Why a fixed-term employment contract is risky in global hiring

January 28, 2022

fixed term employment contract

HR, beware: Considering fixed-term employment contracts as part of your global hiring strategy could expose your company to more risk than you can handle, both legally and financially.

Take it from this funeral home business in Canada: They were required to pay out nine years’ worth of compensation—close to $1.3 million—to a former employee for dismissing him in the first year of a 10-year contract.

The fixed-term contract itself wasn’t the problem; rather, it was the company’s lack of diligence around the employment agreement that cost them.

Here’s what you need to know to help protect your organization from the risk of fixed-term employment contracts, particularly in unfamiliar global markets.

What is fixed-term employment?

Fixed-term employment, also known as limited-term employment, is an employment strategy in which an organization contracts with an individual worker for a specific period of time. You can think of these employees as temporary workers. The difference between a fixed-term employee vs. a permanent contractor is that the former has an end date or certain milestone to mark the end of their employment.

Fixed-term employment contracts usually don’t extend beyond three years, with most contracts landing in the one- to three-year range. In some countries, companies employing fixed-term contracts have options to extend them—if, for example, a critical project remains unfinished or the organization moves a contract employee to another project.

Other reasons why a company would use a fixed-employee contract include:

  • Covering a regular employee who’s away on sick leave, maternity/paternity leave, or on sabbatical
  • Bringing in talent to take pressure off a team overloaded with work
  • Adding a worker with specific expertise for a special project, such as a solution architect to help with an enterprise digital transformation project

What are the global risks of fixed-term employment contracts?

Fixed-term employment is risky when hiring internationally because laws governing employment contracts vary from country to country. If HR is not versed in the nuances of local labor regulations when drafting international employment contracts, it may unwittingly put the organization at risk. For example:

Because of the variance in fixed-term contract requirements around the world, companies considering this approach should keep the following in mind for the country they’re hiring in:

  • The allowable fixed-term contract durations
  • The allowable employment role or job types that a fixed-term worker can hold
  • The general labor laws for the country, including benefits, at-will worker rights, tax liabilities, dismissals and industry-specific regulations

Avoiding risk when using a fixed-term employment contract

A fixed-term employment contract can prove to be a useful tool in global hiring when the organization has a firm grip on the timetable needed to complete a project. In that scenario, a fixed-term contract is not likely a significant risk.

If there is any doubt about local labor laws, HR should follow some established guidelines that can provide a measure of safety when engaging in limited-term hiring. Consider these measures:

  • Avoiding successive fixed-term employment contracts  (an indefinite term contract may be a better solution)
  • Ensuring that the contract is in writing and that it includes early termination language
  • Avoiding any automatic renewal language in a fixed-term employment contract
  • Avoiding any mention of benefits or terms usually associated with permanent employee contracts
  • Having a trusted legal specialist with expertise in the local employment laws the review contracts

Another way to avoid risk is to partner with a global employer of record for fixed-term employment needs. An employer of record, sometimes referred to as an international PEO, hires international workers on your behalf and handles all the local HR, payroll and tax requirements. The employer of record then leases the employees back to you through an employee lease agreement to manage their day-to-day work.

Because it has in-country expertise, the employer of record ensures that all contracts—including fixed-term contracts—comply with the local labor laws, mitigating your risk of penalties, fines or back pay requirements.

Learn more about how our employer of record solution, Global Employment Outsourcing (GEO), can help your organization avoid risk in global hiring by speaking with a global solutions advisor. Contact us today.

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