It is legal to use fixed-term agreements as an employer in New Zealand when you have a: 

  • genuine reason for the role being fixed-term, rather than permanent; and
  • that reason is based on reasonable grounds. 

Because fixed-term agreements provide less stability to employees than long-term permanent employment, the onus is on you to use them in specific cases when there is a proper justification for doing so. This article discusses: 

  • the difference between fixed-term and permanent employees;
  • the question of when it is legal to use a fixed-term agreement; and
  • what mistakes employers commonly make.

What is the Difference Between Fixed-Term and Permanent Employees?

Fixed-term and permanent employees are essentially alike in all ways. However, the one difference is that a fixed-term employee’s relationship with your business will end: 

  • on a specified date; or 
  • when a specified event occurs. 

Other than that, your business should treat them as permanent staff in terms of employment rights and obligations. Whether part-time or full-time, the key difference is that those rights and obligations end with the worker’s employment on a particular date.

As a general rule in New Zealand, most employment relationships are permanent. Employment law supports this rule, in that it encourages long-lasting and stable employment. The implication of this for your business is that there must be a genuine reason based on reasonable grounds to hire an employee on a fixed-term contract. You must also tell the employee about this reason.

What is a “Genuine Reason” for Fixed-Term Agreements?

For a fixed-term employment agreement to be legal, your business must have a genuine reason that is specific and measurable. 

For instance, common uses of fixed-term agreements include:

  • covering for an employee who has taken a period of leave, such as parental leave or extended sick leave; or
  • doing a particular project that requires a specific set of skills. 

These situations are time-limited, clear and can easily be explained to a new employee.

For a reason to be genuine, it must directly give rise to a basis for fixed-term employment in the specific circumstances. You will need to demonstrate a specific reason that you only need the employee for a limited period of time, instead of permanently. Further, you cannot use a fixed-term contract to achieve illegitimate objectives or circumvent other areas of the law.

As an example, using a fixed-term contract to essentially trial a new staff member before offering them permanent employment will not qualify as a legal justification for a fixed-term agreement.

What Are Common Mistakes Employers Make With Fixed-Term Agreements?

Employers sometimes struggle to understand what exactly constitutes “reasonable grounds” for a fixed-term agreement. It is also easy to misunderstand the requirement of a “genuine reason.” This means that some situations may seem like genuine or appropriate situations for a fixed-term role when in fact there are strict rules around what a “genuine reason based on reasonable grounds” can consist of.

For instance, you may work in an industry that is inherently volatile or unpredictable. Alternatively, your customer or client flows may constantly change. In these situations, some employers understandably believe that a fixed-term employment agreement is appropriate because an employee can be let go if the work or industry slows down after a period of time. However, under the law, this is not a genuine reason. 

Another common mistake concerns employees on work visas. Some employers may want to use a fixed-term agreement for a worker who is on a limited work visa, with the agreement ending when the visa expires. However, this is not a legal reason for a fixed-term agreement either. The expiry of a work visa is a feature of the employee’s situation, not of the position itself.

However, if you are concerned about this as an employer, you can include provisions in an employment agreement to require employment to be conditional on the employee holding the correct visa.

Key Takeaways

It is legal to use a fixed-term agreement in New Zealand, but only when the employer has a genuine reason to do so instead of a permanent arrangement. There are rules as to what classifies as a genuine reason based on reasonable grounds. Typically, there are specific situations where fixed-term agreements are common, such as cover for parental leave. You should be careful when you are not sure why the employee is only needed for a fixed period of time, instead of indefinitely into the future. If you have any questions about fixed-term agreements in New Zealand, contact LegalVision’s New Zealand employment lawyers on 0800 005 570 or complete the form on this page.

FAQs

What is a fixed-term agreement?

An employment agreement where the employee is only employed for a limited period of time. The reason for this limit should be clear in the employment agreement and it must represent a genuine justification from the employer.

Do fixed-term employees have the same employment rights as other employees?

Yes, they do. Fixed-term employees only differ from permanent employees in that their employment (and the rights and obligations associated with it) ends on a particular date.

Is it legal to use a fixed-term contract if my business’ future income is unpredictable?

No, this is not classified as a genuine reason based on reasonable grounds for a fixed-term employment agreement.

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