By Globalization PartnersSeptember 2020
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Using limited-term employment arrangements when expanding internationally comes with many advantages.
Under the right circumstances, this type of employment contract provides a best-fit worker from anywhere in the world to deliver vital services within a clear, set timeline.
Understanding how limited-term employment works grows more important by the year, as technology unlocks wider competition vying for top global talent. Armed with this knowledge, your organization can assess if this type of employment is your best route for hiring contractors internationally, plus how to stay compliant and profitable doing so.
What Is Limited-Term Employment?
Limited-term employment refers to temporary roles or appointments whose contracts generally don’t exceed one to three years total.
Also known as a fixed-term contract or a temporary appointment, candidates enter into these contracts understanding its finite nature. Limited-term contracts can sometimes be extended or renewed, depending on a country’s labor laws. Consecutively doing so may result in businesses forced to reclassify the contract and, subsequently, the employees themselves.
The term limited-term employment (LT) is recognized globally. However, every country maintains its own set of labor laws governing:
- How long an LT contract can span.
- What benefits an LT employee can claim.
- Contract renewal amounts.
- How many hours an LT employee can work under this type of arrangement.
- Lawful contract termination proceedings.
Given the country-by-country differences related to limited-term employment, many organizations hiring abroad work with a global professional employer organization (PEO) with employer record services to navigate this unique type of worker relationship safely and lawfully.
Who uses limited-term employment?
Both private companies and public institutions use limited-term employment. Organizations are most likely to go with a fixed short-term employee under the following circumstances:
- To substitute for a full-time employee during leave or sabbatical.
- To backfill a vacant position expected to remain open for a longer time frame.
- To alleviate an overloaded team, department, or business function experiencing an unmanageable uptick in work.
- To offer specific subject-matter expertise or services for a dedicated project.
- To pilot a new program for the business.
- To institutionalize a new substantial piece of enterprise technology or organizational structure.
- To simplify working with both ex-pats and foreign citizens, as well as individuals who move frequently from country to country.
How long can limited-term employment contracts last?
An LT employee’s total contract length depends on their country of residence, and in the U.S., state-specific laws.
A country’s labor laws foremost dictate how a limited term-employment contract is drafted and dismissed, plus what must be included in its terms. Organizations expanding internationally or hiring contractors for a specific project or function must abide by the fixed-contract laws of their contractor’s country of residence or the country they’re looking to hire in.
Consider these countries as reference points for common limits on fixed-term employment periods:
- Germany: LT contracts can be renewed up to three times with a total period of two years.
- Peru: Limited-term contracts can have a total period of five years.
- France: LT employment periods are a maximum of 24 months with only one renewal permitted.
- India: Fixed-term contracts must typically assure a minimum of three consecutive months of work. However, India only established its limited-term contract laws in 2018 and has yet to put a limit on contract renewals.
- United Kingdom: Any individual entering their fourth year of a fixed-term contract automatically becomes reclassified as a part- or full-time employee.
- New Zealand: Contractors entering their third year or third consecutive renewal of fixed-term work are eligible to submit a claim with the Employment Relations Authority and the country’s court system to be considered a regular employee.
- Japan: LT contractors working with an organization for more than five years must be recategorized as indefinite-term employees.
In general, companies looking to hire short-term employees in a specific country must consult that country’s:
- Permitted hours of work per week or month for fixed-term contracts.
- Permitted contract duration, typically in months total.
- Permitted job types or roles that can enter into a fixed-term contract.
- Other individualized laws based on industry, organizational size, budget, and at-will employment rights.
What benefits are limited-term employees eligible for?
In the vast majority of countries, full-time limited-term employees are typically eligible for the following benefits.
- Health: Health coverage includes medical, dental, vision, and an HSA. In many states in the U.S., limited-term employees may enroll qualifying dependents on an employee’s health plan as well.
- Retirement: LT employees are eligible for defined contribution retirement savings plans.
- Paid vacation: Paid vacation days accrue for every bi-weekly or monthly period within an LT’s contract, but the overall policy remains at the discretion of the employer.
- Paid holidays: LT employees are eligible for paid holidays according to a nation’s recognized holidays and customs. The exact holidays covered remain at the employer’s discretion.
- Paid sick leave: Paid sick leave hours also may accrue for every bi-weekly or monthly period according to the employer’s regular policy.
- Bereavement leave: In the unfortunate event of a loved one passing — typically an immediate family member or grandparent — limited-term employees may be eligible for paid bereavement leave at full or partial wages.
Limited-term employees may also be eligible for overtime. Overtime and other labor laws vary widely by country. In the United States, for example, the Fair Labor Standards Act (FLSA) regulates overtime wages, working hours, and other aspects of variable compensation. Depending on if the LT employee is classified as a nonexempt or exempt employee, they may be eligible for overtime payments under FLSA regulations. Limited-term employees will be exempt or nonexempt depending on the nature of their work, their total compensation, and whether they meet specific duty criteria set by the FLSA disqualifying them from overtime pay.
Benefits end based on the labor laws where your contractor resides and individual employer policies. Again, it’s in everyone’s best interests to draft a country-specific limited-term contract clearly outlining benefits eligibility, start dates, end dates, regular compensation, and overtime qualifications at the onset of onboarding a new fixed-term employee. Doing so provides substantial risk mitigation and ensures your organization operates lawfully.
Limited-term employment versus at-will employment
All U.S.-based limited-term employees are considered at-will employees. Under U.S. labor laws, the at-will employee laws allow employers to terminate or dismiss an employee at any point, for any reason, so long as that rationale is not discriminatory.
However, at-will employment is a labor law clause unique to the United States. The majority of countries maintain stricter termination standards and proceedings, including how to end a fixed-term contractor lawfully.
Employment at-will pros and cons can make this type of contract arrangement confusing for organizations hiring outside their home country — and particularly U.S. companies hiring internationally. Limited-term employees outside the U.S. can only be classified as at-will under one exception — when they’re working under a written probationary period.
Advantages of limited-term Employment for foreign subsidiaries
There are distinct benefits brought on by hiring employees under limited terms.
1. Clear Boundaries
As their name suggests, fixed- and limited-term contracts come with the clear expectation of an endpoint. This endpoint is definitive and understood from the onset of the relationship.
Given this nature, LT employment is attractive for organizations requiring specialists for a specific project or position with a finite scope. Employers make this arrangement clear by offering contracts with limit entitlement clauses and a precise start and end date, with additional parameters in writing to prevent misclassification or miscompliance.
2. Skills Development
Both employers and employees engaging in limited-term contracts gain wider exposure to talents and skillsets unavailable in standard employment.
On the employer side, organizations maintain the ability to source top talent needed for specific needs and functions. Meanwhile, employees can use limited-term appointments to develop their own niche expertise, making them more competitive for future appointments. Younger professionals, in particular, can use fixed-term contracts to try out various careers before settling within an industry, as well as deepen their resumes and capabilities.
Employees with a limited-term contract have the autonomy to work at various organizations without making a long-term, weighty commitment. Individuals are free to play the job market, working only with organizations or roles fitting their work-life vision.
Likewise, businesses hiring limited-term contractors benefit from similar flexibility. Organizations can use limited-term contracts as a probationary or trial period to understand if an individual is a best-fit, as well as test the value contractors provide as needs evolve. Those who exceed expectations can easily be brought on as an indefinite employee.
Furthermore, limited-term contracts are a sensible solution to cover for regular employees who are on maternity or paternity leave, sick leave, or any other long-term arrangement requiring a temporary substitute.
4. Expand Operations
Limited-term employees often significantly advance the operational capabilities of their employer by handling specific projects, processes, systems, or technologies. Parent organizations can reallocate staff and resources accordingly, with the temporary contractor mitigating gaps or pain points. When well-supported, fixed-term contractors often leave organizations better than they found them, enhancing internal operations as well as external deliverables.
5. Limit Hiring Liabilities Abroad
Limited-term contracts provide a sound risk-management strategy for companies hiring global employees. It does so in several ways.
First, LT contracts limit entitlements and set precise end dates with benefits terminations. They allow employers to source the global talent they need when they need it, yet shift or end relationships as those needs evolve.
Second, companies minimize certain contracting liabilities since there’s no legal obligation dictating contracts must be reviewed, renewed, or renegotiated at their end date.
Third, their temporary nature lessons the chance of organizations being charged with an unfair dismissal claim or having to pay severance to dismissed employees so long as the contracts contain an early termination clause. However, limited-term contractors terminated before their contract’s written end date are entitled to the remainder of their contract’s earnings.
These liabilities are limited when contracts contain clear information from the onset of the relationship, including the term’s end date, limit entitlement clauses, and an early termination clause.
Disadvantages of limited-term employment for foreign subsidiaries
Under a few circumstances, limited-term contracts can carry drawbacks.
1. Early Dismissal
For employees, early dismissal before their contract’s written end date still entitles them to receive full compensation regardless of job results, project status, or overall role success. This means their employers must pay out potentially large sums to people no longer working for them if they did not include an early termination clause.
For this reason, some companies — particularly those maintaining a network of international fixed-term contractors — find themselves in the position of keeping a contractor who isn’t a best-fit for fear of unfair dismissal claims or large, negative pay-outs. In most cases, the only way to avoid contract compensation is if a contractor has committed misconduct regarding either internal policies, compliance standards, or a country’s laws.
2. Employee Classification Risks
Employee misclassification is a serious liability with severe penalties in many countries. Misclassifying an employee exposes organizations to legal claims with back-pay, benefits, and other entitlements awarded to the misclassified individual.
Some countries carry a larger risk for fixed-term contractor misclassification. For example, India, China, South Korea, South Africa, and New Zealand do not state specific limits on how many times you can offer a consecutive contract renewal. Instead, these countries include clauses in labor laws protecting the “due” or “reasonable expectations” of limited-term workers wishing to become indefinite employees after successive contract renewals. Yet those LT employees must typically file a claim with relevant regulatory or legal bodies to be reclassified.
As a risk-mitigation best practice, organizations should avoid offering more than one contract renewal for any limited-term employee, current or prospective.
3. Established Presence for Labor Court Disputes
International LT contractors who feel they’ve been unjustly dismissed will lodge a labor rights case with their country’s appropriate legal or regulatory body.
If this occurs, employer organizations must defend themselves or negotiate in that country’s labor court. However, companies are only permitted to do so if they have a pre-established entity in that country, such as a registered subsidiary.
Setting up foreign subsidiaries is an unparalleled time, money, and labor-intensive process requiring months, if not years, of bureaucratic navigation. What’s more, it demands specialized legal and HR counsel to assure you take the proper steps to set up country-compliant payroll, tax registration, benefits packages, and much more — expertise most businesses don’t support in-house.
Working with a global employer of record service is today’s leading solution to represent your company in the instance of labor court disputes. These international employers of records exist to manage the administrative side of hiring international employees, placing both fixed-term and indefinite employees on their own payroll and, therefore, establishing your presence in that country.
Contractors still report to you, perform your assignments, assist with your tasks, and generate value for your bottom line. However, you no longer need to go through the arduous process of setting up a subsidiary to hire a contractor compliantly.
Choose a Global PEO When You’re Hiring Short-Term Employees Abroad
The comprehensive solution from Globalization Partners provides access to hiring employees in more than 170 countries in a matter of days, not months. Plus, you don’t have to set up a subsidiary to do so or manage an ever-changing landscape of local labor laws and country-specific compliance.