Male HR leader confidently reviewing a fixed-term employment contract for a new global hire on a tablet

Fixed-Term Employment Contracts: Pros and Cons for Employers

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Hiring talent abroad presents an exciting opportunity for companies to build a highly skilled workforce regardless of location—and fixed-term employment contracts help global employers scale fast.

Still, while fixed-term employment contracts work well for some companies and markets, they aren’t always the right choice for others.

In this article, we explore the basics of fixed-term employment contracts, their pros and cons, and when to use them as part of your global hiring strategy.

What is a fixed-term employment contract?

A fixed-term employment contract, also known as a limited-term employment contract, is a contractual agreement between an employer and an employee that lasts for a specified time period.

Employers might use fixed-term employment contracts for the following reasons:

  • Covering absent employees
  • Increasing staff for a large project
  • Filling an employment gap

Fixed-term vs. indefinite contracts

Limited-term contracts have specified start and end dates, while indefinite contracts, as the name suggests, have no specified end dates. Indefinite contracts end only when the employee or employer terminates the agreement.

Under limited-term contracts, an employee typically works for a company for a few months to a year. When the contract expires, the company can choose to terminate, extend, or renew the employment relationship. Generally, the company or employee cannot terminate the fixed-term contract early.

Under indefinite contracts, an employee works for a company for an indefinite period. Indefinite contracts provide employees with more job security and ensure they receive comprehensive wages and benefits, which is explicitly outlined in the contract.

Neither an employee nor an employer can terminate an indefinite contract without a lengthy notice period as defined by local employment law. Plus, these contracts can only be terminated through lawful termination by the employer or through employee resignation or retirement.

Learn more in our complete guide: Types of Employment Contracts

Benefits of using fixed-term contracts

The benefits of using fixed-term contracts over indefinite contracts include a defined contract length, flexible staffing, and fewer liabilities for employers. We discuss each benefit below.

Defined contract length

Fixed-term contracts specify the length of employment, which sets clear boundaries for employers and employees who don’t wish to commit long-term to the employment relationship. 

Additionally, fixed-term contracts suit businesses that may only need to hire staff in the short term to meet immediate needs. If a business decides it wants to continue the employment relationship, it can always renew or extend the contract as long as the employee is on board.

Flexible staffing

Fixed-term employment contracts make it easier for businesses to meet temporary hiring needs for short projects or seasonal work where demand is high.

For example, if a software company needs to launch a new product under a tight deadline, it may use fixed-term contracts to onboard a small influx of employees to help get the product out on time.

Fewer employer liabilities

Because fixed-term contracts have specified end dates, they don’t require notice periods for termination once the contract expires, which frees employers from the risks of noncompliance.

On the other hand, indefinite contracts typically have explicit notice periods and notice prohibitions, which foreign employers may overlook when attempting to terminate an employee. If an employer fails to abide by these regulations, they may face fines and other penalties.

Risks of using fixed-term contracts

Despite the relatively low-risk nature of using fixed-term employment contracts, they pose challenges like recruiting difficulties, building an incohesive workforce, and non-compliance with employment laws. We discuss these risks in more detail below.

Recruiting challenges

Companies that hire talent abroad using fixed-term contracts tend to recruit more often since the employment relationship has a short and defined end date. Recruiting often is costly and takes away critical time that HR teams could use for tasks like supporting the existing workforce.

Limited-term contracts often are less attractive to potential candidates who seek long-term job stability and security. HR teams may find a great candidate for a position, but that candidate could decide to turn down the offer if the duration of the employment contract is not permanent.

Incohesive workforce

Because employees under fixed-term contracts have limited time with a company, HR teams may have difficulty building long-lasting, cohesive teams. Unfortunately, an unstable workforce often leads to high turnover among permanent employees, which ultimately impacts a company’s bottom line and credibility.

Differing employment laws 

While using fixed-term contracts may seem like a quick way to start hiring in a new market, countries have varying regulations on contract requirements.

For example, some countries impose limitations on the use, renewal, extension, and number of contracts an employer can offer within its organization while others have no limitations. Also, some countries require companies to provide limited-term employees with the same wages and benefits as permanent employees. 

Additionally, there may be restrictions on how many fixed-term employees are allowed to work at an organization based on local employment law. The threshold is usually taken as a percentage of the total workforce.

Lastly, many countries mandate that employers notify their employees on fixed-term contracts at least a month before the expiration date on whether they plan to extend the contract or not. If they don’t provide notice, then it could be construed as a natural extension of unlimited duration.

To mitigate risk, employers seeking to hire talent abroad should always seek counsel from their legal team, an in-country expert, or an employer of record (EOR) who can advise on contractual requirements and help draft compliant international employment contracts.

How to terminate a limited-term employment contract

Generally, neither an employee nor an employer can terminate a limited-term agreement early unless the employee commits a gross act of misconduct.  Terminating a fixed-term contract requires careful navigation to ensure compliance in the country where you’re operating.

However, sometimes workarounds are possible if the employer includes clear and specific terms in the agreement from the start. In these cases, HR teams must include specific language in fixed-term contracts to outline the conditions under which the target country governs early termination.

If your business operates in different countries, the termination clause language must be exact according to that country.

The fixed-term contract should state:

  • Reasons why a contract may be terminated early
  • Required notice period of early termination
  • Termination procedures for employers and employees
  • Expected remuneration to the employee if early terminated
  • References to the appropriate laws that govern such agreements

In some countries, early termination of a fixed-term contract is not possible even if the employer includes clear and specific terms in the agreement from the start. In these circumstances, reaching a mutual termination agreement with the employee is necessary. Such an agreement must include all elements required to ensure compliance with the applicable law. 

When to use a fixed-term employment contract

Choosing which type of contract to use depends on a company’s growth goals and talent needs. Fixed-term contracts are best for companies with temporary work needs. They might use fixed-term contracts to hire seasonal staff, consultants, or talent to fill in for permanent employees on long-term leave.

What to include in a fixed-term employment agreement

Ensuring the language is specific, clear, and compliant is critical when drafting fixed-term contracts. While the exact language will differ based on the country and employment needs, below are some basic elements you should include:

  • Contract start and finish date
  • Early termination clause (if applicable)
  • Justification for fixed-term status
  • Job title and description of work
  • Expected hours
  • Place of work
  • Vacation terms
  • Sick leave
  • Wage
  • Collective bargaining terms
  • Grounds for dismissal (if applicable)
  • Termination benefits and notice periods

Remember that some countries require more detail, so ensure you work with an in-country partner or legal expert to get the details right and maintain global compliance.

Ensure compliant limited-term contracts for your global talent

Recruiting a workforce that meets your budget, project needs, and timeframe is challenging enough. Take away the stress of drafting compliant employment contracts by partnering with an employer of record (EOR) like Velocity Global.

As your EOR partner, we have expertise in local labor and employment laws worldwide and simplify global mobility, allowing you to quickly and compliantly engage or relocate talent around the world without the need for entity establishment.

We also handle onboarding, payroll, benefits administration, employment contract creation, compliance, and HR support on your behalf while you maintain day-to-day control of your team—so you can focus on growing your business globally without the headaches.

Discover how to quickly and compliantly hire anywhere with Velocity Global:

How to hire anywhere with an Employer of Record - Get the guide

 

Or contact us today to start building your global team.


Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information – and your interpretation of it – is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.

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