Removing the cap on unfair dismissal compensation will be consequential; when combined with reducing the unfair dismissal qualifying period, from two years to six months, it will be of even greater significance. With these plans, the government has pulled the pin on a grenade tossed into the workplace. The explosion is expected shortly after 1 January 2027 when both changes are due to come into effect. Employers are starting to plan for the blast, but the shock waves will travel in many directions. One under-appreciated effect will be the impact on fixed-term contracts and employers should start considering action on these now.

Current law on fixed-term contracts

Employees working under fixed-term contracts in Great Britain have the same statutory employment rights as permanent employees – arguably greater, insofar as fixed-term employees have the right not to be treated less favourably than comparable permanent employees in the terms of their contracts or by being subjected to any detriment, a benefit not afforded to permanent staff in comparison to fixed termers. This means employers can’t operate a “two tier” system, with fixed-term employees receiving fewer benefits or otherwise being treated as inferior. 

Additionally, the expiry of a fixed-term contract without renewal is treated as a dismissal for unfair dismissal and redundancy purposes. This is the case even if the employee knew from the start that their employment was intended to be temporary.  

So, other things being equal, an employee whose fixed-term contract is not renewed could bring an unfair dismissal claim. At the time of writing, however, the qualifying period for normal unfair dismissal protection is two years’ service. And it is comparatively rare for employers to use fixed-term contracts- for more than a two year period, so it is not all that often that unfair dismissal risks arise.

For those who do use fixed-term contracts to manage such risks, it’s important to note that doing so is already not infallible. A series of fixed-term contracts without a break can still give employees sufficient continuous service to claim unfair dismissal. The law on continuous service is complex – crudely, at least one week’s break between contracts without any expectation of a renewal on either side would be needed to break continuous service. But assuming continuous service is under two years, employers have been relatively safe to use short fixed-term contracts without renewing them.

Fixed-term employees have several other rights, such as a right to be informed of available vacancies to allow them to compete for those vacancies on equal terms with permanent employees.

If employed under successive fixed-term contracts for four years or more, a fixed-term employee will be regarded as a permanent employee unless the use of a fixed-term is objectively justified. Certain types of fixed-term contract, in particular apprenticeships and certain work experience schemes, are excluded from the scope of this provision

Why do employers use fixed term contracts?

There are many reasons to use fixed-term contracts. For example, and perhaps most obviously, because the job is genuinely time bound. It may be a seasonal job, such as Christmas cover in retail or working in summer tourism. It may be employment to work on a specific project, which will end when the project is finished. Or maybe it is to cover maternity leave or an absence for another reason.

Sometimes, however, fixed-term contracts are used to reduce headcount for reporting purposes or, as described above, to try to avoid employees acquiring sufficient continuous service to qualify for unfair dismissal protection.

What now?

Employees working on a fixed-term contract with a term of 6 months or more will be able to claim unfair dismissal (with uncapped compensation available) if the contract expires without renewal on or after 1 January 2027.

Unless their business need is genuinely met by a contract for less than six months, employers should face up to the unfair dismissal risk and manage it by identifying a fair reason and following a fair procedure when not renewing a fixed-term contract.

Fair reasons for dismissal

Unfair dismissal law recognises 5 potentially fair reasons for dismissal: conduct, capability, redundancy, illegality and “some other substantial reason justifying the dismissal”.

The reason for the ending of a fixed-term contract will often be related to the reason a fixed-term contract was used. If it’s to complete a project, the termination of the contract will be tied to the ending of the project. If it’s to cover maternity (or other family leave), it will be terminated when the new parent returns to work. Whatever the specific reason, the employer will have to bring it under the umbrella of one of the statutory fair reasons and follow a fair dismissal procedure to avoid claims. The most-adopted statutory “umbrellas” are redundancy and some other substantial reason.   

Fixed-term contracts covering family leave

Women on maternity leave (and employees on other types of new parent leave) have a statutory right of return to work. And there is special statutory provision enabling a dismissal to facilitate the right of return from maternity, adoption or shared parental leave. Section 106(1) of the Employment Rights Act 1996 provides that the dismissal of a replacement employee will be treated as being for a substantial reason justifying their dismissal if:

• The employer informs the temporary employee in writing at the time of recruitment that employment will be terminated on the resumption of work by another employee who will be absent wholly or partly because of pregnancy or childbirth or on adoption leave or shared parental leave, and
• The dismissal takes place to give work to the returning employee.

These provisions have risked being otiose whilst the two-year qualifying period for unfair dismissal has been longer than statutory maternity or adoption leave (one year). Now the qualifying period is to reduce to six months, these sections will acquire a whole new significance. 

The requirement to give written notice on recruitment has been interpreted strictly by the courts and must be explicit. A failure to do so, however, won’t make it an automatically unfair dismissal – fairness would just be considered in the ordinary way by a tribunal.

And, again in the ordinary way, these provisions only make the reason for the dismissal potentially fair; the employer must still consider the overall reasonableness of the dismissal. This would involve considering whether there are any available vacancies it can offer the employee to avoid the dismissal. It is likely also to involve consulting with the employee (albeit in a light touch manner) about ways of avoiding the dismissal. Without this, the dismissal may still be deemed to be unfair. Given all this, the statutory provisions don’t add a lot to the general position on fairness.  

Redundancy

There would be a potential redundancy situation if the fixed-term contract was for work of limited duration that has finished. A fair process for a redundancy dismissal involves warning the employee of the risk as early as possible, selecting them fairly, consulting with them about ways of avoiding dismissal and considering them for any available alternative employment. To satisfy the first element, it would be helpful to make it clear at the start of the contract that the work to be done is of limited duration, the contract is due to end when the work is done and that there is no guarantee of another role when it ends.

Fair selection is an area where employers can easily be caught out; they should not select those on fixed-term contracts for redundancy simply because they are on a fixed-term contract. If the employer’s need for work of a particular kind is diminishing, all employees doing the same or similar work should generally be pooled together and the employer should apply objective selection criteria to select which to dismiss. Selection of a fixed-term employee on the basis that their work was always intended to be time-bound could potentially be justified, but it will depend on the circumstances: it is not unknown for employers to be hazy as to the reasons why some comparable staff are on permanent contracts, while others are on fixed term ones.

Those employed on fixed-term contracts are excluded from the obligation to collectively consult where the employer is proposing large-scale redundancies (20 or more) if the dismissal is proposed to take effect on the expiry of the fixed term. Otherwise, the collective consultation duty applies to them too.    

Some other substantial reason

As the name suggests, this category covers a number of different types of reason. To be fair, it must be a substantial reason and of a kind to justify dismissing an employee holding the job in question. But caselaw has held that if the contract was for a specific and genuine purpose known to the employee and which is no longer applicable, it may be a SOSR dismissal. It goes without saying that if the reason is that the employee was put on a fixed-term contract to manage headcount and the job still exists, this will not be a fair reason to refuse to renew the contract.

The fair procedure to be followed will depend upon the circumstances. There is an open question of whether or not the ACAS code of practice on disciplinary and grievance procedures applies. The code states that it does not apply to the non-renewal of fixed-term contracts. But it is arguable that it should if the reason for the non-renewal is related to poor performance or misconduct.

In any event, the code may be helpful to employers when considering how to ensure the dismissal is fair.  In most cases, at least one meeting with the employee and an opportunity to apply for alternative roles will be advisable.

Dismissal and re-engagement

If a fixed-term contract ends and a new contract on less favourable terms is offered, this could still amount to a (potentially unfair) dismissal. Further, it could fall within the new law prohibiting “fire and rehire” which will render dismissals to make changes to key employment terms automatically unfair. These are expected to come into effect in January 2027. We are still awaiting the response to the government consultation on this matter to know how the new protections will work in practice.

Practical actions to take

Don’t be caught in the blast. Review how you use fixed-term contracts to be ready for the upcoming coming changes:

• Consider fixed-term contracts of shorter than six months’ duration where this is workable.
• Make sure that the right people are notified of the expiry dates of any relevant contracts.
• Consider an approvals process for renewals and extensions.
• Review your template wording and amend it where appropriate, for example to make clear if the employee is providing maternity cover.
• From 1 January 2027, make sure you can identify the reason for not renewing the contract of any fixed-term employee with six months’ service, and that you have identified the process you will follow in good time before the expiry date.