Most of us have come across fixed-term employment agreements at some stage in our working lives. Fixed-term agreements are attractive to employers. They provide a solution to a short-term need without the ongoing obligations owed to permanent employees. Most employees will accept fixed-term agreements without too much fuss – because they need the work.

Fixed-term agreements limit the right of an employee to raise a personal grievance for unjustified dismissal, so they can only be used in limited circumstances. An employer must have “genuine reasons based on reasonable grounds”. The Employment Relations Act 2000 (ER Act) does not define what this means. This can lead to many fixed-term employment agreements not being worth the paper they are written on.

This was the result in Tillmans Fine Furniture Ltd v Rookes. In this case the Employment Court provided guidance on when a fixed-term agreement will hold up.

The facts

Tillmans hired Ms Rookes in September 2022 as a sales consultant. Ms Rooke’s employment was permanent but subject to a 90-day trial period. At just under three months Ms Rookes was given notice of dismissal under the trial period. She was told her product knowledge was not up to the required standard. Two days later Tillmans offered Ms Rookes a two-month fixed term employment agreement.

This was not a change of heart. Instead, the managing director (Mr Sandford) felt he had a moral duty to help Ms Rookes by providing her with an income over the holiday period and time to find another job while still employed. Ms Rookes agreed and worked out two more months of employment. At the end of the period of fixed employment her employment with Tillmans’ ended.

Ms Rookes raised a personal grievance for unjustified dismissal and took her case to the Employment Relations Authority (Authority).

The Authority decides

The Authority determined Tillmans use the 90-day trial period in December 2022 was justified. However, Tillmans was not able to rely on the fixed-term agreement to end Ms Rooke’s employment in February 2023.

Tillmans claimed it had genuine reasons for the fixed-term agreement – to grant Ms Rookes a reasonable amount of time to search for a new job after the holiday season finished. The Authority accepted that Mr Sandford genuinely wanted to help Ms Rookes, but that was not enough. Genuine reasons based on reasonable grounds must include consideration of s s66(3) ER Act. This states that genuine reasons do not include:

• Excluding the rights of employees under the ER Act.
• Establishing whether someone is suitable for permanent employment.
• Excluding or limiting the rights of employees under the Holidays Act 2003.

The Authority determined that under the fixed-term agreement Tillmans could avoid obligations it would have had with permanent employees, such as managing performance before proceeding to a dismissal. Tillmans was not entitled to limit Ms Rookes’ rights under the ER Act in this way. The Authority also considered that the situation was one of ongoing employment, as Tillmans had an ongoing need for a sales consultant. The Authority awarded Ms Rookes $15,000 compensation and three weeks’ wages, totalling $2,625.

Tillmans goes to the Employment Court

You can imagine why Tillmans would challenge the Authority’s determination. Tillmans could have said goodbye to Ms Rookes a week before Christmas. Instead, it offered her a limited period of employment over Christmas and New Year. This seems like a decent thing to do.

At the Employment Court Tillmans argued that once an employer is found to be genuine in offering a fixed term agreement, it is not open for a decision maker to determine a fixed term was invalid.

The Employment Court disagreed. Like the Authority, the Court considered two leading cases addressing fixed-term agreements: Canterbury Westland Free Kindergarten Association (t/a KidsFirst Kindergartens) v New Zealand Education Institute; and Morgan v Tranzit Coachlines Wairarapa Ltd. From reviewing the ER Act and these cases and the Judge confirmed the following:

• The test for “genuine reasons based on reasonable grounds” is objective.
• The test does not stop at whether the employer was genuine (or sincere) in offering a fixed-term agreement, as Tillmans was. There is a wider investigation of the reasons relied on by the employer.
• All of the circumstances need to be taken into account when objectively assessing those reasons.
• Nothing that is exploitative of an employee can be accepted as a genuine reason.

The Judge ruled that Authority did not err in its application of the law or misapply the evidence to the ER Act. It properly weighed up all the circumstances before determining that Tillmans did not have reasonable grounds for a fixed-term agreement. Had Tillmans’ objective been merely to assist Ms Rookes it could have achieved that in other ways. Instead, Tillmans was able to secure five months’ work from Ms Rookes, and for the last two months insulate itself from a claim of unjustified dismissal. This resulted in depriving Ms Rookes’ rights under the ER Act, which is specifically excluded as a genuine reason under s 66(3)(a) ER Act. Tillmans’ challenge failed.

Final comment

This case is helpful as it confirms that assessing the validity of a fixed-term agreement is not based on the sincerity of the employer. It is an objective test where all the circumstances must be considered. Anything that is exploitative will not be a genuine reason.

Fixed-term agreements will continue to be a common feature of employment relationships. Employees with little bargaining power are likely to continue accepting such offers. At least now there is greater clarity as to when such agreements will stand up to scrutiny.