Understanding fixed-term employment contracts: Pros and cons

A fixed-term employment contract seems like the perfect solution for a thriving business that needs to bolster its team for an upcoming project. It offers flexibility, clear timelines, and the promise of fresh, new talent. But, as with any powerful tool, it has a proper time and place.

Fixed-term contracts can be a strategic asset, providing stability for employees and predictability for employers. However, they also come with complexities and potential downsides for both parties.

A discerning hiring team always weighs the benefits against the challenges before committing to an employment approach. Here, we’ll unpack the pros and cons of fixed-term employment contracts, guiding you through the intricacies so you can make the best decision for your business.

What is a fixed-term employment contract?

A fixed-term employment contract is a contractual agreement in which a company hires an employee for a predetermined period. This period may be extended or renewed based on the company’s needs and the employee’s performance. Fixed-term employment contracts are common for positions that are temporary or project-based.

Regulations on fixed-term contracts vary between regions. Some countries and states stipulate the maximum length of fixed-term contracts and what benefits companies must offer temporary employees.

Despite similar use cases, fixed-term employment contracts differ significantly from independent contractor agreements. Temporary employees are employed by the company, whereas independent contractors are self-employed.

Comparing fixed-term contracts to other types of contracts 

When considering which employment contracts you want to incorporate within your business structure, you must first understand how fixed-term contracts compare to other common types of employment contracts. Here are a few brief comparisons:

Fixed-term contracts vs. indefinite contracts

• Duration: Fixed-term contracts have a specific start and end date, whereas indefinite contracts do not. An indefinite contract, often called a no-term contract or permanent employment contract, continues until either the employer or employee terminates the agreement.
• Job security: A fixed-term contract has less job security. Work ends when the contract expires. An Indefinite contract offers greater job security and comprehensive benefits. 
• Termination: Fixed-term contracts generally cannot be terminated early without conditions or penalties. Conversely, indefinite contracts may require a notice period for lawful termination, resignation, or retirement. 

Fixed-term contracts vs. casual contracts 

• Duration: Fixed-term contracts have a specific start and end date, whereas casual contracts operate on an as-needed basis with no predetermined duration.
• Work Schedule: Fixed-term contracts usually offer regular hours for the term, providing stability. Casual contracts provide flexibility, as employees work only when needed and have no guaranteed hours.
• Benefits: Fixed-term contracts typically offer benefits similar to permanent roles, although they may not be as comprehensive. Casual contracts generally provide minimal or no benefits, as casual employees are not considered regular staff.
• Commitment: Fixed-term contracts involve a clear commitment for the contract’s duration. Casual contracts require no commitment, allowing employees to accept or decline work as it’s offered.

Benefits of fixed-term contracts

Think of fixed-term contracts as the Swiss Army knife of employment agreements. They offer versatility, precision, and specialized tools to address your business needs in specific situations. Here are some examples:

• Specialized expertise: Fixed-term contracts allow businesses to benefit from the knowledge and skills of specialists for a defined period. This is particularly useful for projects requiring specific expertise that a company doesn’t need permanently.
• Increased flexibility: Fixed-term contracts offer greater flexibility for both employers and employees. Employers can adjust their workforce according to project needs and market conditions, whereas employees can work on diverse projects and gain varied experiences.
• Effective resource management: Fixed-term contracts enable better resource and budget forecasting. When businesses know the duration of a worker’s employment, they can plan and allocate their resources more efficiently, ensuring workforce requirements are met without straining finances.
• Precise contract duration: Fixed-term contracts establish a clear start and end date, which provides transparency and structure for both parties. This helps set expectations and plan for transitions at the end of the contract period.

Risks of fixed-term contracts

Although fixed-term contracts offer flexibility and short-term solutions, they come with risks that may put off the HR professionals managing your employment contracts. Potential downsides of fixed-term contracts include the following:

• Recruiting challenges: Fixed-term contracts require frequent recruitment due to the short and defined employment period. Finding new employees can be expensive and time-consuming, diverting HR resources from other vital tasks, like supporting the current workforce. Additionally, potential candidates seeking long-term stability might find these contracts less attractive, making it harder to attract top talent.
• Difficulty building cohesive teams: Employees on fixed-term contracts have limited tenure, meaning your business may struggle to maintain long-lasting and cohesive teams. A transient workforce can lead to higher turnover rates among permanent staff, hurting the company’s stability and overall performance.
• Varying employment laws: Fixed-term contracts are subject to different regulations worldwide. Some countries impose strict rules on an employer’s use, renewal, and number of such agreements. Some require equal wages and benefits for fixed-term and permanent employees. These varying laws can complicate operations, necessitating legal guidance to comply with local employment regulations.
• Potential impact on employee morale: The transience of fixed-term contracts can affect employee morale, as temporary workers may feel less secure and valued than their permanent counterparts. This could reduce productivity and engagement, impacting the overall work environment and company culture.

What to include in a fixed-term contract

Fixed-term employment contracts should include several crucial elements to ensure clarity and compliance with local labor laws.

• Contract start and finish date: Clearly state the employment period’s beginning and end dates.
• Justification for fixed-term status: Explain the reason for the fixed-term arrangement, such as project completion or seasonal work.
• Job title and work description: Specify the employee’s role and responsibilities.
• Expected hours and place of work: Outline the working hours and location where the job will be performed.
• Vacation and sick leave terms: Detail the employee’s entitlement to vacation days, sick leave, and other time off.
• Wage: Include the agreed-upon salary and any bonuses or additional compensation.
• Termination benefits and notice periods: Define the terms for early termination, including notice periods and severance pay.
• Early termination clause: Include provisions for terminating the contract before the end date under specific conditions.
• Renewal procedure: Describe how the contract can be renewed, including any required approvals or automatic renewal conditions.

These elements guarantee a fixed-term contract is comprehensive and clear, providing both parties with a solid understanding of the employment terms.

When to use a fixed-term employment contract

A fixed-term employment contract’s utility depends on the company’s specific needs and strategic goals. Fixed-term contracts are particularly advantageous for businesses with temporary work requirements. Here are some ideal scenarios:

• Consultants and specialists: Engage consultants or industry experts on a fixed-term basis to meet short-term needs without permanent employment.
• Temporary replacements: Use fixed-term contracts to cover for permanent employees on extended leave, such as maternity leave, medical leave, or sabbaticals, ensuring continuity in operations.
• Fluctuating business demands: Address fluctuating business demands with fixed-term hires to manage workload spikes without affecting the core team structure.
• Peak season staffing: Employ fixed-term contracts to hire additional staff during peak seasons or busy periods without long-term commitments.
• Project work: Utilize fixed-term contracts to bring in specialized talent for the duration of a project, leveraging niche expertise without a permanent hire.

If these circumstances sound familiar, you might be in the market for a fixed-term employee. With the right tools, hiring them doesn’t have to be a hassle.

Discover compliant hiring practices for employees and contractors 

Whether you’re seeking fixed-term workers, contractors, or permanent team members, legal compliance is essential—especially if you’re hiring internationally. Ensure compliant contractor and employee management with Oyster’s global employment platform. We help you handle the legalities, freeing you to focus on achieving your business goals.

Our all-in-one HR software helps you onboard top talent from 180+ countries. Oyster streamlines tasks throughout the employee lifecycle, from compliant contracts and onboarding to payroll and benefits. Discover how Oyster can streamline your hiring process and transform your talent strategy.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.