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12 September 2017 Do "outer limits" employment contracts have a future?

By Richard Ottley, Partner

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!). 

If you require any further information please contact:

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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