You’re an employer with limited funds. Can you use fixed-term agreements?

Strict rules govern the formation of fixed-term agreements. An employee and an employer may agree that the employment of the employee will end —

  • at the close of a specified date or period; or
  • on the occurrence of a specified event; or
  • at the conclusion of a specified project,

only where an employer has genuine reasons based on reasonable grounds.

The Employment Court (Court) has defined genuine in this context as “sincerely held belief” on the part of the employer.[1] But what about reasonable grounds?

Morgan v Tranzit

In Morgan v Tranzit Coachlines Wairarapa Limited [2019] NZEmpC 66, Mr Morgan drove school buses and had been employed by Tranzit Coachlines Wairapapa Ltd (Tranzit) for over 18 years on a series of fixed-term employment agreements. One of the company’s revenue streams was via a funding agreement with the Ministry of Education for the delivery of school bus services.

The company’s position was that there was no certainty, from one funding agreement to another, whether it would retain the school bus contract. It was therefore reasonable to employ Mr Morgan as a school bus driver on a fixed-term basis.

Mr Morgan’s position was that the 18-year period of contractual stability undermined the company’s assertion of reasonableness.

The Court determined that the employer had genuine reasons, but they were not based on reasonable grounds. Funding not being guaranteed beyond a contracted period is a difficulty for the employer to manage. Employees should not be deprived of permanent employment and corresponding entitlements as a result of generic business risks such as withdrawal of funding.

More positive news for employers

Since Morgan, we have seen hesitance from employers and advisers alike in drawing up fixed-term agreements on the basis of funding. However, the recently released decision of Jones v Nga Rangitahi Toa Creative Arts Initiative Trust [2022] NZERA 446 makes it clear Morgan was a fact specific judgment.

Nga Rangitahi Toa Creative Arts Initiative Trust (Trust) is a charitable organisation funded by donations.

Between November 2019 and February 2020, the Trust did not have sufficient funding to justify an administrator role and admin tasks were handled voluntarily. Audits fell behind schedule and an employee, Ms Jones, was appointed as a part-time administrator on a fixed-term basis. The Trust’s evidence was that it had sufficient funding to support Ms Jones’ role for a year, but there was no guarantee of funding after that point.

Upon the conclusion of the fixed-term, Ms Jones’ employment came to an end. Ms Jones raised an unjustified dismissal grievance in the Authority, protesting the validity of the fixed-term agreement, saying she did not accept there was a lack of funding and therefore there was no genuine reason for her employment ceasing.

The Authority considered Morgan (above) and determined that, in the Trust’s case, there was a reasonable basis for uncertainty in relation to the Trust’s funding. There was simply no guarantee it would continue given the nature and focus of the funding provided. The Authority concluded there were genuine reasons based on reasonable grounds for the fixed term nature of Ms Jones’ employment. Further, there was no onus on the Trust to explain to Ms Jones in detail the basis of the funding for her role.

In arriving at its decision, the Authority found it significant that:

  • the only two other employees, one of whom was the Executive Director, were both on fixed-term agreements due to the uncertainty of what funding would be received and in what quantum;
  • some funds were tagged and could only be used for a designated purpose (i.e., not remuneration); and
  • while some of the funding was untagged, its focus was upon the creative industry and working with young people in that area. Donors expected to see the money spent directly on those areas. Further, the donations themselves were split between the Trust and 16 other charities, and the amount of each donation varied and was unpredictable.

Future guidance

The determination in Jones v Nga Rangitahi Toa Creative Arts Initiative Trust provides some much-needed reassurance for employers working with limited funding. A key factor in favour of using fixed-terms appears to be the unpredictability of ongoing funding. However, assessment of the reasonableness of a fixed-term agreement is fiercely fact-dependent, so we would strongly recommend getting in touch with a member of our employment team to obtain bespoke advice.


[1] Canterbury Westland Free Kindergarten Assn v New Zealand Educational Institute ref.

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