unfair dismissal claim despite his employment ending on 30 June 2016 consistent with the contract.

The Full Bench focussed on the FW Act providing that a person has been dismissed if “the person's employment” had been ended. The analysis did not begin and end with the terms of the contract. What mattered was whether the employer initiated the termination of the employment relationship – a broader concept.

The Full Bench then relied on long-standing authority (Mohazab v Dick Smith Electronics Pty Ltd [1995] IRCA 625) that termination at the employer’s initiative focuses on whether the action of the employer was the principal contributing factor that resulted in the ending of the employment. A termination may occur at the initiative of the employer even though it was not done by the employer, such as in the cases of a forced resignation.

A number of circumstances may exist where the outer-limit contract may not represent the true nature of the employment relationship, including where:

• the employer misrepresents the nature of the employment at engagement;

• the employer applied duress or coercion to have the employee sign the contract;

• the contract is a sham;

• the employer has engaged in conduct or made representations about ongoing employment during the term of the contract; and

• the terms of the outer-limited contract are inconsistent with an award or enterprise agreement.

However, as the Full Bench majority said, absent any of the above vitiating factors:

… it should be made clear that the mere fact that an employer has decided not to offer a new contract of employment at the end of a time-limited contract which represents a genuine agreement by the parties that the employment relationship should come to an end not later than a specified date will not by itself constitute a termination at the initiative of the employer.

Finally, the majority read the exception under s 386(2)(a) as only applying to true fixed term contracts, i.e. contracts that do not have the ability to end employment earlier on notice. No clear automatic exclusion from the unfair dismissal regime exists for outer-limit contracts.

Deputy President Coleman, in dissent, held:

• Mr Khayam was not terminated. Navitas simply decided to not enter into a new relationship. The relationship ended by the effluxion of time; and

• an outer-limit contract was a contract for a specified period of time and if the employment ended at the end of that period, then the exception in s 386(2)(a) applied.

A much more certain approach.

The uncertainty

The uncertainty unfortunately is that the decision allows wriggle room for employees. Expect employees to assert they were promised, by some manager or supervisor, another contract or ongoing employment. Or, employees will take advantage of any delay in offering them another fixed term contract to argue the relationship was something different to the contract they were “required” to sign.

This uncertainty means employers will need to defend an unfair dismissal claim, rather than respond with a quick knock out.

Lessons

We must remember the Navitas decision only applies to employees who have access to the unfair dismissal jurisdiction. The decision does not affect "award-free" employees paid above $142,000 pa. Normal contractual principles apply to these employees and their contracts.

The decision also does not give employees, at the end of their employment, a successful claim if their outer-limit contract is genuine (and there are no vitiating factors). It will still be a case of employment ending by agreement.

Careful management of outer-limit contracts is therefore vital. With respect to employing and managing employees on outer-limit contracts, the key take-aways are:

1. Businesses need to have clear, cogent and legitimate reasons for using outer-limit contracts (and re-engaging employees on successive contracts). These may relate to the seniority of the role, the nature of the role or the role being linked to external funding.

2. The contract needs to be explicit in saying that the employment ends at the agreed date (and there is no guarantee of further employment). Other clauses, such as a carefully constructed no representation clause, may also be valuable.

3. Businesses need to ensure they have robust practices that treat employees consistent with the terms of the contract, including making no promises of ongoing employment and reminding employees, during the term, that their employment automatically ends on the agreed end date. Any contract, for a new period, needs to be offered and signed before any work commences in that subsequent period.

A further (unwanted) uncertainty

The uncertainty may also extend to redundancy entitlements. The FW Act provides:

• an employee is entitled to redundancy pay if their employment is terminated “at the employer's initiative because the employer no longer requires the job done by the employee to be done by anyone”; and

• that the entitlement to redundancy pay to does not apply “an employee employed for a specified period of time”.

The similarity in language is striking. The broad approach taken by the Full Bench majority may allow some employees to claim redundancy pay if their employment ends at the agreed end date and they are not replaced.

Uncertainty may also arise in other situations where it could be argued that there was no termination at the employer’s initiative, such as when an employee loses an occupational licence or their visa expires. Will the Commission say it was the employer that ended the employment relationship rather than allow the employee time to rectify the situation?

Time will tell how this issue plays out; it is sure to be tested by an employee that has been on successive rolling contracts.

Conclusion

The old decision of Lunn provided certainty for business. An outer-limit contract meant what it said, and when the contract comes to a conclusion, the employment ended by agreement – there was no dismissal (and no redundancy entitlements).

The Navitas decision allows this position to be challenged when the outer-limit contract is not genuine and does not reflect the real employment relationship. In that sense, perhaps nothing much has changed. After all, the Commission, or a Court, could always imply a contract or make a finding that the contract was something different.

It all points to the need for more administration and better contract management by employers.

 

Author: James Mattson