Compliance Essentials: Understanding Australia’s Fixed-Term Contract Changes.

This article will address the three key limitations on fixed-term contracts, exceptions to these limitations, and the potential consequences of non-compliance.

What are the new rules for fixed-term employment contracts, and what do employers need to do to comply?

From 6 December 2023, new Fair Work Act rules limit fixed-term contracts to a maximum of two years, restrict renewals, and prevent the repeated use of consecutive fixed-term contracts for the same role. While certain exceptions apply, employers who fail to comply risk civil penalties and may find the employee is deemed permanent. Employers should review their employment arrangements and provide affected employees with a Fixed Term Contract Information Statement.

New Limitations on Fixed-Term Contracts

There are 3 new limitations to fixed-term contracts: time limitations, renewal limitations, and consecutive contract limitations.

These changes only apply to contracts entered after 6 December 2023.

Time Limitations

Under the new rules, fixed-term contracts in Australia cannot exceed a period of two years, including extensions and renewals.

This means that regardless of the initial contract’s duration when considering all extensions and renewals, the cumulative employment period must not exceed two years.

Renewal Limitations

Employers will also be restricted from offering fixed-term contracts with options to extend or renew the employment contract if such an extension would result in an employment period, including the extension or renewal period, exceeding two years, or where the contract contains a right to renew more than once.

Consecutive Contract Limitations

 The rules also impose constraints on consecutive fixed-term contracts. An employer cannot engage an employee in a new fixed-term contract if:

1. The new contract primarily involves the same work as a previous fixed-term contract;
2. There is no substantial break in the employment relationship between the previous and new contract; and
3. Any of the following conditions apply:

• • The total period of employment for the previous contract and the new fixed-term contract exceeds two years;
  • The new fixed-term contract can be renewed or extended;
  • iii. The previous fixed-term contract was extended; or
  • There was an initial fixed-term contract in place (before the previous contract) for primarily the same work, and there was continuity of the employment relationship between the initial and previous contracts.

Exceptions

There are exceptions to the new rules, including contracts:

1. Requiring specialised skills;
2. Related to the training;
3. For performing essential work during peak demand periods;
4. For emergency circumstances or temporarily replacing an employee;
5. For individuals earning more than the high-income threshold;
6. Funded by the government for more than two years, where funding is unlikely to be renewed;
7. Involving governance positions with limited timeframes, based on the rules of corporations or associations; and
8. Where an award covers employment and allows for different fixed-term contract options.

Consequences of Non-Compliance

It is important that employers are aware of their obligations following these changes.  The changes come into effect after a year-long adjustment period to assist employers with this transition.

If an employer breaches the fixed-term contract limitations, civil penalties may apply.

There is also a risk that an invalid fixed-term contract may be deemed as an ongoing contract, exposing employers to legal risks of a wrongly classified employment relationship, such as an obligation to provide ongoing employment and the associated rights that come with permanent employment.

Employers must also exercise caution to ensure that they do not fall foul of anti-avoidance provisions in the Act, which incorporates measures to curb attempts to circumvent restrictions on fixed-term contracts.  Such provisions prohibit: terminating an employee’s engagement for a specific timeframe, deliberately deferring the re-engagement of an employee, hiring another person to undertake the same or substantially similar tasks, and modifying the nature of the work or tasks, to avoid fixed-term contract limitations.

Fixed-Term Contract Information Statement

Employers are also required to provide employees entering new fixed-term contracts with a ‘Fixed Term Contract Information Statement.’ This document will help employees understand the terms and limitations of their fixed-term employment, ensuring transparency in the employment relationship.

By understanding and complying with these changes and exceptions employers mitigate their legal risks. It is advisable to seek advice from an employment lawyer if you are unsure of these changes or require advice on the implementation of measures to address them.

Contact us today by emailing Kimberly Jones at kimberly.jones@hhg.com.au or calling us on (08) 9322 1966.

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