At a Glance
Much of the discussion around the Employment Rights Act 2025 (‘ERA 2025‘) has focused on the headline unfair dismissal reforms. From 1 January 2027, employees will acquire ordinary unfair dismissal protection after six months, rather than after two years’ service (and will, moreover, no longer have a c.£124,000 cap on the compensatory award they might receive).
One area that has received comparatively little attention, however, is the impact on fixed-term contracts (‘FTCs‘).
Why FTCs Work
FTCs are a valuable workforce planning tool, allowing employers to plan for project-based work, maternity cover, seasonal demand, externally funded positions, and other roles with clear end points. Employers will also sometimes use FTCs for roles which are not time-limited in nature, as a means to assess a candidate or the need for a role, or because of headcount restrictions.
Historically, part of their attraction has been the perception that employment comes to a relatively straightforward end when the FTC expires. While that is true from a practical perspective, it has never been entirely accurate from a legal one.
The Changing Legal Reality
Where an FTC expires, and is not renewed, that constitutes a dismissal for legal purposes.
That often mattered relatively little previously, as many employees on FTCs had not acquired the two years’ service necessary to bring an ordinary unfair dismissal claim. However, once the qualifying period falls to six months on 1 January 2027, many of those employees will gain unfair dismissal protection by the time their FTCs expire.
For those individuals, employers will need to:
- Identify a potentially fair reason for dismissal (in the FTC context, generally redundancy or ‘some other substantial reason’ (‘SOSR‘) where a role is genuinely time-limited); and
- Follow an appropriate process
Potentially Fair Reasons
SOSR
The completion of a time-limited purpose for which an employee is recruited (e.g., a project) may provide a potentially fair reason for dismissal. However, employers may struggle to defend that position if they continue to require the underlying role after the FTC expires.
In cases of pregnancy or other family-related leave, where an employer can evidence that an FTC was terminated to make space for the returning employee, employers may be able to rely on a statutory presumption that the reason for dismissal was SOSR under section 106 of the Employment Rights Act 1996. Importantly, section 106 requires that the replacement has been informed in writing when engaged that the FTC will end when the permanent employee returns.
Redundancy
A redundancy dismissal may be appropriate, for example, where a project ends and the employer’s requirement for employees to carry out that work reduces or disappears. However, an FTC’s expiration does not bypass ordinary redundancy principles, and particular care should be taken where FTCs expire but other employees performing similar work remain employed.
In addition, employers will need to consider consultation, selection pools, alternative employment, and (for employees with two years’ service) statutory redundancy pay.
Expectation Management
Employers should begin placing greater emphasis on how FTCs are drafted and communicated. Contracts and offer letters should clearly explain a role’s temporary nature, underlying business rationale, and the circumstances in which an FTC is expected to end. For relevant temporary cover roles, the drafting should also address the aforementioned section 106 requirements.
Using FTCs for roles which are not genuinely time-limited has always carried risks, and those will increase where the FTC lasts for longer than six months. Employers will need to consider whether it is appropriate to use FTCs in these circumstances.
An Appropriate Process
Active, Early Management
Employers should not focus on FTCs only when expiry dates are imminent, but should ensure they are clear from the outset about the reason for the fixed term and should implement structured processes to monitor end dates, assess renewal decisions, consult, and consider alternative vacancies. For longer FTCs, it may be sensible to take the same approach to probationary periods as for permanent employees.
Where an employee on an FTC has six months’ service, particular consideration will need to be given to the process on expiry of the term. What is practically required depends on circumstances. Fairness will generally require some opportunity for the employee to comment or be consulted on the non-renewal of the contract and a consideration of alternative employment. For straightforward and genuinely time-limited arrangements (e.g., maternity cover), a relatively light-touch process may be appropriate (although this should still begin sooner rather than later). For trickier dismissals (e.g., relating to funding arrangements), a more substantial process might be appropriate.
In all cases, it will be increasingly rare that FTCs should simply be allowed to reach their end date without an active employment decision being taken.
Managers
As with many aspects of the ERA 2025, successful implementation is likely to depend heavily on managers, who should appreciate that that non-renewal amounts to a dismissal in law, and that a fair reason and process may be required.
Training managers to identify risks early, document decision-making appropriately, and escalate issues where necessary, is likely to become increasingly important.
Looking Ahead
FTCs will not disappear, and will remain a valuable resource. However, as employers will face heightened legal risk in terminating them, they should ask:
- Why is the FTC ending?
- Is the underlying reason potentially fair?
- What process is appropriate in the circumstances?
We also recommend that organisations review contract templates, internal processes and manager training, putting them in good stead for the incoming regime changes.
Please contact your usual Littler contact if you would like any support with preparing for the changes, and see here for further information on Littler’s manager training.
