Fixed-term vs. Non-fixed-term: Avoiding Severance Pay

"Sign this contract for six months; when it expires, the relationship ends automatically, and we do not need to pay severance." This sentence is frequently heard in boardrooms of small and medium-sized enterprises (SMEs) when hiring for short-term projects or during periods of uncertain growth. However, this assumption often leads to expensive legal disputes and unforeseen financial liabilities. Article 9, Paragraph 1 of the Labor Standards Act (LSA) establishes a clear boundary: "Labor contracts may be divided into fixed-term contracts and non-fixed-term contracts. A contract for work of a continuous nature shall be a non-fixed-term contract; a contract for temporary, short-term, seasonal, or special work may be a fixed-term contract."

If the work performed by an employee is continuous, the contract is legally non-fixed-term regardless of the title on the document or the expiration date written in the text. When an employer assumes a contract has expired and asks an employee to leave, but the law views that contract as non-fixed-term, the act of asking the employee to leave constitutes a termination of employment. This requires a statutory cause under Article 11 of the LSA and the payment of severance under Article 17 of the LSA or Article 12 of the Labor Pension Act.

Determining the Nature of Continuous Work

The core criterion for distinguishing between fixed-term and non-fixed-term contracts is whether the work is "continuous." Continuous work refers to the routine, core functions of a business. As long as the company exists, these roles are required. Examples include administrative staff, accountants, regular production line workers, and sales representatives. Even if an employer writes "one-year term" in the contract, the law overrides this if the job nature is continuous. AgreeGold emphasizes that this determination is not at the employer's discretion; it is based on the objective reality of the job functions.

Article 6 of the Enforcement Rules of the Labor Standards Act provides strict definitions for the four types of valid fixed-term contracts:

1. Temporary Work: Unforeseeable and non-recurring work with a duration of no more than six months. This might include hiring someone to handle an emergency office repair or a sudden, one-off administrative backlog caused by an accident.
2. Short-term Work: Predictable and non-recurring work with a duration of no more than six months. An example is hiring a translator specifically for a three-month international trade exhibition.
3. Seasonal Work: Non-recurring work influenced by seasonal raw materials, materials, or market sales, with a duration of no more than nine months. Examples include fruit harvesters or ski resort instructors hired only for the winter season.
4. Special Work: Non-recurring work that can be completed within a specific period. If the duration exceeds one year, the employer must report it to the local competent authority for record-keeping. This often applies to large-scale construction projects or specific research grants.

If a job does not fit into these four categories, any attempt to sign a fixed-term contract is legally void. The contract automatically becomes a non-fixed-term contract from day one. Consequently, the employer cannot simply let the employee go when the date arrives. Doing so without following the procedures for dismissal—such as providing notice and severance—creates a high risk of being sued for wrongful termination.

Legal Traps Leading to Automatic Conversion

Beyond the nature of the work, Article 9, Paragraph 2 of the LSA outlines two specific scenarios where a valid fixed-term contract automatically converts into a non-fixed-term contract. These traps often catch employers who are not diligent with their HR administration.

First, if a worker continues to work after the expiration of a fixed-term contract and the employer does not immediately express opposition, the contract is deemed non-fixed-term. In practice, it is common for both parties to forget the expiration date. The employee keeps showing up, and the employer keeps paying the salary. The law presumes that both parties have agreed to continue the relationship indefinitely. Second, if a new contract is signed, but the gap between the old and new contracts is less than 30 days, and the total duration of the combined contracts exceeds 90 days, it is deemed non-fixed-term. This provision prevents employers from using a series of short-term contracts to evade obligations like seniority accumulation and severance pay.

Article 9, Paragraph 3 of the Labor Standards Act: The preceding paragraph shall not apply to seasonal or special work.

This exception provides some protection for employers, provided the work truly qualifies as "seasonal" or "special." For instance, if a software development project is expected to take two years, it qualifies as special work. A two-year fixed-term contract is valid. However, if the employer signs a new contract for a nearly identical project immediately after the first one ends, the "non-recurring" requirement is challenged. If the work is seen as recurring or routine, the exception in Paragraph 3 no longer applies, and the contract converts to non-fixed-term status.

The Financial Cost of Misclassification

When an employer mistakenly treats a non-fixed-term role as a fixed-term one and terminates the employee upon "expiry," the law views this as a termination under Article 11, Paragraph 4 (change in business nature) or Paragraph 5 (employee inability to perform duties). In these cases, the employer is liable for two major costs: notice pay and severance pay.

Under Article 12 of the Labor Pension Act (the "New System"), severance is calculated as follows: half a month's average wage for every full year of service, with pro-rata calculation for periods less than a year. The total is capped at six months of average wage. Imagine an employee earning 60,000 TWD per month who has worked for one year. If the employer incorrectly assumes the contract just "ends," they may face a demand for 30,000 TWD in severance plus notice pay if the required notice period under Article 16 of the LSA was not observed.

In contrast, Article 18 of the LSA states that an employee is not entitled to notice pay or severance pay if a valid fixed-term labor contract expires. The financial gap between these two outcomes is the primary driver of labor disputes. AgreeGold suggests that during the recruitment phase, companies must determine if a role is truly non-recurring. Hiring to fill a vacancy left by a maternity leave or a leave of absence is a valid "short-term" fixed-term contract. However, hiring extra hands because of a general business expansion—even if you only have six months of orders confirmed—is considered continuous work.

Key Elements for Drafting Valid Fixed-term Clauses

To ensure the legality of a fixed-term contract, the document must do more than state a start and end date. It must explicitly describe "why" the contract is fixed-term. The content should link the employment to a specific, non-recurring task or project. We recommend including the project name, project number, or specific objective.

Sample Clause: This contract is for special work as defined in Article 9, Paragraph 1 of the Labor Standards Act. Both parties agree to employment for the "XYZ Software System Development Project" (Project No. 123-ABC). This contract shall naturally terminate upon the completion of the project tasks or the expiration of the project period, in accordance with Article 18 of the Labor Standards Act.

For special work expected to exceed one year, Article 6, Paragraph 4 of the Enforcement Rules of the LSA requires the employer to report to the local competent authority. While failing to report does not automatically invalidate the contract, having a record of the filing provides strong evidence that the work is indeed non-continuous. The employer carries the burden of proof to show that the position will disappear once the specific task is finished and that there is no ongoing need for that role.

Self-Auditing Your Employment Contracts

Employers can perform a self-check using three steps. First, evaluate the job function: is it an essential, routine part of company operations? If yes, use a non-fixed-term contract. Second, check the duration against the Enforcement Rules: temporary and short-term work must not exceed six months; seasonal work must not exceed nine months. Third, check for successive contracts: has the same employee signed three consecutive six-month contracts with gaps of less than a month? If so, the law almost certainly views the relationship as non-fixed-term.

AgreeGold reminds employers that the LSA is designed to protect employment stability. Therefore, non-fixed-term employment is the legal default. Employers bear a heavy burden of proof when claiming a contract is fixed-term. Using a three-month "fixed-term" contract as a trial or probation period is a common but legally flawed practice. Under the law, a probation period is generally treated as part of a non-fixed-term contract. If an employee fails probation and is dismissed, the employer must still justify the dismissal under Article 11 or Article 12 of the LSA.

FAQ

Can an employee still claim severance if they signed a fixed-term contract voluntarily

Yes. The Labor Standards Act consists of mandatory provisions. If the nature of the work is continuous, the contract is non-fixed-term by law, even if the employee signed a document stating otherwise. Any agreement that provides less protection than the LSA is void under Article 1 of the LSA. If the employer refuses to renew the relationship upon "expiry," it is treated as a dismissal, and the employer must pay severance if no statutory cause for dismissal exists.

Can I avoid severance for project-based staff after the project ends

This depends on whether the project meets the definition of "special work" under Article 6 of the Enforcement Rules. The work must be non-recurring. If a company constantly takes on similar projects and moves the same employees from one to the next without a significant break, the work may be deemed continuous. If the project is truly a one-off and the role is no longer needed after completion, and you have filed the contract with the Labor Bureau (if over a year), then severance is not required upon expiry.

How is seniority calculated if a fixed-term employee becomes permanent

Under Article 10 of the LSA, if a new contract is signed or work continues within 30 days of the expiration of a fixed-term contract, the seniority from the previous contract must be combined with the new one. Employers cannot "reset" an employee's seniority by switching contract types. This combined seniority affects the calculation of annual leave days, the severance pay base, and retirement contributions.

Is it legal to include a probation period in a fixed-term contract

The law does not explicitly forbid probation in a fixed-term contract, but it creates a logical contradiction. Fixed-term contracts are for specific, short-term needs. Adding a probation period may lead to a re-examination of whether the work is truly non-continuous. If you terminate an employee during a fixed-term probation, you still need to meet the requirements of Article 11 or 12. For most employers, it is safer to use a standard non-fixed-term contract with a probation clause if the goal is to evaluate performance.

Does seniority count if a dispatched worker is hired as a full-time employee

If the worker was previously employed by a dispatch agency and is later hired directly by your company, these are two separate employment relationships with different employers. Legally, seniority does not need to be combined. However, if the company uses different dispatch agencies as a shell to keep the same worker doing the same job under its direct supervision for years, this could be viewed as an abuse of rights. If the worker was on a fixed-term contract directly with your company before becoming permanent, Article 10 requires seniority to be merged.

Order of Operations Before Signing

Before finalizing any short-term hiring, follow this sequence to minimize risk. First, verify the nature of the work. If the role is for a permanent department (e.g., HR, Finance, Core Engineering), do not use a fixed-term contract. Second, if the work is for a project, check the timeline. If it is "Special Work" and will last more than 12 months, prepare the filing for the local Labor Bureau immediately upon signing.

Third, review the contract language. Ensure it describes the specific project or non-recurring event rather than just providing dates. Fourth, set an internal alert for the expiration date. You must decide at least 30 days before expiry whether to end the relationship or offer a permanent role. If you allow the employee to work even one day past the expiry without a written objection or a new valid fixed-term agreement, the contract converts to non-fixed-term status by default. Finally, ensure all records of the project's start and end are kept in writing to prove the "non-recurring" nature if a dispute arises.