Limitations on Set-Term Agreements Loom Near: What Employers Need to Know

In this Insight, we explore these limitations in greater detail and set out the steps employers should take as soon as practicable in preparation for these changes.

Overview of the Limitations

On and from 6 December 2023, employers will be prohibited from engaging an employee on a set-term agreement where:

1. the agreement operates for a period of greater than 2 years;
2. the agreement provides an option to extend or renew the agreement more than once or for a period of greater than 2 years; or
3. it would result in the employee being engaged under two consecutive set-term agreements that cumulatively exceed 2 years, or under multiple consecutive set-term agreements, where the employee is performing the same, or substantially similar, work and there is substantial continuity between the relevant employment periods.

These limitations, particularly the limitation on consecutive set-term agreements, can be difficult to understand. We elaborate on how these limitations will apply in practice below.

Entering into Agreements Before 6 December 2023

Any set-term agreements that are entered into before 6 December 2023 will not be subject to the above limitations. In other words, an employer can enter into a set-term agreement with an employee prior to 6 December 2023 without any restriction in terms of:

1. the duration of that agreement (e.g., it could be for 3 years); or
2. the number of prior agreements on which the employee has been engaged (e.g., it could be the employee’s third consecutive agreement).

Notwithstanding the above, employers should note that if one or more set-term agreements are entered into with an employee before 6 December 2023, those agreements will still be relevant to determining whether any future agreement that is entered into with the employee after 6 December 2023 is permitted under the above limitations. This is illustrated in the example in the next section.

Employers will also still need to be wary of the common law risk of an employee who is engaged on multiple-set term agreements, being deemed by a court or tribunal to be in practical reality, a permanent employee of the employer.

Entering into Agreements After 6 December 2023

Any set-term agreements that are entered on or after 6 December 2023 will be subject to the above limitations.

In relation to the limitation on consecutive agreements, if a current employee’s set-term agreement expires after 6 December 2023, and this is the employee’s only set-term agreement with the employer, the employer can enter into a further set-term agreement with the employee provided that the further agreement:

1. does not result in the employee being engaged for a total period exceeding 2 years (i.e., the total length of the current agreement and the new agreement cannot exceed 2 years); and
2. does not include an option for renewal or extension of the agreement.

On the other hand, if a current employee’s set-term agreement expires after 6 December 2023 and:

1. the length of the current set-term agreement exceeds two years; or
2. the employee was engaged on at least one other set-term agreement prior to the current set-term agreement,

the employer cannot enter into any further set-term agreement with the employee.

For example, if an employee was first engaged under a set-term agreement from 1 January 2023 to 30 June 2023 and another set-term agreement from 1 July 2023 to 31 December 2023, the employer cannot engage the employee on another set-term agreement after the expiry of that latter agreement. This limitation may not apply if the employee is not performing the same or substantially similar work across the agreements.

Exceptions to Limitations

There are several exceptions to the above limitations, including where:

1. the employee is engaged to perform only a distinct task involving specialised skills;
2. the employee is engaged to undertake essential work during a peak demand period;
3. the employee is engaged to perform work during emergency circumstances or during a temporary absence of another employee; or
4. the employee earns above the high income threshold in the year the agreement is entered into (currently a base rate of earnings of $167,500 per annum).

Fixed Term Contract Information Statement

Employers must provide employees engaged on a set-term agreement with a copy of the Fixed Term Contract Information Statement before, or as soon as practicable after, the agreement is entered into. The Fair Work Ombudsman is yet to publish the Fixed Term Contract Information Statement.

Penalties

Employers will be exposed to civil penalties if they enter into a set-term agreement that contravenes the above limitations or if they fail to provide an employee with the Fixed Term Contract Information Statement. The maximum penalty that can be imposed is $18,780 per contravention for an individual (or $187,800 for a serious contravention) and $93,900 per contravention for companies (or $939,000 for a serious contravention). Further, if a set-term agreement is entered into in contravention of the above limitations, the term of the agreement that purports to terminate the agreement at a certain time will be ineffective, and the set-term agreement will be automatically treated as a permanent employment agreement.

Anti-Avoidance Mechanisms

An employer must not do any of the following to bypass the above limitations:

1. terminate an employee’s employment for a period;
2. delay re-engaging an employee for a period;
3. not re‑engage an employee and instead engage another person to perform the same, or substantially similar, work for the person as the employee had performed for the person;
4. change the nature of the work or tasks the employee is required to perform for the person; or
5. otherwise alter an employment relationship.

Disputes about Set-Term Agreements

If there is a dispute between an employer and employee about the limitations to the use of set-term agreements, the dispute is first to be resolved at the workplace level by discussion between the employer and employee. If the discussions at the workplace level do not resolve the dispute, either the employer or employee may refer the dispute to the Fair Work Commission. If the employer and employee agree, the FWC will arbitrate the dispute.

Key Takeaways for Employers

Time is quickly running out for employers to prepare for the introduction of these limitations on set-term agreements. Employers should take the following steps as soon as practicable:

1. review their existing set-term agreements to determine whether the employees can be employed on a further set-term agreement and if so, on what terms;
2. determine whether any of the above exceptions will apply to their employees; and
3. review and amend their template set-term agreements to ensure they are consistent with the above limitations.

If you need assistance with preparing or reviewing set-term employment agreements or have any questions about the limitations to the use of these agreements more generally, Addisons’ Employment & Workplace Relations team can assist.