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Fixed Term Employment Agreements

If you are considering employing someone on a fixed term of employment, you need to ensure that you have a genuine reason based on reasonable grounds for doing so.

This has been reinforced by the Employment Court in the case of Morgan v Tranzit Coachlines Wairarapa Ltd.

In Tranzit’s case, they delivered a service under a Ministry of Education (MoE) contract for school bus services. Each contract that Tranzit entered into was for a specified term with no guarantee of renewal at the end of the term. Tranzit had however, received funding over an 18-year period and had been employing drivers on a fixed term, repeatedly over that 18-year period.

Even though the employment agreement stated the reason for the fixed term of employment was aligned to the contract, and therefore had an expiry date, because of the continual success in being awarded the bus delivery contract, Tranzit was found to no longer be in a situation where it had a genuine reason based on reasonable grounds for continuing with a fixed term agreement.

In the case of Tranzit’s circumstances the Court accepted that losing the funding from MoE could very likely impact Tranzit’s financial circumstances, found that the mere fact of financial uncertainty cannot of itself, suffice in terms of the thresholds of s66(2)(a) of the Employment Relations Act. The Court also found that the pattern of rollovers tends to suggest that there was little financial uncertainty, and even if financial uncertainty was a genuine reason for a fixed term agreement, it was not based on reasonable grounds.

In this case, while Court found that the rollovers of Mr Morgan’s fixed term did not automatically give rise to the ineffectiveness of his fixed term employment, the Court did rule that Mr Morgan’s employment to be treated as continuous employment for the purpose of calculation leave entitlements.

So, what does this mean for employers. First, you need to be very clear as to the basis of why you need a fixed period of employment, and that must be based on reasonable grounds. A fixed term cannot be used to exclude or limit an employees rights under the Employment Relations Act 2000 or to exclude the employee’s rights to leave under the Holidays Act 2003. You cannot use a fixed term agreement to establish the suitability of the employee for permanent employment.

You also need to be very careful about rolling over a fixed term agreement continuously, as while there is no “magic number or bright line” test that applies to fixed term agreements, repeated roll-overs will raise a red flag to the Employment Relations Authority and in particular the Employment Court.

If you do roll over a fixed term agreement, be conscious of your obligations under the Holidays Act 2003. Where a fixed term is less than 12 months, it is generally accepted that you can pay annual leave on a “pay as you go” basis of 8% of gross earnings. Where an employee is rolled over, or even offered a new fixed term at the end of their original fixed term agreement, you may need to cease the “pay as you go basis” and start accruing annual leave for the employee.

Our advice is:

  • A fixed term agreement should end when and how it says it should end.

  • If you need to offer an extension, ensure that this is offered before the end of the original fixed term, and be clear about what this means for leave obligations.

  • If you are going to offer a new fixed term agreement for a new reason, we recommend a gap between fixed terms to demonstrate a clear end of one arrangement and commencement of the new arrangement.

  • Be mindful of your leave obligations under the new arrangement.

  • Ensure that you have a genuine reason for the new arrangement that is based on reasonable grounds.

If you are contemplating a fixed term agreement or an extension to an existing fixed term agreement, contact McKone Consultancy for advice to ensure that your arrangement is compliant with employment law.

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