Open-Ended Contract Disadvantages

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If you sign a contract to provide a customer with IT services, how long does the agreement last? An open-ended work contract typically doesn't set an expiration date, whereas a fixed-term contract does. It's important to know whether fixed-term or open-ended is the right choice before you sign on the dotted line.

TL;DR (Too Long; Didn't Read)

The big drawback to an open-ended contract is that there's no ending date. If you want to trim costs by trimming your workforce, for example, firing someone who was hired under an open-ended contract is often difficult and slow.

Fixed-Term vs. Open-Ended Contract

Suppose you contract with a local vendor to deliver raw materials to your factory. Under a fixed-term contract, you spell out price, amounts, delivery frequency and the duration of the contract. For example, the contract might last for one year, and then expire if you don't renew, or it might renew automatically if neither party cancels.

With an open-ended work contract, the clauses are the same, except you don't set an expiration date. Instead, you specify the terms for ending the contract, typically by cancellation with advance notice or when one side or the other commits fraud.

The meaning of an open-ended contract is the same whether it's called a permanent contract or an indefinite contract. There's no difference between "open-ended contract" and "permanent contract".

The Open-Ended Contract Position

In the United States, most people you hire to work for you are employed on an at-will basis. You can fire them at will for almost any reason, and they can quit on the same basis.

If you and your employee sign a contract, you have to decide whether it's a fixed-term vs. open-ended contract. A fixed-term contract might guarantee the job for, say, two years or until a particular task, such as setting up your website, is completed. An open-ended contract lasts until one side terminates it on the grounds specified in the contract — employee theft, for example.

If you do business outside the United States, the open-ended contract position is the norm. Even employees working under renewable fixed-term contracts may be able to claim they're really permanent-contract employees if you renew their positions repeatedly.

Fixed-Term vs. Open-Ended Contract

There are pros and cons to using open-ended contracts.

The advantages of open-ended contracts:

  • Employees have job security, which can lead to greater commitment to the company.

  • A long-term employee is an asset. A constant churn of staff requires time spent on repeatedly training new employees.

  • An employee who's in it for the long haul is a better bet for long-term projects.

  • A team of long-term employees is more cohesive and united.

  • Potential employees may be more willing to apply for an open-ended contract position than for a fixed-term contract.

The disadvantages of open-ended contracts:

  • If times get tight, you can't easily trim your workforce to save money.

  • If you want to fire an employee, it can be a long, arduous process. 

  • Employees can take their jobs for granted and become less committed. 

  • If you need specific skills for a specific project, there's no point in hiring someone for an indefinite period.

Fixed-Term Pitfalls

If you're expanding outside the U.S. — into Canada or Germany, for example — it's wise to consult an employment attorney who understands contract law as it's practiced there. Just as some U.S. employers pretend their employees are independent contractors, courts in some countries suspect fixed-term contracts are a way to avoid the responsibilities of an open-ended agreement.

In Canada, for example, the default assumption is that your employer/employee relationships are open-ended. The contract must make it clear that it is, in fact, a fixed-term agreement. Any ambiguity may be decided in the employee's favor.

References

About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

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