Fixed-Term Contract Does Not Preclude Severance Pay: A Common Misconception Among Employers

Introduction

Fixed-term employment contracts are commonly used in Thailand for temporary, project-based, or seasonal work. However, many employers may mistakenly assume that employees engaged under fixed-term contracts are not entitled to severance pay.

In fact, severance pay is generally payable upon expiry of a fixed-term contract unless the contract satisfies the specific exemption requirements under Thai law. As Thai courts interpret these requirements strictly, employers should not assume that a fixed-term contract will automatically qualify for the exemption.

This Update outlines the key requirements for the exemption, common misconceptions, and the risks highlighted by Supreme Court precedents.

Fixed-Term Employment Contracts Under Thai Law: Is Severance Pay Required When Such Contracts End?

A fixed-term employment contract is an employment agreement with clearly specified commencement and expiry dates. When the agreed period ends, the employment relationship ends automatically, without either the employer or the employee having to terminate the contract.

Many employers believe that the expiry of a fixed-term contract does not constitute a termination of employment and that severance pay is therefore not required. However, this is not necessarily the case.

Under section 118, paragraph 2 of the Labour Protection Act B.E. 2541 (1998) (“LPA“), the expiry of a fixed-term employment contract is treated as a termination of employment. Accordingly, an employee who has worked for at least 120 days will generally be entitled to severance pay upon expiry of the contract.

An exception applies where the fixed-term contract satisfies the requirements under section 118, paragraphs 3 and 4 of the LPA, in which case severance pay may not be payable. 

Severance Pay Exemption for Fixed-Term Employment Contracts 

To qualify for the severance pay exemption under the LPA, all of the following conditions must be satisfied.

1. The employment must be under a genuine fixed-term contract.

A fixed-term employment contract must be in writing and specify definite start and end dates from the outset. Thai courts may not regard a contract as a genuine fixed-term contract if:

• either party has the right to terminate the contract before its expiry date; or

• the contract is repeatedly renewed (with or without gap), suggesting an ongoing employment relationship rather than a genuine fixed-term arrangement. 

2. The employment must fall within one of the following categories of work: 

• • A specific project that is not part of the employer’s normal business

The work must relate to a specific project that is separate from the employer’s normal business operations. Thai courts interpret this requirement strictly and take a broad view of what constitutes an employer’s normal business.

For example, in Supreme Court Judgment No. 4026/2548, the Court held that a driver employed by an employer engaged in sand excavation and dredging business, whose responsibilities included delivering documents and parcels, was performing work connected with the employer’s normal business. The employee therefore did not qualify for the exemption.

• • Work of a temporary nature with a definite end date or completion of the work

The exemption may apply to genuinely temporary work with a definite end or completion date, provided that the work is not part of the employer’s normal business.

If the work forms part of the employer’s ordinary business activities, the exemption may not apply even if the employment is temporary. For example, construction workers engaged by a construction company for a specific project may not qualify for the exemption because construction work forms part of the employer’s core business.

• • Seasonal work performed during the relevant season

Based on court decisions and legal interpretations, the exemption applies only to seasonal work that depends on natural conditions, such as certain agricultural activities. It does not apply where additional workers are required solely because of increased business demand or production needs, as the relevant season must be determined by natural conditions rather than commercial demand (Legal Opinion of the Department of Labour Protection and Welfare No. 0504/4211).

3. The work must be completed within two years.

The severance pay exemption applies only if the relevant project, temporary work, or seasonal work is completed within two years. The two-year requirement relates to the duration of the work itself, rather than the term of the employment contract.

Accordingly, the exemption will not apply if the work continues for more than two years, even where the employee is engaged under a fixed-term contract of less than two years (Supreme Court Judgment No. 2403-2430/2543).

Quick Checklist

Before relying on the exemption, employers should consider the following:

1. Is the contract in writing and for a fixed period?
2. Is it a genuine fixed-term arrangement (i.e. no right of early termination and no repeated renewals suggesting ongoing employment)?
3. Is the work separated from the employer’s normal business activities?
4. Does the work fall within one of the three permitted categories (i.e. a specific project, temporary work, or seasonal work)?
5. Will the project or work be completed within two years?

If the answer to any of the above questions is “no”, the exemption may not apply.

Severance Pay Is Required Unless an Exemption Applies 

If a fixed-term employment contract does not satisfy the exemption requirements and the employee has completed at least 120 days of service, severance pay will be payable upon expiry of the contract.

Failure to pay severance pay may also result in liability for statutory interest at 15% per annum. In addition, repeated renewals of fixed-term contracts may be treated as continuous employment, with service under all contracts aggregated for severance pay purposes. 

Concluding Words

Although fixed-term employment contracts can help employers address temporary staffing needs, they do not automatically exclude severance pay obligations. Thai courts interpret the exemption under section 118 of the LPA strictly, and employers must satisfy all statutory requirements to rely on it.

Employers should therefore carefully assess the nature of the work and the terms of the employment arrangement before relying on the exemption, as an incorrectly applied exemption may result in liability for severance pay and related claims.

Careful review of the employment arrangement and contract documentation at the outset can help reduce the risk of disputes and unintended severance pay obligations.

If you have any queries on the above, please reach out to our Partner listed on this page.

For regional Employment matters, please contact Rajah & Tann Asia’s Employment Practice for more information.

Contribution Note:

This Legal Update is contributed by the listed Contact Partner, with the assistance of Senior Associate Thamolwan Cheewakriengkrai and Associate Teeraphat Thawanworakit.