Concluding an agreement with a new team member in a growing company may be quite a challenge – whether to conclude an employment contract or contract for services, permanent or fixed-term, full or part time or an agreement with another company instead. In order to clarify these issues we hereby talk about the differences between permanent and fixed-term employment contracts, both in the issues of admissibility and termination.

It has been usual that the employment contract with an employee is concluded for unspecified term. It is equally logical to conclude a fixed-term contract if the employee is needed only for a certain time period or for the performance of certain works. However, caution is needed here because the law allows to conclude fixed-term employment contracts only in certain cases.

A. Employment contract for specified term is allowed only in specific cases on sufficient reasons

Pursuant to Employment Contracts Act (ECA) it is presumed that an employment contract is entered into for a permanent term. This means that if the contract does not clearly state that it is valid until the arrival of a specific date or event, the contract is considered as concluded for unspecified term.

Employment contract for fixed term may be concluded for up to five-year term if it is justified by good reasons arising from the temporary fixed-term characteristics of the work, especially a temporary increase in work volume or performance of seasonal work. If duties are performed by way of temporary agency work, an employment contract may be entered into for a fixed term also if it is justified by the temporary characteristics of the work in a user undertaking. Additionally, ECA allows the conclusion of fixed term employment contract for the period of substitution of an employee who is temporarily absent.

The reasons for concluding the contract for specified term and its duration must be stated in the employment contract in a manner understandable to the employee. The Supreme Court has explained that the reason for concluding fixed-term employment contract cannot be the validity or duration of a lease agreement or other agreement concluded by the employer, because any fixed-term agreements or other legal relations undertaken by the employee do not change the nature of the work into fixed-term in themselves. Therefore the fixed-term employment contract cannot be justified based on these circumstances only. Meaning that the risk management of the various risks of the employer cannot be the reasons for concluding fixed-term employment contract.

So, if the fixed-term employment contract has not been concluded for the actual performance of temporary works or for substituting other employee and the contract does not state the reasons for the temporary nature, then such contract is considered to be entered into for unspecified term. Meaning, that if an employee disputes the expiry of such contract the labour dispute committee or court may deem the contract to be concluded for unspecified term based on the claim of the employee and the employer will be obliged to pay a compensation, including for the time out of work.

B. Extension may turn the contract into contract with unspecified term

No more than two consecutive contracts for fixed term may be concluded for performance of similar work and the contract for fixed term may only be extended once in five years. If a third consecutive contract is concluded for similar work or the contract is extended for a second time, it is considered that the contract is concluded for unspecified term from the start. Contracts are considered to be consecutive if no more than two months passes between the expiry of one and the conclusion of another contract.

If duties are performed by way of temporary agency work, the restriction on consecutive entry into or extension of an employment contract for a specified term is applied to every user undertaking separately, i.e. the restriction must be adhered to if the temporary agency work is performed at the same user undertaking under consecutive employment contracts for a specified term.

C. Differences in termination of the contract

While the employment contract for unspecified term may be ordinarily cancelled by the employee at any time following the advance notice terms provided in law, the employment contract for fixed term cannot be cancelled ordinarily.
Employment contract for fixed term may be extraordinarily cancelled with good reason as a result of which, upon respecting mutual interests, the continuance of the employment relationship cannot be expected until the end of the contract term. Such reason can primarily be the material violation of the obligations arising from the contract by a party.
As an exception the employment contract for fixed term may be cancelled ordinarily, i.e. without good reason, if it is concluded for substituting a temporarily absent employee.

Additionally to the conditions provided above, the parties may, of course, cancel both the contracts for unspecified and specified term at any time by mutual consent.

At the expiry of the term the employment contract for specified term automatically expires and the employee or employer are not required to submit any additional representations or perform any actions. However, if an employee continues to perform work after the expiry of the term of contract, the contract shall be deemed a contract entered into for an unspecified term, unless the employer expressed a different will within five working days as of learning or when he or she should have learnt that the employee was continuing to perform the employment contract.

As stated above the fixed-term employment contract has no other legal advantage than the specific time of its expiry. An agreement with agreed term enables both the employee and the employer to perform project based work during a specific period of time; to gain additional expert know-how; is ideal for substituting an employee during maternity leave. There are also downsides – for example the costs of training a new employee, transfer of knowledge in case of switching employment etc. The law could, of course, provide more flexible regulation in conclusion of fixed-term employment contracts by allowing exceptions for certain sectors, for example, or by taking into account the size/time of operation of companies (technology companies, start-ups). Similarly, there are pros and cons in the case of permanent employment contracts – lack of flexibility in case of changes in the need for the workforce; lay-off expenses if the company’s volumes or direction changes etc.

In Avokaado you can create both the employment contract for fixed (specified) and permanent (unspecified), creating the contract takes no more than 10 minutes and you can be sure that all mandatory conditions are regulated in the contract.

If the blog did not help and some questions remained unanswered – write to Avokaado’s online helpdesk!. You can also find answers to frequently asked questions regarding the specific contract type. In order to create the document the user will answer questions, the tooltips next to the questions explain further the contents, court practice and other circumstances related to the questions. When the questions have been answered the contract is instantly added to Avokaado’s client account and it can be downloaded, shared, commented and signed.

Avokaado 06.02.2018