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Outer-limit contracts no longer a sure thing

15 January 2018
In this article we look at a case study on the expiration of “outer-limit” contracts and the recent decision to overturn the view that an expired contract is not a termination at the initiative of the employer.
Traditionally, when an “outer-limit” contract expired the Fair Work Commission frequently took the view that this was not a termination at the initiative of the employer, such that there was no “dismissal” to attract the unfair dismissal jurisdiction. The soundness of this view has been overturned by the very recent decision of the Full Bench of the Commission in Saeid Khaym v Navitas English Pty Ltd trading as Navitas English (C 2017/2976)).

Legislation

Section 386 of the Fair Work Act 2009, provides inter alia:

(1) A person has been dismissed if:

(a) the person’s employment with his or her employer has been terminated on the employer’s initiative.

(2) However, a person has not been dismissed if: 

(a) the person was employed under a contract of employment for a specified period of time, for a specified task, or for the duration of a specified season, and the employment has terminated at the end of the period, on completion of the task, or at the end of the season.

Firstly, it is worth noting that an outer-limit contract, that is, a term contract with an ability to terminate on notice during the term (without establishing a breach) does not fall within subsection 386(2)(a) above because such contracts are not true fixed term contracts (Andersen v Umbakumba Community Council (1994) 126 ALR 121).  

New Principles

The Full Bench laid down the following principles for determining whether there is a termination at the initiative of the employer pursuant to section 386(1)(a) when an outer-limit contract expires:

a. The analysis is to be conducted by reference to the employment relationship and not by reference to termination of the contract of employment.  Where the termination has occurred at the end of a series of outer-limit contracts, this may require consideration of the circumstances of the entire employment relationship and not merely the terms of the final employment contract.

b. The expression “termination at the initiative of the employer” is a reference to a termination that is brought about by an employer which is not agreed to by an employee.  In circumstances where the employment relationship is not left voluntarily, the focus of the enquiry is whether an action on the part of the employer was the principle contributing factor which results, directly or consequentially in the termination of the employment.

c. Where the terms of a time limited contract reflect a genuine agreement on the part of the employer and the employee that the employment relationship will not continue after a specified date and the employment relationship comes to an end on the specified date then, absent a vitiating factor (see below), the employment relationship will have been terminated by reason of the agreement between the parties and there will be no termination at the initiative of the employer.  However, if the term contract does not in truth represent an agreement then that employment relationship will end at a particular time, the decision not to offer a further contract will be one of the factual matters to be considered in determining whether an action on the part of the employer was the principal contributing factor which results in the termination of the employment. 

d. With respect to vitiating factors:

I. The term of the contract may be illegal or contrary to public policy and where the employment was constituted by successive short term contracts, whether this was appropriate in the relevant field of employment may be one of the considerations relevant to an examination of the employer’s purpose of entering into such contracts;

II. 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 which operated for administrative convenience and did not represent the reality or totality of the terms of the employment relationship; 

III. The terms of the time limited contract may be inconsistent with the terms of an award (or enterprise agreement) which prohibit or regulates term employment, in which case the terms of the industrial instrument will prevail over the contract.  

The Case 

The case concerned an employee who had been employed on a series of term contracts.  When the employer determined not to offer him a further contract due to performance reasons at the end of the current term, the employee brought an unfair dismissal application contending there had been a termination at the initiative of the employer. The Commission disagreed and on appeal to the Full Bench, the appeal was upheld. However, the Full Bench referred the matter back to the Commissioner to determine if there was a dismissal.    

Conclusion

The issue of whether the expiry of an outer-limit contract can constitute a dismissal for unfair dismissal  purposes is significantly less certain than it was before this decision. Drafters of outer-limit contracts should refer to the principles discussed in the case when drafting these contracts. More importantly, employers who are considering allowing these contracts to expire at the end of their terms will need to carefully assess whether there is likely to be a “dismissal” within the meaning of the Act when the contract expires and is not renewed.
 

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