What happens when a fixed-term contract is terminated early?
Employees who work on projects, such as the Commonwealth Games, often do so on a fixed-term employment contract.
A fixed-term contract operates for a fixed period, for example, 12 months, at which point it ends or can be renewed by agreement. But what happens when a fixed-term employment contract is terminated before its expiration date?
Is the employer obligated to pay out the employee?
In short, it will depend on the contract.
If the employment contract contains a clause allowing the employer to prematurely terminate the agreement, the employer may only be required to pay the employee any income owed for work performed, notice of termination and any accrued leave entitlements. These are often referred to as “maximum term” contracts instead of “fixed term” contracts, given they are not truly fixed if one party has the right to terminate with notice.
If there is no clause allowing the employer to terminate prior to the expiration of the fixed term, the employee may be entitled to recover the income they would have earned over the balance of the fixed term.
An employer may terminate an employment contract (either ongoing or fixed term) by reason of genuine redundancy.
A job is genuinely redundant when an employer no longer requires it to be performed by anyone. Positions may become redundant due to general downsizing, restructuring, outsourcing, automation or cancellation of the project or event.
If the redundancy is genuine, obtaining legal advice about redundancy entitlements is always a good idea. Entitlements may include notice and redundancy pay under the National Employment Standards or a more favourable entitlement under the terms of the specific employment contract, an applicable policy or an enterprise agreement.
The fact a position is redundant will not ordinarily in and of itself mean that the employer does not need to pay out the balance of any fixed term.
Frustration of contracts
Frustration occurs when an unforeseen event renders the performance of a contract impossible or radically different from what was originally agreed on by both parties. If a contract is frustrated, it is automatically terminated, and both parties are discharged from all future obligations.
When determining whether a contract has been frustrated, a court will consider factors such as whether the event in question was foreseeable, whether obligations under the contract have become impossible to perform and whether the contract contains terms to deal with a frustrating event.
An interesting question of frustration might therefore arise for employees engaged to complete work in preparation for the Commonwealth Games, including whether the cancellation of the Commonwealth Games in Victoria was reasonably foreseeable.
Employees on fixed-term contracts should ensure they understand their rights and entitlements regarding termination before the end date and seek advice from an employment lawyer if they believe their employer has not done so legally.
Written by Trent Hancock
Disclaimer: This article should not be construed as legal advice and is not intended as such. If readers wish to obtain advice about anything contained in this article, they should speak with a lawyer and discuss their individual circumstances.