Fixed-term contracts (FTCs), an important feature of the employment relationship of the peripheral workforce, are analysed to test the following two hypotheses, which are based on dual labour market theory: (i) Firms use FTCs for the peripheral workforce to adjust the level of employment to the profit maximising level in case of demand fluctuations. (ii) Thanks to the utilisation of FTCs, the core workforce is less exposed to employment adjustment. Both hypotheses are supported by the results of the econometric analysis, which uses a German establishment panel.