Fixed-term and Indefinite Employment Contracts Explained
Erez Greenberg| Jul 22, 2021
When you’re onboarding new employees, whether locally or abroad, you’ll need to choose between the two most common types of employment contracts. These are fixed-term and indefinite. Understanding what these terms mean, and the differences in how you can use these contracts compliantly around the world is an essential yet complex task.
What is a Fixed-term Contract?
Also known as Limited-term (LT) contracts, a fixed-term contract sets out the start and end date for an employment agreement. This is different from a short-term independent contractor agreement, because during the duration laid out by the employment contract – the worker will have full benefits and rights almost exactly like any other full-time employee. When the fixed-term contract ends, the employer will need to decide whether they would like to renew the contract or part ways with their employee. The duration of this kind of contract is usually between 12 months and 3 years.
Fixed-term employees are usually the right fit if you’re filling a specific gap, such as hiring for seasonal work, or covering a maternity leave position. This approach may also work for testing the waters with a new position type or a new location, or finding very niche skills or talent from a contractor.
What is an Indefinite Contract?
In contrast, an indefinite contract is what you might consider the “normal” way of hiring employees. This doesn’t mean that workers are guaranteed a job for life – only that there is no fixed time period for their role. Indefinite employment ends in one of four ways: due to lawful termination, employee resignation or retirement, or in the event that the business closes down.
The perks of indefinite employment for employees are more stability and certainty over their role, and as a company, you’re likely to see more loyalty as a result. Indefinite employees also have more protection worldwide in terms of labor laws such as severance pay and a notice period for termination.
If you’re hiring for a new role in your department, scaling your business by expanding a particular team, setting up an entity in a new location, or filling a gap because of a shortage of staff or more work than you can take on – an indefinite contract is likely to be the way to go.
Global Considerations for Choosing an Employment Contract
In the US, and in other countries such as Canada, New Zealand and Switzerland, there is no limit on how long a fixed-term employment contract can be drawn up for, although it’s important for employers to consider a termination clause inside the contract. Without a termination clause, employees may be entitled to their complete compensation package, if and when the organization wants to end the contract early.
In 2019 in Canada for example, the Ontario Supreme Court ruled that a business had to pay a dismissed employee $1.2 million in damages after ending a fixed-term employment contract early.
Which Countries Limit the Use of a Fixed-term Contract?
In many other countries, using a fixed-term employment contract is much more complicated, usually intended to protect the worker in case of unfair dismissals and hiring practices. In France for example, to encourage the use of indefinite contracts, employers can only renew a fixed-term contract once, and the cumulative duration of the contracts cannot exceed 24 months.
Other countries have similar regulations in place. In fact, according to the International Labor Organization, where the data is available, 85% of countries have some level of regulation enforced for the use of fixed-term contracts.
These laws vary from country to country. In China, the limit is also 2 fixed-term contracts, but these can be up to 10 years altogether. The only other country where a whole decade of fixed-term contract is acceptable according to regulation is Estonia. On the other side of the scale, in Chile you are limited to 12 months before you need to switch to an indefinite employment agreement.
In some regions, there are more complex laws to be aware of. For example, in South Africa, low-income employee protections are enforced directly, through the salary that you’re offering your employees. If you pay your employee less than $14,500 USD per year, their fixed-term contract cannot exceed 3 months.
|United Kingdom||Yes||No limitations on who can use a FTC, but a maximum of 48 months.|
|China||Yes||No limitations on who can use a FTC, but a maximum of 2 contracts over 120 months.|
|France||Yes||FTC must be for objective and material reasons, no more than 2 contracts lasting 24 months in total.|
|Germany||Yes||FTC must be for objective and material reasons, no more than 4 contracts lasting 24 months in total.|
|Brazil||Yes||FTC must be for objective and material reasons, no more than 2 contracts lasting 24 months in total.|
|Russia||Yes||FTC must be for objective and material reasons, no limit on number of contract renewals, up to 60 months in total.|
|New Zealand||Yes||FTC must be for objective and material reasons, but has no limitations of contract renewals or successive contracts.|
What if the Fixed-term Employment Contracts are not Back to Back?
In Germany, the law states that 24 months is the maximum for fixed-term contracts, split into a maximum of 4 contract terms. However, there is an ongoing conversation around whether after a period of time has passed, the same employee can be rehired on a fixed-term contract. In fact, the Federal Constitutional Court has overturned a previous ruling by the Federal Labor Court on this issue.
The Labor Court had traditionally said that if more than three years had passed between contracts, a new fixed-term arrangement could be compliantly put into place. According to the Constitutional Court’s rather vague rules, for a fixed term contract to be valid, previous employment would need to be “a very long time ago, of a completely different type or of very short duration.” In a more recent case where the employee hadn’t worked for the company for 8 years, this was not considered long enough to fall under these terms.
Can I use a Fixed-term Contract to Fill Any Position?
Another consideration is whether the specific role that you’re hiring for can be filled by an employee on a fixed-term contract. Again, in the United States there are no limitations here, but that’s not always the case in certain other countries. In Tanzania for example, a fixed-term contract is restricted for the hire of managers and other professional employees. In Lithuania – it’s not about the exact role, but you cannot hire more than 20% of your workforce using fixed-term contracts, so you’ll need to keep track of this ratio. The remainder need to be employees or independent contractors. In Italy, this percentage is 30%.
In many countries, your business will need to provide an “objective and material reason” why a fixed-term contract is appropriate for this specific hire. These also vary between countries and in some cases are very restrictive. In Russia, although fixed-term contracts are possible for up to 5 years, the rules are very strict for who can be considered eligible, including top management positions, employees working abroad, trainees, retired persons and professional athletes. If you enter into a fixed-term contract with someone who is not covered by statutory rights, this contract will be considered as indefinite.
What are my Global Considerations with an Indefinite Contract?
While it might seem complex to use a fixed-term contract for hiring abroad, remember that you are also bound by many labor laws when using an indefinite contract! Most countries require varying advance notice periods to let go of employees, and some will have severance package requirements.
In Belgium, severance is linked to years of employment, while in Brazil – severance will be much higher if you don’t have a justified reason for the termination. Many countries have a 30-day notice period mandated before you can dismiss an employee, but in some cases this will be longer, such as in the Czech Republic where employees will be legally allowed a minimum of two months notice, even at a junior level.
Limiting the Complexity in Hiring Global Employees
No matter which type of employment contract you opt for, expanding your workforce globally is no easy task! It requires encyclopaedic knowledge of labor laws, compliance, benefits, contract terms, and more.
At Papaya Global, we house a unique Center of Excellence on all things employment related, so that we can advise customers on the easiest way to compliantly expand operations abroad, and onboard employees according to their local needs.
If you’re ready to start talking about your business requirements, schedule a demo of the Papaya platform, where we can answer any of your questions.