Fair Work Commission raises risk profile on maximum-term contracts

Facts and initial decision

Mr Khayam had been employed by Navitas on a series of maximum-term contracts over a four-year period. They were maximum-term contracts because they had specified end dates, and provided that either party could terminate the contract early by giving four weeks' notice.

At the end of the term of the last of those contracts, Navitas decided not to offer Mr Khayam a further contract due to concerns it had about his performance.

Mr Khayam brought an unfair dismissal claim that failed initially. In dismissing his application, Commissioner Hunt considered herself to be bound by an earlier Full Bench decision in Department of Justice v Lunn (Lunn)¹, which stood for the principle that when a maximum-term contract reaches its nominated end date, the “contract terminates through the effluxion of time and there is no termination of employment at the initiative of the employer”. Under the Fair Work Act, if there is no dismissal at the employer’s initiative, the employee is excluded from the unfair dismissal jurisdiction.

Appeal

Mr Khayam challenged the decision, and was granted permission to appeal on the ground that the Commissioner had erred in relying upon the decision in Lunn. Mr Khayam argued that Lunn was incorrectly decided, or, alternatively, was not applicable to the unfair dismissal provisions of the Fair Work Act, having been decided under the preceding legislation, the Workplace Relations Act 1996 (Cth).

The Full Bench agreed with Mr Khayam. It held that, in deciding whether there has been a termination at the employer’s initiative, reference must be had to the termination of the employment relationship, as opposed to the termination of the employment contract.

Accordingly, if an employee’s employment ceases at the end of a series of rolling maximum-term contracts, the Commission is likely to look at the circumstances of the entire employment relationship, not merely the terms of the final employment contract, to decide whether the termination was at the employer's initiative.

The Full Bench identified a number of factual matters that the Commission is likely find relevant to this decision, including whether:

• the use of maximum-term contracts was appropriate in the relevant field of employment;
• the maximum-term contract may be contrary to public policy, e.g. if it had the purpose of frustrating the operation of the Fair Work Act or preventing access to the unfair dismissal jurisdiction;
• the contract may have been varied or replaced by written and/or oral agreement, such that the specified time limit or end date no longer applies; and
• the employment contract may not be limited to the terms of a written document and may, for example, be one of a series of standard-form contracts used for administrative convenience and does not represent the reality or totality of the terms of the employment relationship.

The Full Bench acknowledged that maximum-term contracts may well reflect a genuine agreement on the part of an employer and employee that the employment relationship will not continue after a specified date or event. If this is the case, then the risk of a successful unfair dismissal claim at the end of a contract is low.

Do maximum-term contracts fall within the “specified term” unfair dismissal exclusion?

Maximum-term contracts have a fixed termination date, but can also be terminated by one or both parties at an earlier time. They are commonly used by employers because of the flexibility they offer.

Previous decisions have suggested that maximum-term contracts fall within the s 386(2) unfair dismissal exception which provides that people “employed under a contract for a specified period” whose “employment has terminated at the end of the period” do not have access to the unfair dismissal jurisdiction. The Full Bench in Navitas demonstrated that this is not the case.

The Full Bench favoured authority and legislative history indicating that contracts containing a fixed end date and an unqualified right for the parties to terminate cannot be properly characterised as “contracts for a specified period”. However, the Full Bench noted this positon would not necessarily be the same for contracts with a fixed termination date that provide for a limited right to terminate for breach.

Redundancy pay implications

The decision may also have implications in relation to redundancy pay entitlements for maximum-term employees. Prior to the Navitas decision, employers may have sought to rely on provisions of the Fair Work Act that provide redundancy pay is not payable to employees:

• whose employment has not been "terminated at the employer's initiative" (i.e. through the effluxion of time); or
• who have been "employed for a specified period of time".

For employers, liability for redundancy pay entitlements for maximum term employees is likely to turn of the facts, and involve consideration of the factual matters flagged by the Court in Navitas.

Bottom line for employers

• The risk profile of maximum-term contracts has increased.
• Employers should exercise caution when employing employees on a series of maximum-term contracts, and examine the reasons for any rolling contracts.
• Employers should review their maximum-term contracts and consider limiting early termination clauses to gain the protection of the “specified term” unfair dismissal exclusion.

1. [2006] AIRC 756, 158 IR 410