Workers hired by clients under fixed-term employment contracts are not contractors running a business supplying a service, but employees whose employment has an end-date or finishes when a specific task or outcome has been achieved.
Fixed-term employment contracts may superficially resemble a contractor’s contract, in that they are typically for a fixed duration for the purposes of a specific project, but the nature of the relationship between the client and worker is one of employment, and not business-to-business.
But under certain circumstances, fixed-term contracts can offer benefits to both clients and contractors, particularly where line management, being in a position of authority, or employee benefits are a feature of the role.
What is a fixed-term employment contract?
For a worker to be a fixed-term employee, they must have an employment contract, or ‘contract of service’, directly with the client, or employer. That contract must be ‘fixed term’, so it must end on a particular date, when a specific task or outcome has been completed or when a particular event occurs.
Workers on an agency or recruitment business payroll are not classified as fixed-term contract employees because their employment contract is with the agency and not with the end-client, or employer.
Fixed-term employment contracts are very common outside of the core contracting disciplines in both the private and public sectors. They are frequently used to bring on board a worker for a fixed period to cover maternity leave and long-term sickness, or perhaps for a single academic year in a school, or when future funding for a role may be uncertain.
Taking on fixed-term employment contracts is not running a contractor business
Workers on fixed-term contracts differ significantly from contractors running a small business. Unlike contractors, fixed-term contract employees have employment rights, just like permanent employees, and receive most of the same benefits as permanent employees on a pro-rata basis, such as annual leave, sick pay and training.
Contractors trading via their own contractor limited company and outside of IR35 typically pay themselves a low salary and the balance of their remuneration as dividends, which can be highly tax efficient. They can also benefit from tax relief on genuine business expenses, such as equipment, travel costs and subsistence.
Fixed-term employees are paid just like permanent employees and pay the full amount of employee’s income tax and National Insurance Contributions (NICs) under Pay As You Earn (PAYE). They can’t claim for travel expenses to and from their main place of work.
Contracts fail the tests of employment – fixed-term employees don’t
Crucially, genuine contractors should fail all of the key three tests of employment by being able to send a substitute in their place, by not being controlled by the client, and by having no mutuality of obligation (MOO) with the client.
Workers hired under fixed-term employment contracts will typically be under the control of their client, being told what, when and where to complete their tasks. They cannot send a substitute in their place.
Workers on fixed-term contracts differ significantly from contractors running a small business
Up until the point that the contract ends, there is a mutuality of obligation. This means the fixed-term employee must turn up each day for work, and their employer must find them something to do and pay them regardless.
Advantages to fixed-term employment contracts
Although it can complicate their tax affairs for the financial years they work on an employed basis, contractors can benefit from short periods of being hired on a fixed-term employment basis if:
- There is no other contract work available
- The assignment would provide them with experience on a particular project or with a specific client that they would otherwise be unable to secure
- They wish to benefit from training offered by that employer, or wish to gain some experience in line management.
However, contractors who choose to accept a fixed-term employment contract will no longer be genuine contractors and in control of their own day-to-day activities, and career, throughout the duration of the employment contract.
Fixed-term employment contract workers are attractive to clients because, like contractors, they are a low-risk option compared to hiring permanent employees. A fixed-term contract worker is the ideal solution where the role is temporary but may require line management, or the worker must be an employee for compliance reasons, which is common in the financial sector where fixed-term employment contracts are popular.
Contractors opting for fixed-term employment contracts are technically no longer contractors. But the loss of their higher take-home income may be compensated for by other benefits, such as an opportunity to gain skills and experience.