It's been over two years since the Federal Government overhauled the rules on fixed-term employment contracts and we continue to see employers tripped up by the same issues. With civil penalties on the table and the Fair Work Ombudsman paying close attention, it's worth a refresher on what the rules actually require and where the common pitfalls lie.
Recapping Australian Fixed-Term Contract Rules: What Changed?
Since 6 December 2023, the Fair Work Act 2009 (FW Act) has restricted the use of fixed-term contracts (including maximum-term and outer-limit contracts). The reforms were aimed at stopping employers using rolling fixed-term arrangements as a substitute for genuine ongoing employment.
In short, an employer cannot enter into a fixed-term contract with an employee if:
- The contract term is longer than two years (including any extension or renewal, whether built into the contract or agreed later); or
- The contract has already been extended or renewed once; or
- It is a consecutive contract for substantially the same work, where the combined term of the contracts exceeds two years or the new contract follows a previous extension/renewal.
The employee must also be given a Fixed Term Contract Information Statement (FTCIS) at the time of entering into the contract. This is a separate obligation to the Fair Work Information Statement.
Key Exceptions to the Fixed-Term Contract Rules
The restrictions don't apply to every fixed-term arrangement. The most commonly relied upon exceptions include where the employee:
- Is engaged to perform only specialised tasks that the employer doesn't ordinarily need performed;
- Is engaged under a training arrangement (such as an apprenticeship or traineeship);
- Is engaged for essential work during peak demand periods (such as harvest work);
- Is engaged to replace another employee on leave or temporarily absent;
- Earns above the high-income threshold in the first year of the contract (currently $183,100 and indexed annually on 1 July);
- Is engaged in a position funded wholly or predominantly by government funding of more than two years where there are no reasonable prospects the funding will be renewed; or
- Holds a governance position with a time limit under the entity's governing rules.
There are also some narrow modern award exceptions. Importantly, the employer bears the burden of establishing that an exception applies.
What Happens If Employers Breach the Fixed-Term Contract Rules?
If a fixed-term contract breaches the rules and no exception applies, the end-date provision is automatically void. The rest of the contract continues, but as a permanent employment relationship.
That means the employee can keep turning up to work and the employer is on the hook for unfair dismissal exposure if it tries to "end" the engagement at the original expiry date.
On top of that, civil penalties apply for contraventions, the Fair Work Ombudsman can pursue compliance notices, and there are anti-avoidance provisions designed to catch employers who restructure roles or change duties to dodge the consecutive contract rule.
Common Fixed-Term Contract Mistakes Employers Make
In practice, the most common issues we see include:
- "Rolling" fixed-term arrangements for project staff, where each new contract covers substantially the same work;
- Renewal clauses built into contract templates that, on their face, allow more than one extension;
- Assuming a "second extension" is fine because the original contract didn't mention extension, whereas the one-extension cap applies to the engagement itself, not just to options written into the contract.
- Mistaken reliance on the high-income threshold exception, particularly where remuneration drops below the threshold mid-term, or where superannuation has been incorrectly included in the calculation;
- Failure to issue the FTCIS (a standalone breach, even where the contract itself is compliant); and
- Government-funded roles where the funding is, in fact, ongoing or rolling, meaning the exception doesn't apply.
Fixed-Term Contract Compliance Tips for Employers
If you use fixed-term contracts as part of your workforce model, now's the time for a stocktake.
Employers should:
- Audit current fixed-term contracts to confirm they comply with the two-year cap and single renewal limit;
- Review template employment contracts to ensure renewal/extension clauses don't inadvertently breach the rules;
- Document the basis for relying on any exception at the point of engagement – don't leave it to be reconstructed later;
- Issue the FTCIS at the time of entering each new fixed-term contract, and retain evidence that it was provided;
- Reconsider whether a fixed-term arrangement is genuinely needed, or whether ongoing employment with a properly drafted probationary period would achieve the same commercial outcome with less risk; and
- Train HR and managers so that contract renewals aren't being made informally by line managers without legal sign-off.
Need Help Reviewing Fixed-Term Employment Contracts?
Fixed-term contracts can still be a valuable tool, but the days of using them long-term as a flexible alternative to permanent employment are well and truly over. If you'd like our employment law team to review your contracts, advise on a specific engagement, or train your people leaders on the new rules, please get in touch with our employment lawyers via the form below.
Disclaimer: This article is a general commentary on a topical issue and does not constitute legal advice. If you're concerned about any topics covered in this article, we recommend that you seek legal advice.
