By Globalization PartnersSeptember 2020
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Hiring skilled international employees is a pivotal moment when your organization looks to scale its capabilities and diversify its workforce.
Yet it also means performing due diligence since every country maintains distinct labor laws that dictate compliant work classifications and contract types.
The chances are that you offer new international hires one of two types of employment contracts: fixed-term or indefinite.
Understanding the differences between a fixed-term and an indefinite contract agreement is crucial for compliance, day-to-day operations, profitability, and overall brand reputation.
What Is a Fixed-Term Employment Agreement?
Fixed-term agreements are finite contracts and are also known as limited-term (LT) contracts. Employees enter into fixed-term agreements with full knowledge of their definitive start and end dates and receive full employee benefits during the contracts’ duration.
At the conclusion of the contract, an organization may choose to renew or extend the fixed-term contract. However, it must be careful when doing so. Many countries maintain limitations on how often a fixed-term employment contract can be renewed, either by capping a contract’s total period or restricting the number of renewals — or both.
These international restrictions on fixed-term contracts seek to protect a country’s citizens from potential abuses that have historically occurred under such an agreement type. It also assures companies can’t structure themselves around a continual cycle of short-term workers, leaving its employees in limbo regarding long-term job security and benefits. Finally, limits on fixed-term contracts ensure a lawful contract termination process occurs at the agreed-upon end date.
After reaching the maximum number of contract renewals or maxing out a fixed-term contract’s total permitted duration, organizations must reclassify the employee as indefinite.
To summarize, the key characteristics of a fixed-term contract include:
- Temporary duration with a stated end date.
- Specific workloads, projects, or task scope.
- Qualifies for employee benefits.
- Outlined work hours and restrictions on requiring fixed-term contractors to work overtime.
- Clear contract termination procedures.
- Contracts that typically do not exceed one to three years, though exceptions exist.
Pros and Cons of Fixed-Term Employment
Given the unique legal parameters of fixed contracts, organizations looking to hire internationally should consider the general pros and cons.
The clear scope of a fixed-term employee comes with several advantages — for both the employer and the employee.
- Best-fit skillsets: Fixed-term contracts are the intuitive choice when expertise is needed for a specific project or task. For example, a temping agency might hire a fixed-term employee to implement and oversee a new, enterprise-wide piece of HR software. Once that software is up and running smoothly, the relationship between the organization and the contractor ends.
- Quickly scaled operations: Fixed-term contractors can tackle specific projects, workloads, or assignments for teams that are already over-extended or at-capacity. Even better, they can pilot systems or set up new workflows, equipment, or technology to alleviate that overburdened team, allowing your organization to scale up work to meet new goals and market demands.
- Nimble operations: Fixed-term contracts are innately flexible. Employers bring on the talent they need right when they need it. Contractors themselves get to experience what it’s like working in various roles and for various industries, as well as shape an ideal work-life balance that might not be possible with an indefinite contract.
Employers must also review the unique risks of hiring fixed-term contractors, particularly if those limited-term hires live abroad.
- Rights to full compensation: Fixed-term contractors are entitled to their contract’s full compensation even if they are dismissed before their contract’s stated end date. Including an early termination clause in the contractor’s agreement can sometimes prevent this dismissal payout, but only in certain countries.
- Labor court disputes: Given the country-by-country differences in lawful fixed-term contracts, it can be difficult to manage transparent and fully compliant contracts. Organizations headquartered in one nation are likely well-versed with their own labor laws but less-than-familiar with international regulations. This presents a complicated situation if an international contractor considers their fixed-term contract unlawful or their worker status misclassified, or if they believe they have been unjustly dismissed. Under any of these circumstances, the contractor may file a claim with their country’s labor law regulators. To defend yourself in court, your organization must have an established entity within that country, usually a subsidiary. Without a subsidiary or similar entity, you cannot represent yourself in international labor courts and are liable for additional employee damages, fines, fees, and penalties.
What Is an Indefinite Employment Agreement?
An indefinite employee agreement is the most common type of employment relationship today, where an employee is hired for an indefinite, continuous period. Their contract contains no predetermined expiration date. As a result, indefinite employment ends only under:
- Employee resignation
- Lawful termination
- Employee retirement
- Permanent business closures
Indefinite employees are eligible to receive company benefits, such as health plans, retirement packages, paid vacation, paid holidays, sick days, and other benefits offerings. What’s more, indefinite term employee agreements come with stronger employee rights and employer-side obligations, namely the right to reasonable notice upon termination. The vast majority of countries support indefinite employment agreements over fixed-term ones, paying particular attention to crafting employee-favored laws regarding lawful dismissals.
The procedures to terminate an indefinite employee legally vary widely across countries. For example:
- In Belgium, advanced notice periods are required to notify indefinite employees of layoffs, and severance pay must be tiered to their years of employment.
- In Brazil, termination does not require a cause but does require severance pay whether justification is given or not. Severance pay is higher if employers don’t offer an explanation for the dismissal.
- In the Czech Republic, terminated employees must receive a notice a minimum of two months in advance of their end date unless termination is due to criminal activity, plus severance pay determined by their length of employment.
- In Japan, employees may only be dismissed with a given cause and a minimum 30-days notice, alongside a full dismissal proceeding and documentation. The country’s labor laws enact some of the strictest limitations on terminating employees in the world.
Pros and Cons of Indefinite Employment
Indefinite employment is the familiar approach to employee-relationships for the vast majority of organizations. Its familiarity, though, may make people overlook this contract type’s advantages and disadvantages.
There are inherent strengths to maintaining the same domestic and international employees over the years.
- Stability: Organizations experience less turnover by maintaining a core network of indefinite employees. Research reveals lower turnover rates provide a range of benefits, from higher employee morale and increased productivity to improved customer retention and lower recruitment costs.
- Loyalty: Indefinite-term employees commit to organizations with the expectation of years of employment. Organizations can boost that loyalty through incentivization schemes, bonuses, professional development opportunities, workplace amenities, employee perks, and more strategies, few of which make sense or pay off with short-term employees.
- Clear organizational structure: Companies committed to indefinite employment over contractors and fixed-term hires build a sensible and stable organizational structure bolstering operations. Employees have a definitive understanding of workflows, teams, departments, and leadership, plus where they fit into the wider organizational structure — plus positions or promotions they can progress toward.
Likewise, there are a few unique challenges to indefinite-term employment agreements, particularly when hiring globally.
- More employer obligations: Worldwide, indefinite employees tend to be more protected under labor laws regarding pay, benefits, time-off policies, and — most stringently — lawful termination. Indefinite contracts missing clear termination clauses or notice provisions are far more liable to paying dismissed employee damages. Even employers with contract termination provisions will still likely have to provide severance pay, tapering benefits, and reasonable termination notices to avoid labor law breaches.
- Challenges in navigating international indefinite labor laws: Again, indefinite labor contracts and their required clauses range country by country. Few organizations have legal, financial, and HR experts in-house who are fluent in a target country’s labor laws. For this reason alone, many organizations turn to professional employer organizations (PEOs) and employer of record services to manage the administrative functions of international indefinite employees, since PEOs do support country-specific subject matter experts available to draft compliant contracts.
When to Use a Fixed-Term Versus an Indefinite Contract
Fixed-term contractors can be a cost-effective and risk-averse solution under the following circumstances:
- Hiring for seasonal work.
- Filling in for employees taking leaves of absence or on sabbaticals.
- Temping for employees who are on parental or long-term medical leave.
- Backfilling a vacancy that will only be filled after a long, thorough hiring process or during major organizational restructuring.
- Offering subject-matter expertise or consultancy for a dedicated project.
- Building or integrating new enterprise-wide technology.
- Testing a new position type.
- Managing ex-pat or foreign citizen contractors.
Likewise, indefinite employees are recommended if you’re:
- Filling a requisite department role.
- Expanding a department or team, particularly to increase its long-term work capacities.
- Experiencing sustained revenue growth.
- Having to frequently turn away new clients, orders, or work.
- Setting up permanent operations in a new country or market.
- Short-staffed administratively or for customer service and support functions.
Both private and public organizations alike use fixed-term and indefinite contracts based on needs, budgets, staffing capacities, and current business priorities. Determining the best employment agreement type, though, also requires considering your risk tolerance for properly classifying employees via contracts and whether you have relevant legal counsel readily available to help navigate this new contract terrain.
Comparing Indefinite-Term Contracts Compared to Fixed-Term Contracts
What to include in a compliant indefinite contract or fixed-term contract varies by country.
However, several major clauses permeate contracts regardless of what country you’re hiring in. For indefinite employment agreements, most labor laws mandate contracts contain the following:
- Job title.
- Estimated work hours.
- Job location.
- Benefits, including health, dental, vision, life insurance, and more.
- Vacation and sick day policies.
- Additional leave policies.
- An outlined probation period, if relevant to the role.
- Termination clauses, including just causes, severance pay, due notice, and other dismissal policies.
- Collective bargaining rights.
- Required insurance or certificates, such as medical malpractice insurance for physicians in certain U.S. states.
For fixed or limited-term agreements, contracts should generally include the following to avoid misclassification and general labor law statutes:
- Clear contract start and end dates.
- Role title and description.
- Estimated work hours.
- Overtime eligibility.
- Vacation and sick day policies.
- Early termination clause, including just causes, contract fulfillment compensation, due contract termination notice, and other dismissal policies.
Again, working with a PEO and Employer of Record service with a presence in the country where you’re looking to hire provides an invaluable resource to draft legally appropriate contracts. Your PEO partner has the resources and knowledge to navigate both types of employment contracts — fixed and indefinite — to match regulations and attract top talent.
Other Types of Employment Contracts
Generally speaking, employment contracts fall under one of two categories:
- Standard employment: Standard employment encompasses contracts that outline full-time hours, salary, employee benefits, retirement packages, overtime pay, vacation policies, set termination clauses, severance pay requirements, due termination notice, and any other standards generally associated with contemporary full-time, stable employment.
- Nonstandard employment: Nonstandard employment refers to employee arrangements falling outside the standard scope of work and without the same list of contractual obligations and requirements. Nonstandard employees include seasonal workers, temporary or outsourced agency workers, part-time employees, on-call employees, and in many cases, freelancers and independent contractors.
Indefinite contracts overwhelmingly fall under the standard employment category. Conversely, fixed-term contracts align with nonstandard employment, given their set expiration dates and specific work parameters.
As a general hiring best practice, organizations should set employee classifications based on the nature of an employee’s role rather than pure terminology like “standard” or “nonstandard.”
For example, an international employee may have initially been brought on board for a year via a fixed contract. At the end of the year, your organization is so impressed with their work, you decide to offer a contract renewal — this time with even higher compensation, wider responsibilities, and additional benefits.
Under basic employee arrangement terminology, this contract is still nonstandard and fixed-term. However, the overall character of your employee’s role now borders something closer to standard long-term employment. In some countries, offering this fixed-contract extension in the first place is illegal. To keep that employee on payroll, you would instead be required to reclassify the worker as indefinite — and their contract agreement with it.
- Terms like “standard” and “nonstandard” are helpful guideposts but not defining, legally binding contract terminology.
- Fixed-term and indefinite-term employment offer far more prescriptive information on compliantly classifying your international employees.
- The expected duration of an employee’s work, followed by the nature of that work itself, are the most important considerations when drafting a compliant employment contract.
- Always include an early termination or dismissal clause in employee contracts, whether fixed or indefinite.
- Always research a country’s specific fixed-term labor laws, noting elements like the total number of allowed contract renewals, permitted contract lengths, fixed-term employee benefits, overtime eligibility, and more.
- Consult labor-law legal counsel when drafting contracts for new hires. This ensures your employees — whether fixed-term or indefinite, domestic or international — collect full entitlements while you minimize misclassification risks.
Offer the Right Contracts to Your Employees, Wherever They Are
At Globalization Partners, our comprehensive solution is primed and ready to help you hire top talent in 187 countries — without months of researching country-specific labor laws, contract drafting, legal requirements, entitlements, and more.
Request a proposal to protect yourself from using the wrong types of employment contracts as you expand globally.