A recent decision of the Full Bench of the Fair Work Commission delivered last Friday has substantially changed the unfair dismissal landscape and the law governing fixed and maximum term contracts of employment. Employers are now squarely on notice that a decision to not renew a fixed term contract on its expiry may result in the employee successfully pursuing an unfair dismissal claim, where such a claim was not previously thought to exist. These fixed term arrangements are common place in numerous industries where the ongoing nature of the employment is not certain or guaranteed. They are also used frequently by employers who look for short-term labour to assist on one-off projects, or to cover a short-term absence of a staff member, such as cover for parental leave. The employee is engaged for a maximum period of time, and if their services are still required when the period comes to an end, the contract is often renewed. For many employers, these arrangements deliver the labour flexibility needed to compete in their market place.

It has long been accepted that, where a fixed or maximum term contract comes to an end due to the period of the agreement expiring, there will be no right to pursue an unfair dismissal claim. The rationale for this is that the unfair dismissal regime protects only those employees whose employment is brought to an end at the initiative of their employer. If a contract expires, and the employment ends, in exactly the way the employee and employer agrees, what could be unfair about that? Of course, this protection from the unfair dismissal regime was one of the attractive aspects of fixed or maximum term employment over ongoing employment.

The Full Bench of the Fair Work Commission recently revisited this issue in Khayam v Navitas English and determined that, just because an employee may be dismissed because their term contract expires, does not mean that they will be precluded from pursuing an unfair dismissal claim.

In Khayam, the employee was engaged on a series of term contracts. On the expiry of his most recent term contract, the employer determined that it would not renew his contract, citing performance concerns. The Commission determined, at first instance, and consistent with prevailing authorities, that the employee had not been dismissed at the initiative of the employer, but rather, his employment contract ended due to its expiry. The employee appealed to the Full Bench, contending that the law on this question was no longer applicable in light of changes to the law made by the Fair Work Act, or that previous cases on the issue were otherwise wrongly decided.

The Full Bench of the Commission agreed that the law on this issue was not correctly or completely decided and considered whether or not fixed term employees should be permitted to access the unfair dismissal regime.

In considering this question, the Fair Work Commission drew an important distinction between the termination of the employment relationship and the termination of the employment contract, observing that an employer may, for example, terminate a relationship, but the employment contract may remain binding. In this regard, the Fair Work Commission has stated that the question to be determined in assessing whether or not a fixed term employee should get access to the unfair dismissal jurisdiction is whether or not the employer has terminated the employment relationship at its own initiative, not terminated the employment contract.

What's the difference, we hear you ask? A good question. In effect, it seems that the Fair Work Commission will look behind a term contract expiring to find out why the employer allowed the contract to come to an end. If, for example, the fixed term contract contemplates the potential for it to be renewed at the end of the term, but it is not renewed, the Fair Work Commission may determine that this constitutes an active decision by the employer to bring the employment relationship to an end. And if such an active decision is made, the Fair Work Commission can determine whether or not that decision was unfair, and if so, impose reinstatement or compensation. Of course, if a fixed term agreement has been renewed previously, and then is not renewed, the risk that this will be found to be a dismissal at the initiative of the employer, invoking the unfair dismissal jurisdiction, is significantly heightened on the reasoning of the Full Bench. 

What Does This Mean?

For those employers who use maximum term contracts for short, one-off periods, which have no clause permitting a renewal of the agreement once it expires, the decision is unlikely to alter the position that, on expiry of the contract, there will be no recourse for the individual to seek an unfair dismissal remedy. Similarly, those employers with termination provisions that mandate dismissal on the occurrence of a particular event, such as reaching a retirement age, are equally likely to be unaffected.

However, for the substantial majority of employers with maximum term employment contracts that contain a clause permitting renewal of the contract, this decision should not result in any Christmas cheer. To the contrary, the decision puts employers squarely on notice that a decision to not renew a fixed term contract on its expiry may result in the employee successfully pursuing an unfair dismissal claim, where such a claim was not previously thought to exist.

We have every expectation that this decision will be the subject of appeal. On the one hand, this may lead to the authority being overturned, but on the other, it may lead to this new legal position being cemented by the Federal Court. Only time will tell.