When employers think about the Employment Rights Act 2025, much of the attention has understandably focused on the reduction in the qualifying period for unfair dismissal and the proposed removal of the statutory cap on compensation.
However, one area that has received far less attention is the impact these changes are likely to have on fixed-term contracts.
For many organisations, fixed-term contracts have traditionally provided a relatively low-risk way of engaging employees for projects, maternity or other family leave cover or seasonal demand. From January 2027, however, employers will need to rethink their approach.
Why does the change matter?
At present, an employee whose fixed-term contract expires is treated in law as having been dismissed. This is the case even if the employee knew that their employment was going to be for a fixed, temporary period. However, because employees currently need two years’ service to bring an ordinary unfair dismissal claim, the majority of fixed-term contracts end before that threshold is reached, meaning that relatively few fixed-term employees had sufficient service to challenge the dismissal.
The reduction of the qualifying period to six months changes that position dramatically.
From 1 January 2027, a far greater proportion of employees on fixed-term contracts will qualify for unfair dismissal protection before their contract comes to an end. Combined with the proposed removal of the cap on compensatory awards, employers who simply allow contracts to expire without careful planning could face a much greater litigation risk than they do today.
In practical terms, what does this mean?
It means that where the fixed-term employee has 6 months’ service, employers can no longer bring a fixed-term contract to an end by serving notice, as many employers have been doing whilst the qualifying period has been 2 years (as there was no risk of an unfair dismissal claim).
In the same way as in any dismissal where the employee has requisite service to bring an unfair dismissal claim, the employer will need to establish:
- the principal reason for the dismissal;
- that the reason falls within one of the potentially fair statutory categories (capability, conduct, redundancy, illegality or some other substantial reason (SOSR); and
- that dismissal was reasonable, including that an appropriate procedure was followed.
The principal reason for the dismissal will often be related to the fixed-term contract coming to an end, for example because funding has ended, a project has completed or in cases where a contract is used to cover maternity or other family leave, where the parent returns to work.
In most cases, it will be appropriate for the employer to rely on either some other substantial reason or redundancy as the fair reason for the dismissal, but the correct reason will depend on why the fixed-term contract was created and why the employee’s services are no longer required.
Fair reasons for dismissal
Maternity/family leave cover
Most employers are familiar with the fact that employees returning from maternity, adoption or shared parental leave have statutory rights to return to work. What is less widely appreciated is that the law also contains specific provisions dealing with employees who are recruited purely to provide temporary cover during that period of leave.
Section 106 of the Employment Rights Act 1996 recognises that, in these circumstances, an employer may need to bring the replacement employee’s employment to an end when the substantive postholder returns. Provided certain conditions are met, that dismissal will be treated as having a fair reason, as required in unfair dismissal law.
To rely on this provision, employers must ensure that, at the point of recruitment, the temporary employee is informed in writing that their employment will end when the employee they are covering returns from maternity, adoption or shared parental leave and that the dismissal is taking place to give work to the returning employee.
Generally, employers have not been doing this- they haven’t needed to because the qualifying period for unfair dismissal has been longer than the period of maternity/family leave cover and the length of the fixed-term contract, but as explained above, that will all change when the qualifying period reduces.
Importantly, these statutory provisions do not remove the need to follow a fair process. They establish only a potentially fair reason for dismissal. As with any dismissal, the employer must still act reasonably in all the circumstances. This is likely to include considering whether there are any suitable alternative vacancies available and light touch consultation with the employee about ways to avoid the dismissal before any decision is made.
So in summary, when recruiting maternity or other parental leave cover, ensure the temporary nature of the role is clearly explained from the outset, confirm this in writing and remember that, even where section 106 applies, a fair process remains essential.
Redundancy
Dismissing a fixed-term employee by reason of redundancy will constitute a fair reason for dismissal where the fixed-term employee was engaged to undertake work that has now ceased or reduced, for example where a particular project has been completed, seasonal demand has reduced, or external funding for the role has ended.
However, employers should not assume that the fixed-term employee can automatically be selected for redundancy simply because their contract is due to expire. An employer will still be required to show that they have followed a fair selection process, meaning that where permanent and fixed-term employees undertake the same or similar work, the employer may need to consider whether they should be included within the same selection pool and scored against a set of objective criteria.
As a fair process also involves warning the employee of the risk of redundancy as early as possible, it is important to make clear at the start of the fixed-term contract that the work to be done is for a limited period, the contract is due to end when the work is done and that there is no guarantee of another role when it ends.
Some other substantial reason (SOSR dismissal)
A dismissal for some other substantial reason is a catch-all dismissal, but may be particularly helpful for ending fixed-term contracts fairly. Case law makes clear that if the contract was for a specific and genuine purpose, which has now come to an end, an employer may be able to fairly rely on an SOSR dismissal.
The employer would need to show that the reason was substantial and capable of justifying the dismissal of an employee holding that particular role.
There will still need to be a fair procedure followed, and we would recommend at least one meeting, as well as an opportunity to apply for alternative roles.
The Countdown to 2027
As always, the key to staying ahead of the changes is preparation.
For that reason and ahead of the changes, we would recommend that you:
- Consider fixed-term contracts that are shorter than 6 months in duration, as there will be no impact as a result of the change to the qualifying period. However, in many roles, the disruption to the business will outweigh the benefit of avoiding the legal risk.
- Review your use of fixed-term contracts and update documentation, making expressly clear within offer letters and contracts the intended purpose, duration and the circumstances in which the fixed-term contract will come to an end.
- Consider your current fixed-term contracts. Are there any that you wish to bring to an end before the change in the law on 1 January 2027?
- For those fixed-term contracts that will expire on or after 1 January 2027, ensure that you have identified the process that you will follow in plenty of time before the expiry date.
- Document expiry dates for fixed-term contracts and consider implementing an approvals process for renewals and extensions in an attempt to reduce the risk.
- Raise awareness so managers are aware of the changes and the implications.
We appreciate that this is a complex area to navigate, so please do get in touch if you need any further advice.
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We’re here to help with any questions or concerns you may have. Whether you need expert advice or would like an initial conversation about our services, pricing, or the options available, please don’t hesitate to get in touch. At Refreshing Law, what sets us apart from other law firms is that you’ll get to speak to an experienced employment lawyer right from the very first call.
lreynolds@refreshinglawltd.co.uk
Lousha Reynolds
Refreshing Law