Choosing Between Fixed-term Contracts and Indefinite Contracts

Looking to hire some highly skilled staff but unsure of which contract would be most suitable? 

You may be confused as to which type of employment contract suits your industry or the job type you are hiring for. Let's take a look at the main differences and some pros and cons of fixed-term contracts and indefinite contracts.  

So, you’ll be well on your way to securing your new hires compliantly and under the best conditions for both parties.

What is a fixed-term employment contract?

Fixed-term employment, also known as a limited-term contract, has a clear end date when an employer can choose to end the employment relationship or to renew the fixed-term contract on different terms. 

Internationally there are strict labor laws attached to fixed-term contracts to protect people’s long-term job security and prevent companies from hiring continuously for a short period of time.

If you have employees in your company on fixed-term contracts it is advised that should inform them if any full-time roles become available.

With fixed-term contracts, nothing lasts forever and after maxing out the number of contract renewals companies must reclassify the employee as indefinite.

However, if your employee does work beyond their end date you can use what is called an implied agreement to inform them that you have changed the end date and provide a new notice period. 

Key statistics - fixed-term employment around the world

France - Maximum contract length of 24 months.

The UK - After 4+ years will automatically become permanent unless the employer can provide evidence that there are valid business reasons for continuing the fixed-term agreement. Fixed-term agency workers are not covered by this employment law.

India - Fixed-term employees are entitled to the same wages and benefits as permanent employees.

Germany - A maximum contract length of two years with contracts forbidden to be extended more than three times.

What is an indefinite term employment contract?

Indefinite employment contracts shouldn’t be confused with at-will contracts used in the US where an employee can be dismissed at any time, but with indefinite employment contracts reasonable notice must be given and contracts should include termination clauses.

 It is wise to take a look at the rest of the world who predominantly use indefinite term employment contracts.

With indefinite employment, there is no end date. This means the contract can continue until either termination, resignation, retirement, or business closure.

Indefinite term employment contracts are weighed in favor of the employee and contracts vary.

The main differences in employment contracts

Fixed-term employment contract

• Length - Fixed-term contracts are usually limited to 4 years.
• Best when hiring for- independent contractors, seasonal work, maternity cover, long-term sick cover, consultancy role for a specific project.
• Less common.
• Unique to fixed-term contracts - Clear start and end dates.

Indefinite term employment contract 

• Length - No specific end date.
• Best when hiring for - New role in a department, covering staff shortages, setting up new operations in foreign countries.
• The most commonly used contract globally.
• Unique to indefinite-term contracts - collective bargaining rights in some cases, it includes all benefits and notice periods.

Pros and cons of fixed-term employment

Pros

• More flexibility

Fixed-term contracts have more flexibility in hiring talent for short-term projects. An example of this would be hiring a software engineer to help install a new piece of software to help your business and when his or her expertise is no longer needed you can part ways at the end of the term.

• Clearly defined length

For instance, for seasonal work where the contract length is clearly defined, for example, hotel staff at a ski resort. If an employer and employee don’t wish to make a long-term commitment to each other then opting for a fixed-term contract can solve this. Starting on a fixed-term contract can still be a stepping stone to a permanent contract in the future.

Overall a fixed-term agreement may align more closely with your business goals if you are scaling your business and adding talent to your team to more quickly and effectively meet market demands

Cons

• No long-term stability

Fixed-term contracts may feel unreliable for workers since they have a clear end date and don't guarantee long-term job security.

• More frequent recruiting for employers

Avoiding to offer an indefinite term contract to employees may mean that the employer needs to recruit more often. That may result in higher costs, and harm the employer's reputation since people are usually looking for more stability.

However, fixed-term contracts are heavily regulated to protect employees’ rights, with 85% of countries having some form of regulation for fixed-term contracts.

When you draw up your contract with a new employee you may have to go through a checklist of employee's rights under this agreement. 

• Fixed-term employees are entitled to full compensation upon dismissal even if the contract is not finished.
• Simply not renewing a fixed-term contract of your employee can be seen as unfair dismissal for a contract over 2 years. There should be clear communication when drawing up the contract that it is a temporary position with a fixed end date with fair notice of termination.
• Be sure to check your hiring country's labor laws as fixed-term contract laws vary from country to country.
• Even after the offer to renew a fixed-term contract, there is still a risk that the contract could be legally identified as indefinite by law and so invalidating it.
• It seems simple, but if you are part of a big company it may be that you forget an employee is hired under a fixed-term employment agreement and the employment relationship lasts beyond the agreed end date. The contract then legally becomes indefinite in nature and the employee's entitlements change. Terminating an employee's contract without an advanced notice period would mean they are entitled to compensation in the form of lieu of notice which means they will receive severance pay of the amount they would have earned in their notice period. 

Pros and cons of indefinite term employment

Pros

• Low staff turnover

Employing people for an indefinite duration gives you a chance to build a core team who are committed to your company and understand and trust the work you are doing and this low turnover of staff breeds productivity. 

• Employment relationship

Indefinite-term employees have a more stable entry into your company and are more likely to encourage loyalty in the long term and secure a rewarding employment relationship.

• Future-proof

You are more able to shape your business future with an incentive for your employee to start or develop their career and push for promotions within your company.

Cons

• Extra costs 

You may find there are increasing costs with more protections under local labor laws for a variety of benefits including; paid leave, pensions, medical care.

• International labor laws

Again like fixed-term contracts, there is a need to navigate the murky waters of labor laws with many countries requiring advanced notice periods to terminate an employee’s contract. Added to this obligations to pay severance in some circumstances.

To get an indication of the differences in labor laws for indefinite employment contracts take a country like Belgium, where if an employee is judged to be given an unfair dismissal they can claim damages between three and 17 weeks salary, whereas in France a minimum of six months pay is seen as compensation for unfair dismissal.

• Employee power 

There is no doubting that the law is stacked against the employer. Under indefinite term employment contracts, before terminating the employment relationship businesses are required to give a lengthy notice period.

How to decide which one is suitable for your new hire?

Now that we have weighed up the pros and cons you may have an idea of what is best to offer your prospective employee. 

It is worth noting that contract duration and clearly defining the nature of the work your prospective employee will do are the most important factors when drawing up your contract.

For fixed-term employment contracts in particular make sure you have the following checklist:

• The reasons why it’s a fixed-term contract.
• Decide if you want to automatically renew the contract and if you don’t, be sure to state otherwise stating clearly when employment ends.
• Think carefully about the nature of the job and the contractual relationship being sure you don't misclassify an employee as an independent contractor. If circumstances change E.g funding drys up for a project do you need to consider another type of contract?
• The contract should include early termination or dismissal clauses.
• Try and avoid employees working beyond their contract end date unless a renewal or extension has been negotiated.

For indefinite employment contracts consider:

• Check notice periods and severance package requirements for the country you are hiring in as well.
• Like a fixed-term contract, it’s essential to include early termination or dismissal clauses clearly defining just cause for dismissal.
• Check the length of employment for the particular position and whether the job you are hiring for an indefinite period.

Generate compliant contracts with Deel

If you are seeking clarification about labor laws and assistance in onboarding your new hire in an efficient and compliant manner, take a look at how you can start for free at Deel.

We aim to make inherently daunting things like hiring anywhere and paying your team across the globe less scary and instead approachable.