Do ​“out­er lim­its” employ­ment con­tracts have a future?

Intro­duc­tion

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. 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.

This method of engag­ing employ­ees is par­tic­u­lar­ly pop­u­lar with those employ­ers whose abil­i­ty to employ their staff may depend upon exter­nal fac­tors. It is often a mode of employ­ment used by uni­ver­si­ties whose abil­i­ty to main­tain their work­force may depend upon exter­nal funding. 

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). How­ev­er it should be not­ed that the deci­sion in Lunn was reached in the con­text of the then Work­place Rela­tions Act 1996.

The imple­men­ta­tion of the Fair Work Act 2009 (with pro­vi­sions dif­fer­ing from ear­li­er leg­is­la­tion) has now pro­vid­ed the oppor­tu­ni­ty for review­ing this area of the law. A deci­sion of the Full Bench of the Fair Work Com­mis­sion deliv­ered on 16 August 2017 in the mat­ter of Khayam v Nav­i­tas Eng­lish Pty Ltd C2017/2976, has now paved the way for the Com­mis­sion to revis­it this area of the law.

This arti­cle reviews the deci­sion in Khayam and high­lights argu­ments which will no doubt be resub­mit­ted to the Com­mis­sion when it for­mal­ly sets out to deter­mine the appeal in Khayam. How­ev­er our start­ing point is Lunn.

Full Bench deci­sion in Lunn

In Lunn, the Appli­cant had been employed by the Attor­ney-Gen­er­al’s Depart­ment pur­suant to a series of con­tracts which spec­i­fied a fixed peri­od. The last one was for a peri­od of three months and was also an ​“out­er lim­it” con­tract (that is to say it could be ter­mi­nat­ed before the end of that peri­od on notice). Two weeks before the end date of the con­tract, the employ­er ter­mi­nat­ed the con­tract by ​“pay­ment in lieu of notice”. The issue then arose as to whether ter­mi­na­tion had occurred by efflux­ion of time or at the ini­tia­tive of the employer. 

Usu­al­ly when a con­tract for a spec­i­fied peri­od or an ​“out­er lim­it” con­tract reach­es the nom­i­nat­ed end date, the con­tract ter­mi­nates through efflux­ion of time and there is no ter­mi­na­tion of employ­ment at the ini­tia­tive of the employ­er. There­fore no unfair dis­missal rights arise. 

In Lunn, the Full Bench con­sid­ered a time hon­oured author­i­ty in the case of D’Li­ma v Princess Mar­garet Hos­pi­tal (1995) 64 IR. 19. D’Li­ma was a deci­sion in which Mar­shall J had reject­ed the employ­er’s con­tention that there was no ter­mi­na­tion at the ini­tia­tive of the employ­er because of a series of writ­ten fixed term con­tracts, on the basis that such series of fixed term con­tracts did not reflect the real sit­u­a­tion, or in his words:

“The prac­tice of sign­ing of fur­ther con­tracts for alleged peri­ods of tem­po­rary employ­ment appears to have been one of mere admin­is­tra­tive con­ve­nience and can­not com­pel the Court to ignore the weight of strong coun­ter­vail­ing fac­tors indi­cat­ing a con­tin­u­ous employ­ment rela­tion­ship.”

The deci­sion in D’Li­ma gen­er­at­ed con­cerns as to the effec­tive­ness of a series of back to back fixed term or ​“out­er lim­it” con­tracts.

In Lunn, the Full Bench con­sid­ered that the deci­sion in D’Li­ma should be treat­ed with cau­tion giv­en a deci­sion of the High Court in Equ­us­corp Pty Ltd V HFT Invest­ments Pty Ltd (2004) 218 CLR 471. It con­sid­ered that the fact that almost all of the Depart­ment staff, includ­ing Lunn, had been engaged on a tem­po­rary con­tract (with an expec­ta­tion they would be renewed) did not of itself, per­mit the con­clu­sion that there was a ​“com­mon inten­tion” that the con­tracts were not to cre­ate the legal rights and oblig­a­tions they gave the appear­ance of cre­at­ing. The Full Bench in Lunn con­clud­ed that:

“The Depart­men­t’s prac­tice of engag­ing almost all staff on suc­ces­sive ​‘out­er lim­it’ con­tracts may be viewed by some as indus­tri­al­ly con­tentious. How­ev­er, sub­ject to leg­isla­tive con­straints, employ­ers are enti­tled to struc­ture their affairs, includ­ing the con­tracts they offer to employ­ees, in the way that they think best suits their inter­ests. There is noth­ing in the WR Act that pre­vents an employ­er from offer­ing a series of out­er lim­it con­tracts to an employ­ee. More­over, even if it was shown that the pur­pose of the pol­i­cy was to avoid the Com­mis­sion’s unfair dis­missal juris­dic­tion… this would still not ren­der such con­tracts a ​“sham” in a sense that, viewed objec­tive­ly the par­ties to those con­tracts had a com­mon inten­tion that they would not cre­ate bind­ing legal rights and oblig­a­tions accord­ing to their terms.”

In essence, the Full Bench reject­ed an ear­li­er find­ing by the Com­mis­sion at first instance that the series of con­tracts con­cerned were a sham. It held that the employ­ment had ter­mi­nat­ed due to the expiry of the last con­tract and not at the ini­tia­tive of the employ­er. There­fore the employ­ee had not been dis­missed and was not able to access the unfair dis­missal pro­vi­sions of the then Work­place Rela­tions Act.

Full Bench deci­sion in Khayam

On 16 August 2017 the Full Bench hand­ed down its deci­sion in Khayam. The deci­sion con­cerned an appli­ca­tion for per­mis­sion to appeal against a deci­sion by Com­mis­sion­er Hunt (as dis­tinct from deter­min­ing the sub­stan­tive issues). How­ev­er its deci­sion to ulti­mate­ly grant per­mis­sion to appeal is sig­nif­i­cant, as its rea­son­ing sug­gests that the deci­sion in Lunn may come to be dis­tin­guished and be of dimin­ish­ing rel­e­vance in future deci­sions of the Commission. 
In Khayam, the Appli­cant was employed on 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 who dis­missed the Appli­can­t’s unfair dis­missal appli­ca­tion, had felt bound by the Full Bench deci­sion in Lunn, notwith­stand­ing that she had some con­cerns about its applic­a­bil­i­ty to the Fair Work Act (the deci­sion in Lunn had been ref­er­enced to the then Work­place Rela­tions Act). She found that the employ­ment 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. 

Com­mis­sion­er Hunt also con­sid­ered that the ​“anti-avoid­ance pro­vi­sions” under sec­tion 386(3) of the Act the unfair dis­missal pro­vi­sions of the Fair Work Act were not engaged as Mr Khayam’s employ­ment was for a spec­i­fied peri­od of time. Mr Khayam sought per­mis­sion to appeal against the decision. 

Mr Khayam assert­ed that the prop­er approach to mat­ters such as the appli­ca­tion was whether or not as a mat­ter of prac­ti­cal real­i­ty the employ­er brought about the end of the employ­ment rela­tion­ship. In sup­port of his posi­tion, Mr Khayam addressed some tech­ni­cal incon­sis­ten­cies in the oper­a­tion of Fair Work Act and in par­tic­u­lar Sec­tion 386. He also con­tend­ed that Lunn wrong­ly focussed on whether the employ­ment con­tract was ter­mi­nat­ed at the employ­er’s ini­tia­tive as dis­tinct from the employ­ment rela­tion­ship. Sec­tion 386(1)(a) refers to ter­mi­na­tion of ​“the employ­ment”. Third­ly Mr Khayam sub­mit­ted that an inter­pre­ta­tion con­sis­tent with Lunn would have the effect of dis­en­ti­tling casu­al employ­ees to unfair dis­missal reme­dies, as, under tra­di­tion­al com­mon law prin­ci­ples, each day’s engage­ment serves as a sep­a­rate con­tract. It ter­mi­nates at the end of the day, arguably much like a con­tract for a spec­i­fied period. 

The Full Bench of the Com­mis­sion grant­ed per­mis­sion to appeal, not­ing that the deci­sion in Lunn was referrable to the unfair dis­missal pro­vi­sions in the then Work­place Rela­tions Act 1996. The applic­a­bil­i­ty of the rea­son­ing in Lunn had not been the sub­ject of analy­sis by the Full Bench in the con­text of the leg­is­la­tion which replaced it, name­ly the Fair Work Act.

Con­sid­er­a­tion of Sec­tion 386(3) of the Act also fea­tured in the Full Bench deci­sion. Sec­tion 386(3) is an anti-avoid­ance pro­vi­sion which pro­vides that if a per­son has been employed under a con­tract of employ­ment for a spec­i­fied time and a sub­stan­tial pur­pose of the arrange­ment is to avoid the employ­er’s oblig­a­tions under this Part of the Act, then the exemp­tion from an unfair dis­missal claim for such a con­tract does not apply. 

At first instance, Com­mis­sion­er Hunt gave con­sid­er­a­tion as to whether or not a sub­stan­tial pur­pose behind the use of max­i­mum term con­tracts by Mr Khayam’s employ­er was to avoid any oblig­a­tions with respect to unfair dis­missal. The Full Bench was sat­is­fied that Com­mis­sion­er Hunt had giv­en due con­sid­er­a­tion to such a sub­mis­sion and decid­ed not to dis­turb her find­ings of fact that the employ­er had not had as a sub­stan­tial pur­pose for using con­tracts for spec­i­fied peri­ods, the avoid­ance of the unfair dis­missal provisions. 

This aspect of the deci­sion high­lights the fact that the s 386(3) anti-avoid­ance pro­vi­sion, whilst not found to be engaged on this occa­sion, is cer­tain­ly a pro­vi­sion which might be sought to be exploit­ed in the future by appli­cants in sim­i­lar cir­cum­stances, and where the evi­dence demon­strates that a sub­stan­tial pur­pose for suc­ces­sive con­tracts was the avoid­ance of the unfair dis­missal provisions.

Con­clu­sion

The Full Bench deci­sion in Khayam has opened up the prospect that the deci­sion in Lunn will be dis­tin­guished or at the very least side­lined by fur­ther deci­sions in the Com­mis­sion. It is antic­i­pat­ed that Sec­tion 386(3) will play a role in future deci­sions and there is increas­ing­ly less room for com­pla­cen­cy by employ­ers con­cern­ing the use of suc­ces­sive fixed term (or out­er limit/​maximum term) contracts. 

If they are to be used and relied upon to defeat an unfair dis­missal claim, employ­ers will need to be sure that there are cogent busi­ness rea­sons asso­ci­at­ed with their use (oth­er than to avoid unfair dis­missal claims!).