Employer’s should consider utility of maximum term contracts in wake of Full Bench decision

In a recent decision, the Full Bench of the Fair Work Commission has created some doubt about the utility of maximum term contracts, especially where the employer provides a series of maximum term contracts to an employee.

Brief Facts and First Instance Decision

The Employee in this case was employed through a series of ‘maximum term’ or ‘outer limit’ contracts between April 2012 and May 2016.  Due to concerns about his performance, at the end of what was then the current maximum term contract, the Employer determined not to offer the Employee a further contract.  The Employer considered that the Employee’s employment had then terminated by the effluxion of time.

The Employee made an unfair dismissal claim on the basis that he had been terminated at the Employer’s initiative, as opposed to the employment contract ending by the effluxion of time (pursuant to the terms of the contract).

At first instance, Commissioner Hunt, who heard the unfair dismissal matter, decided that she was bound by the Full Bench of the Australian Industrial Relations Commission (‘AIRC Full Bench’) decision of Department of Justice v Lunn [2006] AIRC 756.  The background to Lunn is described as follows:

“[6] Towards the middle of 2004, Ms Lunn’s relationship with her supervisor Mr Shields deteriorated, culminating in allegations being made on both sides about the other’s behaviour. In order to attempt to resolve these difficulties it was suggested in November 2004 that mediation conducted by the Employment Assistance Service should occur.

[7] In December 2004 the applicant was told by Mr Shields that at the expiry of the contract she had entered into in March 2003 she would be offered a contract for three months only. Eventually on 18 January 2005 a contract was signed by the applicant specifying a period commencing on 16 January 2005 and ending on 15 April 2005 unless terminated sooner.

[8] In a meeting on 24 March 2005 the applicant was informed that she would not be offered a new contract. She was told that she would be paid all of her entitlements to 15 April 2005 but that she was not required (or obliged) to attend for work. She was told that it would be preferable for her to pack up her personal belongings and take them but was later told that if she had anything she wished to finish off an office would be found for her away from her usual workplace.”

Whilst the initial decision of the single Commissioner in Lunn was that the contract was terminated prior to the contract ending by effluxion of time and was then at the employer’s initiative, when the matter became before the AIRC Full Bench, the Full Bench overturned that decision, and accepted that given that the employee was paid until the end of the maximum term, the contract had terminated by the effluxion of time.  Relevantly, the AIRC Full Bench stated:

“When a contract for a specified period or an ‘outer limit’ contract reaches the nominated end date, the contract terminates through the effluxion of time and there is no termination employment at the initiative of the employer.”

Following on from this, and despite expressing concern with the Lunn precedent, Commissioner Hunt followed the Lunn decision and found that the Employee’s employment terminated by effluxion of time and in accordance with the agreed terms of the employment contract and was therefore not a termination at the initiative of the employer.

Appeal

The Employee appealed the decision and was granted leave to appeal by the Full Bench.

To understand the Full Bench’s discussion, it is necessary to consider section 386 of the Fair Work Act 2009:

“386  Meaning of dismissed

             (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; or

(b)  the person has resigned from his or her employment, but was forced to do so because of conduct, or a course of conduct, engaged in by his or her employer.

             (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; or

                     (b)  the person was an employee:

                              (i)  to whom a training arrangement applied; and

(ii)  whose employment was for a specified period of time or was, for any reason, limited to the duration of the training arrangement;

and the employment has terminated at the end of the training arrangement; or

                     (c)  the person was demoted in employment but:

(i)  the demotion does not involve a significant reduction in his or her remuneration or duties; and

(ii)  he or she remains employed with the employer that effected the demotion.

(3)  Subsection (2) does not apply to a person employed under a contract of a kind referred to in paragraph (2)(a) if a substantial purpose of the employment of the person under a contract of that kind is, or was at the time of the person’s employment, to avoid the employer’s obligations under this Part.”

When is a termination at the employer’s initiative under s386(1)?

In considering the facts of this case, the Full Bench Majority, summarised their interpretation of s386(1)(a) as follows:

“[75] … we consider that s 386(1)(a) should be interpreted and applied as follows:

(1) The analysis of whether there has been a termination at the initiative of the employer for the purpose of s 386(1)(a) is to be conducted by reference to termination of the employment relationship, not by reference to the termination of the contract of employment operative immediately before the cessation of the employment. This distinction is important in the case of an employment relationship made up of a sequence of time-limited contracts of employment, where the termination has occurred at the end of the term of the last of those contracts. In that situation, the analysis may, depending on the facts, require consideration of the circumstances of the entire employment relationship, not merely the terms of the final employment contract.

(2) As stated in Mohazab, the expression “termination at the initiative of the employer” is a reference to a termination that is brought about by an employer and which is not agreed to by the employee. In circumstances where the employment relationship is not left voluntarily by the employee, the focus of the inquiry is whether an action on the part of the employer was the principal contributing factor which results, directly or consequentially, in the termination of the employment.

(3) In Mahony v White the Full Court stated that a termination of employment may be done at the initiative of the employer even though it was not done by the employer. In circumstances where the parties to a time-limited contract have agreed that their contract will expire on a specified date but have not agreed on the termination of their employment relationship, it may be the case that the termination of employment is effected by the expiry of the contract, but that does not exclude the possibility that the termination of employment relationship occurred at the initiative of the employer – that is, as a result of some decision or act on the part of the employer that brought about that outcome.

(4) Where the terms of an operative time-limited contract reflect a genuine agreement on the part of the employer and 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 or other factor of the type to which we refer in (5) 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. Further, in those circumstances a decision by the employer not to offer any further contract of employment will not be relevant to the question of whether there was a termination of employment at the initiative of the employment. The decision not to offer further employment is separate and distinct from the earlier agreement between the parties to end the employment relationship on a particular date (Griffin/Fisher). However if the time-limited contract does not in truth represent an agreement that the employment relationship will end at a particular time (as, for example, in D’Lima), 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, directly or consequentially, in the termination of the employment.

(5) In some cases it will be necessary to go further than just examining the terms of any contract in which the parties have ostensibly agreed to terminate the employment relationship at a particular time. It is not necessary or appropriate that we attempt to identify exhaustively all relevant matters, but the authorities to which we have earlier referred indicate that the following are likely to be relevant and may in some cases be determinative:

(a) The time-limited contract itself may be vitiated by one of the recognised categories by which the law excuses parties from performance of a contract.

…(b) The time-limited employment contract may be illegal or contrary to public policy …

(c) The contract may have been varied, replaced or abandoned by way of a separate agreement, whether in writing and/or orally, such that its ostensible time limit no longer applies (Fisher).

(d) 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 the totality of the terms of the employment relationship (Fisher/D’Lima).

(e) During the term of the employment relationship the employer may have engaged in conduct or made representations (for example, representing to the employee that the employment will continue subject to conduct and performance notwithstanding a contractual time limit on the employment) which provide a proper legal foundation to prevent the employer from relying upon the terms of the contract as the means by which the employment relationship has been terminated (Fisher).

(f) The terms of the contract time-limiting the employment may be inconsistent with the terms of an award or enterprise agreement given effect by the FW Act which prohibit or regulate fixed-term employment, in which case the terms of the award or agreement will prevail over the contract (Fisher).”

A signficant takeaway for employers is the Majority’s discussion at (4) above, where the Majority confirmed that where there is a genuine agreement that the employment relationship will not continue after a specific date, and the employment comes to an end on that date, then their will be no termination at the initiative of the employer. However, employers should read (4) in conjunction with sub-paragraph (5) above, and note that in some circumstances the Court will need to consider more than just the terms of the contract to determine whether the termination is at the employer’s initiative.  For employers who use maximum term contracts, they should note sub-paragraph (5)(e), which deals with the situation where maximum term contracts are used for ‘administrative convenience’ rather than for the purpose of stipulating a particular time.

Is a maximum term contract a contract for a specified period of time?

Relative to employers who use maximum term contracts, the next critical consideration for the Majority was the exclusion in section 386(2)(a), being that an employee will not be considered to have been dismissed for the purposes of the unfair dismissal jurisdiction where they are employed under a contract of employment for a specified period of time and the employment has terminated at the end of the period.  The key item for employers from this discussion by the Majority centred around whether an ‘outer limit’ contract or maximum term contract is a contract of employment for a specified period of time.

As part of that consideration the majority considered in some detail, whether a maximum term or ‘outer-limit’ contract, which contains an unqualified right to terminate prior to the expiry of the contract, can be considered a ‘contract of employment for a specified period of time’.  The Full Bench noted that historically, the legislation and case law relative to this exclusion, did not intend to widen the scope of the concept of a contract for a specified period of time to include a contract of employment which contained an unqualified right to terminate the contract before the expiry of the term.

On this issue, the Full Bench stated:

“[88] It was against that background that s 386(2) was enacted. In respect of time-limited contracts, s 386(2)(a) contains two requirements that must be met in order for the exclusion to apply. The first is that the person must have been employed under a “contract of employment for a specified period of time”. This expression is of course identical to that used in the former reg 30B(1)(a) and then s 170CBA(1)(a) (later renumbered as s 386). The second requirement, which was not contained in the preceding legislation, provides that the exclusion only applies where the employment has terminated at the end of the specified period.

[89] [The Employer’s] submission that the addition of the second requirement amounts to a recasting of the entire provision, such that the earlier judicial interpretation of the expression “contract of employment for a specified period of time” can be ignored, finds little support in the text of the provision. The obvious inference to be drawn from retention of an expression with such a well-settled interpretation is that the legislature intended it to have the same meaning, namely that it did not include an employment contract which had a maximum or outer time limit but contained an unqualified right to terminate the employment beforehand. If the legislature intended to change the meaning, it would reasonably be expected that a different expression would have been used. The text of the second requirement in s 386(2)(a) is certainly new, but it only makes express the implication drawn from reg 30B(1)(a) in Cooper, and as earlier discussed apparently adopted in the subsequent statutory note, that the exclusion was not to apply where the employment was terminated by the unilateral act of the employer before the end of the specified period. There is nothing in the text of the second requirement which can be read as effecting an alteration in the meaning of the language used to express the first requirement, and [the Employer’s] submissions (nor those of the Ai Group or the ACCI) did not explain how any contrary textual conclusion could be reached.”

The Full Bench made this finding, that the wording ‘contract of employment for a specified period of time’, did not include a contract which had a clause which provided for an unqualified right to terminate, despite conceding that there was wording in the Explanatory Memorandum that appears contrary to this finding:

“[92] The passage from the Explanatory Memorandum relied upon by Navitas reads as follows (emphasis added):

“1532. Paragraph 386(2)(a) reflects the common law position that termination in these circumstances would not be a dismissal. The fact that an employment contract may allow for earlier termination would not alter the application of this provision as the employment has terminated at the end of the period, task or season. However, if a person engaged on this sort of contract is terminated prior to the end time specified in the contract, they may seek an unfair dismissal remedy if they satisfy the other requirements.”

On this issue, the Full Bench stated:

“[93] It may be accepted that the emphasised sentence in the above passage may, on one reading, be understood as meaning that s 386(2)(a) is intended to apply notwithstanding that a time-limited contract of employment allows for a right of termination exercisable prior to the expiry of the time limit. However the passage does not demonstrate any unambiguous intention to widen the scope of the exclusion as compared to the preceding legislative exclusion upon which it is so clearly based, nor does make it clear whether it is merely maintaining the previous position whereby the capacity to terminate a time-limited contract early for breach did not take the contract outside the scope of the exclusion or whether it was intended to extend the exclusion to encompass time-limited contracts with an unqualified right of early termination.”

Having taken that view, the Full Bench noted that the final contract between the Employee and the Employer “provided for an unqualified right for either party to terminate the contract on four weeks’ written notice or for [the Employer] to terminate on the provision of four weeks’ pay in lieu of notice.  The contract was therefore not a contract of employment for a specified period, and the exclusion in s 386(2)(a) did not apply”.

The matter was remitted to Commissioner Hunt for further determination.

Lessons for Employers

There is a strong view in the employment law community that this decision will be subject to an appeal.  If it is not appealed, then it will be interesting to see how this decision is applied by the Commission and the Courts moving forward.

Certainly, there is a view that this case means that where a maximum term contract provides for a specified end date, but also contains an unqualified right to terminate during the period, then this contract will not be considered one that is ‘for a specified period of time’ and so the exclusion in s 386(2)(a) will not apply.

Having said that, the Full Bench’s confirmation that where there is a genuine agreement as to a specific end date and the employment ends of that end date then that will not be a termination at the employer’s initiative, gives some scope for employers to argue that where there is a single maximum term contract and it ends on the specified end date, then the termination is not at the initiative of the employer.

As a reminder and also given this decision, an Employer who is utilising maximum term contracts and is intending to use the termination clause within the maximum period should ensure that a fair process for termination is followed.

Aitken Legal has long advised its clients to exercise caution in rolling over maximum term contracts repeatedly.  This decision certainly heightens the risk that rolling over maximum terms contracts, even once, could create a heightened risk that upon termination, the employee could make an unfair dismissal claim on the basis that the termination was actually at the employer’s initiative rather by effluxion of time.

Aitken Legal recommends that employers who utilise maximum term contracts, and intend to roll over such a contract, let alone repeatedly, seek advice about their particular circumstances, as this decision can certainly have some implications for employers who engage in this practice.

Aitken Legal will provide an update on the further decision of Commissioner Hunt, or any appeal that is undertaken by the parties when such information becomes available.