Employers be wary of using fixed term contracts

Beware of automatic termination clauses in fixed term contracts!

Many service providers provide services in terms of a limited duration contract to other businesses. For example, a cleaning or security company has a two-year contract with another company to provide cleaning and or security services at particular sites. From a human resource perspective, these types of service providers face the problem of having to retrench or relocate employees working on these sites when the contract expires and is not renewed by the client.

In order to avoid these difficulties, these service providers typically conclude fixed term contracts with their employees, which provide for the “automatic” termination of the employment contract upon the termination of the contract with the client. Normally, clauses in these sorts of contract will read as follows:

‘  This employment contract will commence on 2008/10/23, and will automatically terminate on the expiry of the contract between the employer and the client, alternatively, in the event where the Client does not require the services of the Employee for whatsoever reason.’

The rationale behind the use of such contracts is that if employment contract terminates as a result of the occurrence of a certain event, such as the termination of the contract with the client, the termination arises as a matter of law and does not constitute a dismissal in terms of section 186 of the Labour Relations Act 66 of 1995 (as amended) (The LRA). It is said that these contracts terminate automatically. This rationale has found judicial approval in a number of cases, most recently in Sindane v Prestige Cleaning Services [2009] 12 BLLR 1249 (LC).  The obvious advantage of contracts which terminate automatically is that, these terminations are not subject to the requirements of fairness as set out in the LRA.

However, in a recent decision, the Labour Court has held that the termination of contracts in this way may constitute dismissals in terms of the LRA. In Mahlamu v CCMA & others [2011] 4 BLLR 381 (LC), the court was asked to review and set aside a decision, by a CCMA commissioner, that the termination of a contract of employment in the manner described above did not constitute a dismissal in terms of the LRA constituted a material mistake of law. In this matter, the employer had concluded a contract of employment with their employees that included the following clause:

  ‘2.  Employment period

This employment contract will commence on 2008/10/23, and will automatically terminate on:

A)Expiry of the contract between the employer and the client alternatively

B)In the event where the Client does not require the services of the Employee for whatsoever reason.’

The contract with the client had run its term and the client had then terminated the contract. The employee in this case was then simply informed that, in terms of the aforementioned clause, his contract had been terminated. The employee referred a dismissal dispute to the CCMA. At the CCMA, the employer raised the point that the termination of the contract did not constitute a dismissal in terms of the LRA. The commissioner agreed and dismissed the dispute. The employee then referred the commissioner’s decision to the Labour Court for review. The crisp issue before the court was whether the commissioner’s ruling was legally correct or not.

The court found that such a clause was, in essence, an attempt to contract out of the employee’s right not to be unfairly dismissed, and was thus contrary to public policy and as such was invalid in terms of section 5 of the LRA.    As such, the court found that the commissioner’s decision, that the termination of the contract did not constitute a dismissal, constituted a material mistake of law. The court set the decision aside and found that the employee had been dismissed and referred the matter to trial court to determine the fairness of that dismissal.

The purpose of this post is not to provide a critique of the judgment, but to unpack the consequences for employers who rely on such clauses in their contracts.

The consequences for employers who rely on such clauses are as follows:

Firstly, the judgment means that the employer cannot contract out the employees right not to be unfairly dismissed, and that contractual provisions, whose purpose or effect is to remove the right not to be unfairly dismissed and or to dispute the fairness of a dismissal, will be deemed to be invalid and no force and effect will be given to them. The court relied on the provisions of clause 5 of the LRA in this regard. For my part, having forgotten about the provisions of clause 5 of the LRA, I feel that practitioners, and laypersons alike, should look at the provisions of that clause again. Very briefly, clause 5 provides that any contractual clause that seeks to directly, or indirectly, limit the provisions or rights of a person in terms of the LRA is invalid unless the provisions are permissible in terms of the LRA.

Secondly, and more precisely, clauses which link the termination of the contract of employment to some external event, such as the termination of the contract between the service provider and the client, will, it seems, in the absence of some justifying purpose other than to avoid the provisions of the LRA, relating to the fairness of a dismissal, be invalid in terms of the LRA.

Thirdly, in the event that a client does terminate a contract with a service provider, employers cannot simply rely on such automatic termination clauses and simply inform their employees that their contracts are thereby terminated. Employers will have to ensure that there is a fair reason for the termination of the contract and that a fair procedure is followed.

This does not mean that the employer is without recourse should a client terminate a service agreement. The employer can still terminate the contract by way of operational requirements (retrenchment) provided that there are no other viable alternatives and a fair procedure has been followed. Another, less reliable, option would be as follows: If an employer realises that, if a client had to cancel a contract, they may not have work available for employees, they could place such employees on, what I call, permanent part time contracts. The essence of such contracts is that the right to work and to be paid is not ongoing and that those rights are linked to the availability of work. Thus, when a contract with a client is terminated, the employee’s contract is not terminated, but they are merely sent home because there is no available work. Such clauses in contracts are similar to short time arrangements, which are permissible in law. However, there is no guarantee that the CCMA, Bargaining Council or Labour Court may also find such clauses invalid in the light of the constitutional imperative as interpreted by the Constitutional Court to protect employees.

Please note that this post is not meant to substitute legal advice and should an employer or employee find himself or herself faced with this situation, they are advised to contact an attorney or some other such professional prior to deciding on any course of action.