Fixed term agreements – what is a genuine reason based on reasonable grounds?

Fixed term agreements are a handy tool for employers who don’t require a permanent employee, but require more commitment than a casual employee.  The Employment Relations Act 2000 (Act) provides that an employer and an employee may agree that the employment will end after a specified date or period; or on the occurrence of a specified event; or at the conclusion of a specified project.

The Act contains specific requirements that must be complied with before a fixed term provision is valid:

  • The employer must have “genuine reasons based on reasonable grounds” for limiting the employment to a fixed period; and
  • Those reasons, and the way in which the employment will end, must be clearly set out in the employment agreement.

What is a genuine reason and what is not?

Not just any reason will qualify as a genuine reason for a fixed term.  A genuine reason will explain why the employment is for a limited time and why the role (not the employee) will no longer be required in the business after that period.  Reasons that may be considered genuine:

  • The employee covers for another employee who has gone on a period of leave (i.e. primary carer leave); or
  • The employer requires extra resourcing for a particular project.

It is a big no no that an employee is put on a fixed term agreement for the purpose of the employer trialling out the employee, their performance or the fit for the company.   While this reason may seem obvious, other reasons are not.   For example, some employers are under the mistaken belief that they can use a fixed term agreement because the industry is unpredictable, or the workflow is unknown.  The employer, understandably, doesn’t want to commit to the employee in case they don’t need them after a term.  This is not considered a genuine reason, however.  If, after a period the business can not sustain employing that person, an employer will need to initiate a process that may result in the redundancy of that role.

Another reason that is not considered genuine is the use of a fixed term agreement where the employee is on a work visa.  This is because the expiry of a work visa is a circumstance of the employee, not of the position itself.  If a position is a permanent one, it should be filled on that basis even if an employee only wishes to work for a finite term.  In this situation, an employee would simply provide notice to resign from the position in line with the terms and conditions of their employment agreement.  Provisions can be included in an employment agreement to the effect that employment is conditional upon the employee holding and retaining the appropriate visa under the Immigration Act 2009.

Is it a genuine reason based on reasonable grounds though?

Just to make it a little more confusing, the genuine reason needs to be based on reasonable grounds as well.  By way of example, in New Zealand Educational Institute (Inc) v Board of Trustees of Red Beach School (ERA Auckland AA437/05, 7 November 2005), teacher aides were employed on fixed term agreements because funding was tied to the number of children enrolled.  The Employment Relations Authority (Authority) said that while this was a genuine reason, the roll was stable, there were always waiting lists for places, and roll fluctuations could be managed under the agreement’s provisions for variations of hours.  As such, while there was a genuine reason to have fixed term agreements, it was not based on reasonable grounds.   The aides were therefore permanent employees.

It is therefore important for an employer to consider if its aim can be achieved in other ways.

To conclude, if your business is considering using a fixed term agreement, it is worthwhile having a good think about the reason for it, and whether that may be considered on reasonable grounds.  After all, if an employer does not met the requirements of the Act, the employment relationship may be deemed to be permanent, and the business could be open to a claim of unjustified disadvantage or dismissal.

Workplace Law team

If you have any queries in respect of the above, or any other Workplace Law issues, please contact a member of Lane Neave’s Workplace Law team:

Employment: Andrew Shaw, Fiona McMillan, Gwen DrewittMaria Green,  Hannah Martin, Joseph HarropHolly StruckmanAlex Beal, Giuliana Petronelli, Abby Shieh
Immigration: Mark Williams, Rachael Mason, Daniel Kruger, Nicky Robertson, Julia StrickettKen Huang, Mary Zhou, Shi Sheng Cai (Shoosh)Sarah Kirkwood, Janeske SchutteLingbo Yu
ACC: Andrew Shaw
Health and Safety: Andrew ShawFiona McMillan

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