HR, beware: Considering fixed-term employment contracts as part of your global hiring strategy could expose your company to more risk than you can handle, both legally and financially.
Take it from this funeral home business in Canada: They were required to pay out nine years’ worth of compensation—close to $1.3 million—to a former employee for dismissing him in the first year of a 10-year contract.
The fixed-term contract itself wasn’t the problem; rather, it was the company’s lack of diligence around the employment agreement that cost them.
Here’s what you need to know to help protect your organization from the risk of fixed-term employment contracts, particularly in unfamiliar global markets.
What is fixed-term employment?
Fixed-term employment, also known as limited-term employment, is an employment strategy in which an organization contracts with an individual worker for a specific period of time. You can think of these employees as temporary workers. The difference between a fixed-term employee vs. a permanent contractor is that the former has an end date or certain milestone to mark the end of their employment.
Fixed-term employment contracts usually don’t extend beyond three years, with most contracts landing in the one- to three-year range. In some countries, companies employing fixed-term contracts have options to extend them—if, for example, a critical project remains unfinished or the organization moves a contract employee to another project.
Other reasons why a company would use a fixed-employee contract include:
- Covering a regular employee who’s away on sick leave, maternity/paternity leave, or on sabbatical
- Bringing in talent to take pressure off a team overloaded with work
- Adding a worker with specific expertise for a special project, such as a solution architect to help with an enterprise digital transformation project
Advantages of fixed-term contracts
Understanding the pros and cons of fixed-term contracts helps businesses make informed global hiring decisions. Opting for fixed-term contracts over indefinite contracts comes with its fair share of benefits.
Specified contract duration
Fixed-term contracts clearly outline the length of employment, providing distinct parameters for employers and employees that may not want to commit to a long-term relationship. These contracts are particularly suitable for businesses with short-term staffing needs. If an ongoing employment relationship is desired, contract renewal or extension is always an option.
Flexible staffing
Fixed-term employment contracts facilitate the efficient fulfillment of temporary staffing requirements. This is especially true for short projects or seasonal work with heightened demand anywhere in the world. For instance, a software company facing a tight deadline for a new product launch may employ fixed-term contracts to quickly onboard additional staff for timely project completion.
Reduced employer liabilities
Due to their specified end dates, fixed-term contracts do not necessitate notice periods for termination upon contract expiration, thereby freeing employers from risk to ensure compliance. In contrast, indefinite contracts typically involve explicit notice periods and restrictions, which, if overlooked, could lead to fines and penalties for employers.
Risks associated with fixed-term contracts
Despite the relatively low-risk nature of fixed-term employment contracts, challenges such as global recruitment difficulties, the formation of incohesive global teams, and noncompliance with employment laws may arise.
Recruiting challenges
Employers utilizing fixed-term contracts for international hires may find themselves engaging in frequent recruitment activities. The temporary nature of the employment relationship causes these recurring activities. Therefore, the recruitment process lacks time and cost effectiveness when building a global talent pool. Potential candidates may be less attracted to limited-term contracts, preferring job security and stability associated with permanent contract positions.
Fragmented workforce
The limited duration of employment under fixed-term contracts may hinder HR teams from building enduring and cohesive teams. An unstable workforce often contributes to higher turnover among permanent employees, impacting a company's financial standing and credibility.
Varying employment laws
Fixed-term contracts, while seemingly expedient for international hiring, are subject to varying regulations in different countries. Countries may impose restrictions on the use, renewal, extension and quantity of contracts within an organization, and regulations may dictate equal wages and benefits for limited-term employees compared to permanent ones. Some countries set limits on the percentage of fixed-term employees relative to the total workforce, and notification requirements regarding contract extensions may vary.
To mitigate these risks, employers seeking international talent should seek guidance from their legal team, an in-country expert, or an employer of record (EOR) who can provide advice on contractual requirements and assist in drafting compliant international employment contracts.
Examples of global risks with fixed-term employment contracts
Fixed-term employment is risky when hiring internationally because laws governing employment contracts vary from country to country. If HR is not versed in the nuances of local labor regulations when drafting international employment contracts, it may unwittingly put the organization at risk. For example:
- In Germany, fixed-term employment contracts are only renewable up to three times in a two-year timetable.
- In Germany, fixed-term employment contracts are only renewable up to three times in a two-year timetable.
- In France, fixed-term work contracts are only allowed in special cases, such as to replace a temporarily absent employee, and they must have a written contract. A fixed-term contract should not exceed 18 months, including a renewal.
- In the United Kingdom, an employee with fixed-term contracts of four or more years goes from a contract position to becoming a permanent employee.
- In Japan, if a fixed-term employee is with the same employer for five years, they will be considered a permanent employee.
- In Lithuania, there is a limit of 20% of fixed-term employment contracts allowed in the country.
Because of the variance in fixed-term contract requirements around the world, companies considering this approach should keep the following in mind for the country they’re hiring in:
- The allowable fixed-term contract durations
- The allowable employment role or job types that a fixed-term worker can hold
- The general labor laws for the country, including benefits, at-will worker rights, tax liabilities, dismissals and industry-specific regulations
Avoiding risk when using a fixed-term employment contract
A fixed-term employment contract can prove to be a useful tool in global hiring when the organization has a firm grip on the timetable needed to complete a project. In that scenario, a fixed-term contract is not likely a significant risk.
If there is any doubt about local labor laws, HR should follow some established guidelines that can provide a measure of safety when engaging in limited-term hiring. Consider these measures:
- Avoiding successive fixed-term employment contracts (an indefinite term contract may be a better solution)
- Ensuring that the contract is in writing and that it includes early termination language
- Avoiding any automatic renewal language in a fixed-term employment contract
- Avoiding any mention of benefits or terms usually associated with permanent employee contracts
- Having a trusted legal specialist with expertise in the local employment laws the review contracts
Another way to avoid risk is to partner with a global employer of record for fixed-term employment needs. An employer of record (EOR), sometimes referred to as an international PEO, hires international workers on your behalf and handles all the local HR, payroll and tax requirements. The employer of record then leases the employees back to you through an employee lease agreement to manage their day-to-day work.
Because it has in-country expertise, the employer of record ensures that all contracts—including fixed-term contracts—comply with the local labor laws, mitigating your risk of penalties, fines or back pay requirements.
Learn more about how our employer of record services, can help your organization avoid risk in global hiring by speaking with a global solutions advisor. Contact us today.
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