Fixed-term contracts: what a small employer can and can't do

Somebody goes on maternity leave. A funded project lands with an end date printed on it. The summer gets busy enough that you need a fourth pair of hands until October. The obvious answer is a fixed-term contract, and in all three of those cases it is the right answer.

The trouble starts when an owner reaches for one for a different reason — because it feels like a safer version of hiring. A way of taking somebody on with fewer strings attached, so that if it doesn't work out the contract simply runs out and everyone shakes hands. That is not what a fixed-term contract is, and treating it that way is how small employers end up with an unexpected permanent employee, or a bill for the rest of a term they thought they could walk away from.

What actually counts as a fixed term

A fixed-term contract is an employment contract that ends automatically in one of three ways: on a specific date, on the completion of a particular task, or on a specified event happening — most commonly the return of the person being covered.

The person on it is an employee. They get a written statement of employment particulars on or before their first day, and that statement has to say when the contract ends or how it will end. Vagueness here is where problems begin: 'until the project finishes' is a task-based fixed term only if anybody can say, objectively, what finishing looks like.

It is a different animal from casual or zero-hours work, where the issue is how much work is guaranteed rather than how long the relationship lasts — the rules on zero-hours arrangements are a separate question and worth keeping separate in your head.

The rights that don't change at all

The Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002 do exactly what the name says. A fixed-term employee cannot be treated less favourably than a comparable permanent colleague — on pay, on benefits, on access to the pension scheme, on training — unless you can objectively justify the difference. 'They're only here till March' is not an objective justification. A genuine, proportionate business reason might be.

They also have a specific right to be told about permanent vacancies in the business. You do not have to write to them individually; circulating vacancies the way you normally do, so they actually see them, is enough.

Everything else runs as normal. Holiday accrues at 5.6 weeks a year, pro-rated. Auto-enrolment assessment applies from the start, on the same basis as anyone else. Discrimination protection applies from day one, as do paternity leave and ordinary parental leave following the changes that came in on 6 April 2026. So does statutory sick pay, which since that date is payable from the first qualifying day rather than the fourth, with no lower earnings limit to fall below: the employee gets the lower of £123.25 a week and 80% of their normal weekly earnings, for up to 28 weeks.

A fixed-term contract fixes the end date. It doesn't reduce the rights in between.

Letting it expire is still a dismissal

This is the single most commonly missed point, and it is not a technicality. When a fixed-term contract reaches its end date and is not renewed, the law treats that as a dismissal. Not a resignation, not a mutual parting, not 'nothing happened'. A dismissal, which needs a fair reason and a fair process once the employee has enough service to claim unfair dismissal.

Right now that qualifying service is two years, so a nine-month summer contract carries little unfair dismissal risk. From 1 January 2027 the qualifying period drops to six months, and at that point a twelve-month maternity cover contract runs well past the line before it ends. That is a genuine change in the arithmetic of fixed-term hiring, and it is worth reading up on the wider effects of the six-month qualifying period before you sign anything that runs into next year.

In practice, doing it properly is not onerous. Talk to the employee well before the end date about whether there is anything else available. Confirm the end of the contract in writing. Give the statutory notice, or the contractual notice if it is longer. If the reason the role is ending is that the work has gone, that is a redundancy, and if the employee has two years' service they are entitled to statutory redundancy pay. You cannot contract out of that: waiver clauses in fixed-term contracts were abolished in 2002 and one sitting in an old template today is worth nothing.

The four-year rule nobody diaries

Here is the one that arrives without warning. Under regulation 8, an employee who has been continuously employed on successive fixed-term contracts for four years or more becomes a permanent employee automatically, unless the continued use of a fixed term can be objectively justified.

It happens by operation of law. Nobody has to issue a new contract, nobody has to agree to it, and the employer being unaware of it changes nothing. The employee can write and ask for a statement confirming their status, and you have 21 days to reply.

So the September project assistant you renewed for a fourth twelve-month term is, from the start of that fifth year, permanent — with an ordinary contract of employment that now needs a fair reason and a fair process to end at all. If you are going to renew fixed terms repeatedly, put a reminder in the calendar at the three-year mark and make the decision deliberately rather than discovering it later.

The clause that decides what ending it early costs

A fixed term is a promise of work for a period. Break that promise without a clause allowing you to, and you are in breach of contract for the balance of the term.

Put real numbers on it. Take a twelve-month contract at £32,000 a year and a decision at the end of month four that it is not working. If the contract contains a one-month early-termination clause, the exposure is a month's pay — £2,667 — and you serve notice. If it contains no early-termination clause at all, the remaining eight months of the term is £21,333, and that is a straightforward contract claim, reduced by whatever the employee earns elsewhere in that period but not by your good intentions. It also sits separately from anything an employment tribunal might award.

One clause, eight times the cost. Check that every fixed-term template you use has a notice provision that works in both directions, and check it says how much notice, not just that notice exists.

When a fixed term is the right tool

It is the right tool when the end is genuine and identifiable: maternity or long-term sickness cover, a grant-funded post, a seasonal peak, a one-off event, a specific piece of work with a definable finish.

It is the wrong tool as a substitute for a probationary period. If what you actually want is a way to part company early if somebody isn't right, that is what a probation clause in a permanent contract does, and what probation periods actually protect is worth understanding before you build a hiring approach on the wrong one. Using a fixed term for the same purpose gets you the worst of both: the same dismissal obligations, plus a candidate pool that shrinks because good people are wary of an end date.

The half-hour that saves the trouble

Pull every fixed-term contract you currently have. List the name, the start date, the end date and how many consecutive terms that person has now done. Most owners with three or four of these cannot answer the last column from memory.

Diary two dates for each one. Three months before the end date, so you have time to consult properly rather than announcing it. And the three-year point of continuous service, so the four-year rule is a decision rather than an accident.

Check each contract has a working early-termination clause, with a stated notice period.

Compare terms and conditions against a permanent colleague doing similar work — pay rate, bonus eligibility, pension, access to training. Anything different needs a business reason you would be comfortable explaining out loud.

Check the end-date wording says something objectively verifiable, especially on task-based contracts.

None of this takes long. All of it is considerably cheaper than the alternative, which is finding out about regulation 8 from somebody who has just read it more carefully than you have.

Common questions

Can I use a fixed-term contract instead of a probation period?

You can, but it does not do what most owners hope. Letting a fixed-term contract expire is a dismissal in law, so once the employee has enough qualifying service you need a fair reason and a fair process either way — the end date does not remove that. A probation clause inside a permanent contract achieves the actual aim more honestly: a defined review period with a short notice period on both sides. It also reads better to candidates, because a fixed end date makes good applicants assume the role is temporary and price the risk into whether they apply at all.

What happens after four years of fixed-term contracts?

Under regulation 8 of the Fixed-term Employees Regulations 2002, an employee continuously employed on successive fixed-term contracts for four years or more automatically becomes a permanent employee, unless the continued use of a fixed term can be objectively justified. It happens by operation of law: no new contract is issued, nobody has to agree to it, and the employer not realising makes no difference. The employee can request a written statement confirming their status and the employer has 21 days to respond. If you renew fixed terms repeatedly, diary the three-year point so the fourth renewal is a deliberate decision rather than an accidental permanent hire.

Do fixed-term employees get redundancy pay?

Yes, on the same basis as anyone else. If a fixed-term contract ends because the work has gone, that is a redundancy, and an employee with two years' continuous service qualifies for statutory redundancy pay calculated on age, length of service and weekly pay. Continuity counts across successive contracts, so four one-year terms with no meaningful gaps is four years of service, not four separate short jobs. You cannot contract out of it: clauses waiving redundancy rights in fixed-term contracts were abolished in 2002, so one sitting in an old template you inherited has no effect at all.

Can I end a fixed-term contract early?

Only if the contract lets you. A fixed term is a commitment to employ for that period, so terminating early without an express early-termination clause is a breach of contract, and the employee can claim the balance of the term less anything they earn elsewhere in that time. On a twelve-month contract at £32,000 ended after four months, that is around £21,333 rather than the £2,667 a one-month notice clause would have cost. Check that every fixed-term template you use contains a notice provision, that it works in both directions, and that it states an actual notice period.

AD Solicitors, a separate SRA-regulated law firm, has a guide to employment law for small employers.