1-Year Employment Contract: Must Severance Pay Be Paid When the Contract Ends, and Can the Employee Resign Early?

"Employing on a year-to-year contract — once it ends and isn't renewed, that's the end of it, nothing to pay" is a common belief at companies that use fixed-term employment contracts, and it is a belief that causes employers to lose labour cases more often than almost anything else.

Thai labour protection law treats not renewing a contract because its term has expired as a termination of employment. An employee who has worked 120 days or more therefore has the right to severance pay based on length of service, just like a permanent employee. A fixed-term employment contract is therefore not a tool for avoiding severance pay, except for certain kinds of work that the law defines very narrowly.

What Can a Fixed-Term Contract Change?

What a fixed-term contract can actually change is the advance notice requirement. When the term under the contract ends, the employment ends by itself without any advance notice, unlike an open-ended contract, which requires notice before termination.

What does not change is:

• The right to severance pay when the employee is not hired to continue, if the employee has completed the qualifying service period.
• Other rights under labour protection law, such as holidays, leave, overtime pay, and social security.
• The length of service counted continuously when the contract is renewed.

Exception: Project Work, Occasional Work, and Seasonal Work

The law exempts the employer from severance pay upon contract completion only for employment that meets all of the following conditions:

1. There is a fixed start and end date
2. The work is of the type specified by law — that is, project work that is not part of the employer's normal business or trade; work that is occasional and has a defined end or completion of the work; or seasonal work hired only for that season
3. The work must be completed within two years
4. A written contract is made from the start of employment

The condition companies most often fail is condition 2. For example, an accountant, a salesperson, or a production employee doing the company's regular work is not project work even if they sign a year-to-year contract, so the exception does not apply. An engineer hired specifically to install a new system to completion within a fixed period, which is not work the company normally does, may fall under the exception if the other conditions are met.

Renewing the Contract Every Year Does Not Restart the Clock on Length of Service

Companies that renew the contract year after year for the same employee over many years should know that the length of service counts continuously from the very first day. When the day comes that the contract is not renewed, severance pay is calculated from the total length of service, not only from the final contract.

Creating a gap between contracts — for example, letting an employee go and taking them back a few days later so that the length of service does not run continuously — is a pattern the law clearly provides must be counted as continuous service, if it is done to prevent the employee from obtaining their rights.

Employee Resigns Before Completing the Contract

An employee may always resign, but leaving before the agreed term without a ground under the contract or the law counts as a breach of contract. What an employer can and cannot do is as follows:

• May claim actual damages incurred, such as expenses for urgently finding a replacement, but the damage must be proven — not a figure set arbitrarily.
• Cannot deduct from wages the employee has already earned as self-compensation. Wages may be deducted only in cases the law permits. See How much can an employer deduct from an employee's salary?
• A penalty written into the contract that is excessive may be reduced by the court to no more than what is appropriate.

Employer Terminates the Contract Before the Term Expires

If the employer is the party terminating the contract before the term expires, in addition to severance pay based on length of service, the employee may also claim damages for early termination as a separate item. If there is no cause under the contract or the law, a good contract should therefore clearly set out the grounds for early termination, such as work performance failing to meet measurable criteria or a breach of discipline under the regulations.

Employer side: Make sure fixed-term contracts are actually workable

• Use a fixed-term contract when a genuine business reason supports it, not to avoid severance pay — because that cannot be avoided.
• If you intend to rely on the project-work exception, specify the nature of the work, the start date and the end date, and put the contract in writing from day one.
• Budget for severance pay for contract employees whose contracts may not be renewed, counting their total length of service.
• Set out in writing the grounds for terminating the contract early, and the procedure when the employee resigns before the term ends.
• Check that the contract does not conflict with the company's work rules.

Read more

• How is severance pay calculated when employment is terminated
• Rights upon dismissal
• Probation: to what extent can employment be terminated during probation

📌 See more: Employment contracts, salary structures and employee handbooks · Labor cases

If your company uses fixed-term employment contracts and you are not sure what must be paid once the contract term ends, consult our legal team. We will review the contract and the actual nature of the work before the due date.

This article is general information and not legal advice for any specific case.