Last year, the district auditor Brian Willmor found over 260 council employees were on illegal fixed-term contracts.
A report which went to the equality and personnel sub- committee said the termination clauses were 'unlawful because they commit the council to make severance payments which are now unlawful after the North Tyneside decision.'
The North Tyneside case first came to the attention of local government in 1991, when payments made to employees of North Tyneside MDC were found to be illegal by district auditor David Allsop.
But the issue has almost been resolved. Tower Hamlets has negotiated revised contracts with most of the affected staff following advice from the Greater London Employers Organisation.
According to a spokesman, there are a minority of council employees they are still negotiating with.
The illegal contracts were originally introduced by the Liberal Democrat administration as a result of a review of chief officers' pay which took place in 1989.
The review found that their pay was 30% behind the market rate, but rather than simply increase rates for chief officers, it was agreed to introduce fixed-term contracts comprising a 10% salary increase and a performance-related pay element of up to 20%.
The contracts also allowed for a payment of one year's salary plus notice if the council were to terminate a contract part way through the period other than for reasons of dismissal due to misconduct.
In addition, the Liberal Democrats also decided to introduce similar contracts for junior staff from the the business service and for third-tier staff in one of the council's neighbourhood offices.