This article was written by Michael Hardiman, employment specialist at national law firm Shoosmiths LLP.

Fixed-term contracts in HR

Employers often use fixed-term contracts on a regular basis to meet the fluctuating demand for staff at certain times of the year, to cover a specific assignment or project, or more commonly to cover for an employee on maternity leave.

It is a widespread belief that employing an individual on a fixed-term contract will provide greater flexibility and freedom over terminating employment. However, recent case law has demonstrated that this is often a misunderstanding which can result in significant liabilities.

A dangerous fixed-term contract myth

A common myth surrounding fixed-term contracts is that the contract cannot be a fixed-term if the employer can give notice to terminate before the end of the term. In Allen v National Australia Group Europe Ltd [2004] the EAT confirmed that an early termination provision did not destroy the parties' original intention that "in the normal course" the contract would expire on the date specified unless some unexpected event, such as frustration or material breach, intervened. Accordingly, early termination provisions should always be considered when drafting fixed-term contracts.

A fixed-term contract without a notice provision could potentially be very expensive for an employer as it would be liable in damages for breach of contract based on the employee’s remuneration and benefits until the end of the fixed term if it terminated early. Obviously, where the fixed term is for 12 months or more, early termination could be an extremely costly decision.

Legal precedent: the Blackburn Rovers case

The case of Henning Berg v Blackburn Rovers Football Club highlights the importance of drafting early notice provisions into fixed-term contracts.

Whilst the world of football is somewhat unique in that player and manager contracts often contain liquidated damages clauses providing for payment of the sums due under the remainder of the contract in the case of early termination, the principles from this case provide a helpful reminder to those who use fixed-term contracts.

The proceedings against Blackburn were commenced after Henning Berg, the team manager, was summarily dismissed and informed that the remaining £2.25m due under this contract would be paid in accordance with his contract. Blackburn subsequently tried to avoid making the payment by arguing firstly that the managing director did not have authority to enter into the contract on behalf of the Club in the first place and secondly on the basis that the provision actually amounted to a penalty clause.

The matter was disposed of by the Judge in the High Court who emphatically stated that the payment was due and it was not arguable that the clause was an unenforceable penalty, because it was not a penalty for breach at all as it operated when the Club did something it was entitled to do under the contract by terminating early and making the payment. The Court therefore ordered (presumably to Mr Berg’s delight) that the full sum was payable.

Whilst the sum involved in this case is not uncommon in football circles and there was an express term providing for payment of the remainder of the term, all employers should be aware that the absence of an early termination provision could have serious consequences.

Pitfalls of fixed-term contracts

• Is it necessary to use a fixed-term contract for example to cover maternity leave, a limited term activity or project based role? Could a rolling contract or zero hours contract be used instead?
• How long is really necessary to complete the project/activity in question?
• Do you wish to provide for early termination in any circumstance or are you prepared to terminate early only when there is just cause (e.g. poor performance)?
• Unless there is a specific commercial reason always provide for early termination on written notice either in any circumstance or with just cause (for short-term contracts this can be as little as one week’s written notice).
• If the contract is being terminated early ensure that notice is given in accordance with the contract.
• Always ensure that discussions and the reasons for early termination are documented so as to avoid later arguments about the reasons for termination and/or the monies due under the contract.

Conclusions

The above points are a helpful reminder to keep your ‘eye on the ball’ when drafting a fixed-term contract.

It is advisable to consider early termination clauses at the drafting stage to avoid being caught out if it becomes necessary to terminate before the term expires. Should a situation similar to the one that arose at Blackburn Rovers occur in your organisation, a well drafted notice clause will provide your first line of defence should a disgruntled former fixed-term employee try to bring a claim for breach of contract.