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12 March 2018 Outer limit/maximum term employment contracts – their future after the Navitas decision

By Richard Ottley, Partner

Introduction

The decision of the Full Bench of the Fair Work Commission on 8 December 2017 in Saeid Khayam v Navitas English Pty Ltd t/a Navitas English [2017] FWCFB 5162 (Navitas) has narrowed the opportunity for employers to rely upon outer limit or maximum term contracts as a defence to a claim for unfair dismissal.

An "outer limit" or "maximum term" contract is a contract for a "specified period" which may be terminated before the end of that period upon the giving of notice.

The offering of a series of "fixed term" contracts to employees (often by the use of "outer limit" or "maximum term" contracts), has been seen as an attractive strategy for employing persons and then having their employment terminate without attracting the unfair dismissal provisions of industrial relations legislation (as termination would generally be regarded as not have occurred at the "initiative of the employer").

 

The criteria for determining the efficacy of such arrangements in the context of unfair dismissal law has, until recently, been regarded as settled by a decision of the Full Bench of the Australian Industrial Relations Commission in 2006 in the matter of Department of Justice v Lunn (C2006/2686) (Lunn)

 

However in Navitas, a 2/1 decision of the Full Bench has created greater scope for employees to argue that employer's actions should be interrogated to determine whether they are implicated in the termination of the employment relationship, where it ceases upon the expiry of an employment contract for a "specified period".

 

This article looks at the most recent decision of the Full Bench of the Fair Work Commission in Navitas. 

 

Full Bench decision in Navitas – Minority Decision

In Navitas, the applicant Mr Khayam had been employed under a series of "maximum term contracts" between April 2012 and May 2016.  At the expiration of his last contract, his employer decided not to offer him a further contract because of concerns about his performance. 

 

At first instance, Commissioner Hunt dismissed the applicant's unfair dismissal application, finding in accordance with the principles in Lunn, that the employment had terminated by effluxion of time and in accordance with the agreed terms of the parties and therefore otherwise than at the initiative of the employer.  A claim for unfair dismissal could therefore not be entertained.

The matter was then appealed to a Full Bench of the Fair Work Commission which determined to grant Mr Khayam permission to appeal against the decision of Commissioner Hunt. Permission was granted for various reasons including that the decision in Lunn had been based upon earlier legislation and that the Commission had yet to determine the issue of contracts for a "specified period" of time in the context of the Fair Work Act (s. 386) (Act).

Following that decision the matter came then before a differently constituted Full Bench of the Fair Work Commission. 

The minority decision of Deputy President Colman who found for the employer and dismissed the appeal, is a useful starting point.

 

There were essentially two subsections of s. 386 which arose for consideration in the appeal.  The first related to s. 386 (1) and whether or not the "employment" had been terminated "on the employer's initiative".

 

Section 386(1) of the Act states that a person will have been "dismissed" if their "employment" has been terminated on the employer's initiative. In other words, if termination of the employment has occurred otherwise than on the employers' initiative, a claim for unfair dismissal will not be available.

 

Colman DP considered the Full Bench's interpretation in Lunn, of the expression "termination of the employment at the initiative of the employer" (in earlier legislation) as limited to termination of the contract of employment to be erroneous. Colman DP considered that termination of employment meant termination of the employment relationship not simply the employment contract. In a practical sense, determining whether termination of the employment relationship occurred at the initiative of the employer will involve a much greater level of inquiry than if simply determining whether the employment ended due to expiry of the employment contract.   

 

Colman DP noted that the contention in the present appeal was as follows:

 

"[119] The contention in Lunn and in the present appeal was not that the employment relationship had survived the termination of the outer limit contract: both Ms Lunn and Mr Khayam were told in advance of their contracts’ termination that they would not be offered a further contract, and it was acknowledged that the contract and the employment relationship ended on the same day. Rather, the contention was that while the outer limit contract terminated in accordance with the agreement of the parties, the employment relationship ended contemporaneously but at the initiative of the employer." (my emphasis)

 

Colman DP considered that the approach that should be taken to interpreting s. 386 (1) should be the approach that prevailed under earlier legislation or in his words:

 

"[128] The correct approach to interpreting s 386(1) is akin to the one that prevailed under the WR Act. In applying s 386(1) to a case involving outer limit contracts, all of the circumstances should be considered to determine whether the employer terminated the employment relationship. It is necessary to consider the outer limit contract (including whether it is valid or may have been vitiated in some way), the possible relevance of statute and industrial instruments, and promises or representations that might have been made to the employee by the employer during the employment. In short, there may be more to the employment relationship than the outer limit contract. However, in the absence of other significant factors, the employment will have come to an end by the effluxion of time in accordance with the agreement of the parties. The High Court’s observation in Victoria v Commonwealth will be apposite, even if it is not a binding statement of law in relation to the interpretation of s 386(1): ‘as a matter of ordinary language, an employer does not terminate an employee’s employment when his or her term of employment expires.’"

 

Colman DP then went on to consider the history of the employment relationship between Mr Khayam and Navitas and considered that the only clear representation that had been made by Navitas to Mr Khayam concerning the future of the employment relationship was that it would end on the expiry of the outer limit contract.  He considered that the evidence did not establish that Navitas had terminated the relationship but rather it had decided not to enter into a new one.  Therefore the thing that brought the relationship to an end was the effluxion of time that had been agreed to by the parties.  On this ground alone therefore, termination had not been at the employer's initiative and Mr Khayam could not be said to have been dismissed.  Therefore the appeal failed. 

 

Whilst he considered it not strictly necessary to determine other arguments given this primary finding, Colman DP went on to consider the application of s. 386 (2)(a). 

 

S. 386 (2)(a) relevantly provides a person has not been dismissed if they are employed under a contract of employment for a "specified period of time… and the employment has terminated at the end of the period". 

 

He considered that the circumstances described in s. 386 (2)(a) contemplate that the employment will terminate at the end of the period because the end date has been reached and there is no other reason for the employment ending. 

 

He went on to consider the relationship between s. 386(1) and s. 386(2)(a). He was of the view that the latter was not an exception to the former, rather it confirmed that s. 386(1) does not apply in certain circumstances.  In his words:

 

"[141]In an ordinary case where a contract for a specified term (or task, or season) ends, and there is nothing more to the relationship, there will quite clearly be no 'dismissal' under s 386(1). The function of s 386(2) is to confirm that this is the case. This does not make s 386(2) otiose. It would only be otiose if it were intended to be an exception, because an exception is not needed. Rather, s 386(2) serves a useful function by drawing attention to modes of engagement that are very common in the Australian economy, and putting beyond doubt that these circumstances (in and of themselves, and without more) do not involve a dismissal."

 

Colman DP then addressed perhaps the most complex argument in the appeal. This argument concerns the interpretation of s. 386 (2) (a). 

 

The expression "specified period of time" (which appears in S386(2)(a)) had acquired an established meaning under decisions relating to the interpretation of previous industrial relations legislation. That meaning was that a contract would not be for a "specified period" if it allowed for termination during its term other than for a breach of contract or misconduct. That is to say, if the contract contained a notice period allowing for termination, then such contract would not be for a specified period. 
Colman DP considered that the introduction into s. 386 (2)(a) of the Fair Work Act of the words "and the employment has terminated at the end of the period" gave the words "contract of employment for a specified period" a different context to that which had existed under previous legislation. 

 

That is to say the emphasis under s. 386 (2)(a) of the Fair Work Act was now on the contemporaneous expiry of the contract and the employment.  There was therefore no reason to interpret "specified" in the way it had previously been interpreted in the narrower sense of "fixed" because the words "specified period" were now aligned with termination of employment. 
To conclude on this point, in his words:

 

"147 An employee who has served out the term of a contract for a ‘specified period’ containing no general termination provision, and whose employment ended on the last day of that period and because the period ended, has not been dismissed under s 386(1). This is also a situation meeting the description of s 386(2)(a). If the scenario is changed only by including a general termination provision in the relevant contract - one that was clearly never acted upon - the result is the same. In my view, the circumstances of the present case fall within s 386(2)(a)." (my emphasis)

 

Colman DP found that outer limit or maximum term contracts (eg contracts of employment for a "specified period" which contain a notice provision) which terminate due to effluxion of time should be treated in the same way (under s 386) as contracts for a "specified term" which lack a notice period. Such outer limit or maximum term contracts therefore fall within the description in s 386(2)(a).

 

He considered that Commissioner Hunt had reached the correct conclusion and having found that Mr Khayam was not dismissed for the purposes of ss 385(a) and 386(1)(a) of the Act, dismissed the appeal.

 

Full Bench decision in Navitas – Majority Decision

The majority comprising Vice President Hatcher and Commissioner Saunders allowed the appeal and referred the matter back to Commissioner Hunt for re-determination and in particular to determine whether or not Mr Khayam had been dismissed by Navitas within the meaning s 386(1)(a) of the Act. 

 

Having reviewed the authorities and the evolution of earlier legislation containing similar provisions they considered that s 386(1)(a) of the Act should be interpreted and applied as follows:

 

(1)        Any analysis of whether termination had been at the "initiative of the employer" should be conducted by reference to termination of the employment relationship not by reference to the termination of the contract of employment operating immediately prior to cessation of the employment.  Such analysis may, depending on the facts, require consideration of the circumstances of the entire employment relationship not merely the terms of the final contract). 
(2)        The focus of enquiry is whether an action on the part of the employer was the principal contributing factor in the termination.
(3)        Where there is a time limited contract but the parties have not agreed on the termination of the relationship, this does not exclude the possibility that termination occurred at the initiative of the employer – that is as a result of a decision or act of the employer. 
(4)        Where an operative time limited contract reflects a genuine agreement that the employment relationship will not continue beyond a specified date and the employment relationship comes to an end on that date, then absent a vitiating or other factor of the type which is later referred to, the employment relationship will have been terminated by reason of the agreement of the parties.  That is to say there will be no termination at the employer's initiative.  However if the time limited contract does not in truth represent an agreement that the employment relationship will end at a particular time, any decision not to offer a further contract will be one of the factual matters to be considered in determining whether an action on the part of the employer was the principal contributing factor which results in termination of the employment.
(5)        Factors which may vitiate or affect the operation of a time limited contract included:

  • Misrepresentation or misleading conduct by the employer

  • Employee entering into contract as a result of a serious mistake

  • Unconscionable conduct associated with the making of the contract

  • Duress or coercion

  • Lack of legal capacity on the part of the employee to make the contract

  • The contract being a sham and not intended by the parties to give legal effect to its apparent terms

(6)        Other factors included:

  • A time-limited contract may be illegal as contrary to public policy

  • Whether the use of time limited contracts was appropriate in the relevant field of employment

  • The contract might be varied, replaced or abandoned by a separate agreement

  • The employment contract may not be limited to the terms of the written document and may be one of a series of standard form contracts used for administrative convenience which do not represent the reality or totality of the employment relationship

  • During the employment relationship the employer may have made representations that the employment would continue beyond a contractual time limit

  • The terms of the time limited contract might be inconsistent with the terms of an award or enterprise agreement which might prohibit or regulate fixed term employment

Having listed these factors the majority concluded that Commissioner Hunt had not taken into account all of the relevant circumstances (being an appealable error). It should be noted that the approach she had taken was informed by her view that she was bound by the decision in Lunn. 

 

The majority then considered s 386(2)(a) of the Act which relevantly provides that "a person has not been dismissed if the person was employed under a contract of employment for a specified time… and the employment has terminated at the end of the period". 

 

At issue was whether an outer limit or maximum term contract (being a contract for a specified term but which contains an unqualified right to terminate before the end of the term) fell within the exemption in s 386(2)(a). The majority considered that the historical meaning given to the expression contract of employment for a specified period of time, applied, namely that such an expression did not include a maximum or outer time limit employment contract. However it considered that such expression did not necessarily exclude contracts where there might be a limited ability to terminate for breach.

 

The majority rejected the argument that the addition of the words "and the employment has terminated at the end of the period" amounts to recasting of the entire provision such that earlier judicial interpretation of the expression "contract of employment for a specified period of time" could be ignored. 

 

The majority considered that the final contract of employment between Mr Khayam and Navitas which provided for an unqualified right of termination on 4 weeks' notice meant that the contract was not a contract for a "specified period".  Therefore the exclusion in s 386(2)(a) did not apply. 

 

It referred the matter back to Commissioner Hunt for her to re-determine whether Mr Khayam had been dismissed "on the employer's initiative" within the meaning of s 386(1)(a). 

 

Summary

In relation to s 386(1)(a) of the Act, Full Bench was in agreement that the reference to the person's employment being terminated on the employer's initiative was a reference to the employment relationship being terminated as distinct from the employment contract being terminated. 

 

Both minority and majority judgments listed the circumstances which should be considered in assessing whether the employment relationship had been terminated at the initiative of the employer.

Colman DP determined that the appeal should be dismissed as he was satisfied that on the evidence before Commissioner Hunt, the employment relationship had not been terminated on the initiative of the employer. 

 

Hatcher VP and Saunders C considered that this question should be resubmitted to Commissioner Hunt for redetermination as she had not taken account of all the relevant circumstances. 

 

Where the minority and majority judgments diverged on the law, was in relation to the interpretation of s. 386 (2)(a). Hatcher VP and Saunders C held that outer limit or maximum term contracts are not captured by the exemption in s 386(2)(a). By contrast, it would appear that Colman DP found that outer limit or maximum term contracts which terminate due to effluxion of time, should be treated by s386(2)(a) in the same way as contracts for a "specified term" which lack a notice period.

 

Lessons for employers

The majority decision in Navitas means employers cannot afford to be complacent about reliance on outer limit or maximum term contracts as a means to avoid unfair dismissal claims, when the contract is not renewed. 

 

It is clear the Commission may conduct a detailed analysis of all the circumstances relating to the employment relationship in order to come to a view as to whether or not the employment relationship has ended at the employer's initiative.  Factors of the kind outlined by the Full Bench will be a helpful guide to employers in considering whether the employment relationship could be said to have ended at their initiative. 

 

Whilst by no means conclusive, the drafting of outer limit or maximum term contracts which contain a provision which makes clear that the employment relationship will terminate at the end of the specified period without any act being required to be taken by the employer for that to occur, may assist in the argument that the relationship terminated by effluxion of time. 

 

Some commentators have already, questioned whether the decision in Navitas could have implications for other areas of the Fair Work Act in which the expression employment being terminated at the employer's initiative is referenced.  For example the redundancy pay provisions in the Act. 

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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