Indefinite Contract vs. Fixed-Term: Which to Choose?

Before an individual can begin working for a company, it is imperative both they and their employer agree to a written document summarizing the main terms of employment. This agreement — otherwise known as an employment contract — is a legally binding document that sets out an employee’s rights, responsibilities, and remuneration. While the type of contract can vary depending on myriad factors, the most common type of employment agreement is an indefinite contract.

This article will help you to understand more about employment contracts, in particular indefinite contracts. We’ll delve into what defines an indefinite contract, the major differences between indefinite and fixed-term contracts, your responsibilities as an employer, and which form of contract you should choose for your employees. 

Note: This article provides general information on employment contracts as they operate internationally. To assess your specific situation, it is recommended you seek professional legal advice in your location. 

Key Takeaways

1. Indefinite contracts are defined as contracts that have no specified end date. This means that the period of employment continues indefinitely until either the employer or employee terminates the contract.

2. Indefinite contracts help companies to boost employee morale, productivity, and loyalty. This is achieved through benefits like bonuses, incentivization schemes, and professional development opportunities.

3.  Employees on a fixed-term contract are hired by an enterprise or company for a specific time period.

4. The major disadvantage of a fixed-term role is that it can be harder to recruit for. This is because candidates may not find the prospect of a short-term contract as attractive as an indefinite one.

5. Depending on the type of role that you’re recruiting for, as well as the time frame that work duties need to be performed (i.e. seasonal work), indefinite contracts, fixed-term contracts, or independent contractors may be best suited for your company.

What is an indefinite contract? 

An indefinite contract (also known as an indefinite-term contract or permanent contract) is the most common type of employment contract throughout the world. It can be used to cover both full-time and part-time workers. 

Indefinite contracts are defined as contracts that have no specified end date. This means that the period of employment continues indefinitely until either the employer or employee terminates the contract. Both parties, that is the employer and the employee, are free to terminate the employment, which is pursuant to the contract and/or the in-country employment law. 

The four ways in which an indefinite contract can be terminated are lawful termination by the employer, employee resignation or redundancy, and in the event that a company shuts down.

Employees on an indefinite contract have the right to a number of entitlements that include paid vacation, paid annual leave, paid sick leave, paid long service leave, and notice of termination. In many cases, these entitlements are applied on a pro-rata basis for part-time employees. 

It is common for permanent employees to agree in advance to employment conditions such as working a set number of days until employment ceases. Consequently, employees on indefinite contracts should expect to work regular hours each week for an indefinite period of time. 

Indefinite term contracts come with stronger employee rights and employer-side obligations, most notably the right to reasonable notice upon termination. This generally makes indefinite contracts more appealing to employees, as there is a greater sense of long-term job security. In addition, many employees may wish to negotiate their salary from contract to permanent

Most countries support indefinite contracts over fixed-term contracts and independent contractors; paying particular attention to the drafting of employee-favored laws that relate to lawful dismissals. Though it is worth nothing that in some countries there are restrictions on offering indefinite employment contracts, such as the prohibition on indefinite contracts for foreign workers under Vietnam labor law

Sometimes the non-permanent workforce is referred to as the ‘contingent workforce‘. 

If employers wish to terminate an indefinite worker’s employment, there is a lawful process they must follow. This can include reasonable periods of notice, government-mandated severance, and other duties that may even involve court proceedings. 

 

What do employers need to include in an indefinite contract? 

Depending on the country, there can be different mandated benefits and notice periods in an indefinite contract. In Mexico, for example, employees are not legally required to serve a notice period before leaving their employment. However, in countries like Switzerland and the Czech Republic, employees are required to give at least two months’ notice before resignation.  

When drafting an indefinite employment contract, it is recommended that all employers include the following:

  • Job description, work hours, and job location
  • Probation period 
  • Dismissal process — including the notice period and any severance policies
  • Collective bargaining if applicable 

Employers are advised to check with the local labor laws to ensure they include any other required conditions, policies, or information. 

What are the benefits of an indefinite contract?

Indefinite contracts provide both employees and employers with a number of advantages. For employees, indefinite employment supports them through wages and benefits that are guaranteed and explicitly outlined in their contracts. Employees also gain more certainty and stability over their role, which has wider implications regarding their job satisfaction and financial security. 

For employers, maintaining the same employees over a number of years means that there is less worry of turnover. And lower turnover equates to lower recruitment costs. Not only this but productivity levels are also likely to increase — as employees are empowered to grow and become more committed to their work.

Indefinite contracts also help companies to boost employee morale and loyalty. This is achieved through benefits like bonuses, incentivization schemes, and professional development opportunities that are typically not offered with casual or fixed-term employment. 

Additionally, indefinite contracts help to promote a clear organizational structure; one in which employees possess a definitive understanding of workflows, plus where they fit into a company’s wider operations. 

What are the disadvantages of an indefinite contract? 

While indefinite contracts offer a host of benefits, there are also some challenges (that could be seen as potential disadvantages). These challenges are more evident for employers than they are for employees. 

Regarding employees, there is less freedom to decide one’s own schedule and try different types of work, when compared to casual or fixed-term work. For employers, there are further employer obligations and labor laws to consider. 

Across the globe, employees on indefinite contracts tend to be better protected under labor laws regarding pay, benefits, and lawful termination. Although this is inherently a positive thing, employers should be mindful that indefinite contracts are not missing clear termination clauses or notice provisions — especially when employees are negotiating salary from contract to permanent. Otherwise, they could be liable to pay dismissed employee damages. 

Indefinite contracts also present challenges for employers attempting to navigate international labor laws. This is because few businesses have legal and HR experts in-house who are fluent in a target country’s labor laws. Hence, many businesses engage Professional Employer Organizations (PEOs) to manage the administrative functions — such as contract drafting, tax withholding, and benefits payments — of international employees on indefinite contracts. 

What is the difference between a fixed-term contract and an indefinite contract?

Employees on a fixed-term contract are hired by an enterprise or company for a specific time period. Hence, there is a start and end date for the employment agreement. Additionally, these employees are often hired as cover for an absent employee, to fill a human resources gap, or as staff for a larger project. 

Fixed-term contracts, also known as limited-term contracts, are generally drafted for a period of several months to one year. Once a fixed-term contract has lapsed, a company has the right to either renew, extend, or terminate the contract.  

Generally speaking, an employer or employee cannot terminate a fixed-term agreement early. This may only be changed if the reasons for termination allow the parties to end the contract early.

What are the pros and cons of a fixed-term contract? 

Although fixed-term contracts do not provide the long-term stability that many job seekers want, they provide employees with greater flexibility (as they’re not committed to a long-term position). At the same time, employees gain valuable experience in roles that often pay more than their indefinite-term counterparts. 

While fixed-term contracts offer employees the chance to ‘move on’ after a shorter period, they also lack the long-term job security of indefinite work. This means more time spent job hunting and the likelihood that recruiters view their CV more critically (as short-term work may suggest that an employee can’t commit). 

For employers, fixed-term contracts provide a number of key advantages. Firstly, an employer is not required to apply for a dismissal, which means they do not need to take into account relevant notice periods and notice prohibitions (unless a premature termination is involved). 

Fixed-term employees can also bring new skills and experiences that a company’s current team does not have. If there is a specific project that would complement the growth of a company, a fixed-term employee can join the team and work until that project’s completion. This is particularly beneficial if the project is quite niche or technical in nature. 

Another benefit of fixed-term contracts is that they allow companies to cover a certain period when they may be short of staff or busier than normal. Companies could hire staff and once the demand has subsided (for example the Christmas rush in retail) they would no longer need to keep the employee on their payroll.  

The major disadvantage of a fixed-term role is that it can be harder to recruit for. This is because candidates may not find the prospect of a short-term contract as attractive as an indefinite one. 

Because an employee’s contract is limited to a shorter time frame, it can also be more challenging to build a cohesive team. This can result in poor staff morale and increased turnover — which can end up costing companies significant money.  

Additionally, if a fixed-term employee isn’t the right fit, an employer may want to terminate the contract early. However, if the contract has been drafted to disallow early termination, an employer would potentially need to pay the employee for the time left in their contract. 

Conclusion

Depending on the type of role that you’re recruiting for, as well as the time frame that work duties need to be performed (i.e. seasonal work), indefinite contracts, fixed-term contracts, or independent contractors may be best suited for your company. While fixed-term employees can cover an absent worker or a time when your company is busier than normal, these roles can also be harder to recruit for. Additionally, if an employer wishes to terminate a fixed-term employee’s contract before it has lapsed, they may be liable to a pay-out figure. These factors tend to make indefinite contracts more attractive for employees and employers.

If your business needs to hire employees in foreign markets, New Horizons’ global PEO supports you to recruit, onboard, and draft indefinite contracts for employees. With our entities in 150+ countries, we ensure you maintain legal and tax compliance, all while connecting your business with the world’s best talent.

Frequently Asked Questions 

‘Indefinite contract’ refers to an employment contract that has no specified end date. Either the employee or employer can end the contract, pursuant to the terms contained in the contract or the common workplace law. 

Indefinite-term contracts offer employment for an indefinite period. That is, there is no end date that is explicitly contained in the contract. 

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