Do you have genuine reasons for hiring fixed term employees?

Tuesday 30 July 2019

Authors: Tim Clarke and Simon Moore

​​​​​Ordinary business risk or the general risk of financial insecurity is not a good enough reason to offer employment on a fixed term. The Employment Court has clarified what amounts to “genuine reasons based on reasonable grounds" when justifying the use of fixed term employment agreements.

Background

In Morgan v Tranzit Coachlines, a school bus driver was hired under a number of fixed term employment agreements over his 18-year tenure with the employer. Each agreement was said to be for a fixed term, due to the possibility of the school bus funding agreement no longer being renewed by the Ministry of Education. In all the years that the employer had contracted with the Ministry of Education, however, the funding agreement had been renewed after each three-year period.

The law

A fixed term employment agreement must set out the genuine reasons why the employee's employment is to end at a certain point. These genuine reasons must be based on reasonable grounds. The fixed term employment agreement must state the way in which the employment will end, and the reasons for the employment ending in that way, failing which the employer cannot rely on the fixed term agreement to end the employee's employment. In other words, a “fixed term employee" will be treated as a permanent employee if the agreement does not comply with statutory requirements.

The ruling

The risk of a business's contracts expiring without renewal is a common risk that all businesses must bear. Ordinary business risk, or financial insecurity in general, does not amount to “reasonable grounds" for using a fixed term employment agreement. Additionally, where the context indicates that a contract is likely to be renewed, the employer's reliance on that reason cannot be said to be “genuine" for the purposes of using fixed term employment.

If financial risk or insecurity is going to form the basis for offering a fixed term employment agreement, the employer must be able to produce specific information showing the particular risk to them.

Drafting robust agreements

Employers should take care when drafting and relying on fixed term agreements to ensure that the genuine reasons are robust and would withstand scrutiny by the court. 

If you are unsure about the reasons for which you are hiring fixed term employees, we recommend getting in touch with the contacts listed or your usual Bell Gully advisor for further clarification.​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Tim Clarke

    Partner Auckland
  • Liz Coats

    Partner Auckland
  • Rachael Brown

    Partner Wellington
Related areas of expertise
  • Employment and workplace safety
  • Litigation and dispute resolution