14/06/2017
When can employers validly and legitimately enter into contracts of employment with their employees in terms of which the contracts expire automatically after a certain period of time or on the occurrence of a specified event?
By: P.A.K. le Roux
When can employers validly
and legitimately
enter into contracts of
employment with their employees in
terms of which the contracts expire
automatically after a certain period
of time or on the occurrence of a
specified event? This has been a
question that has exercised the minds
of the legislature, arbitrators and
judges. This is because of the tension
between common law contract
principles and the provisions of the
Labour Relations Act, 66 of 1995
(LRA). Common law contract principles
provide that, if a contract of
employment for a fixed period of
time has been concluded, the contract
terminates automatically when
the period for which it has been entered
into expires. There is therefore
no dismissal the fairness of which
can be challenged in terms of the
provisions of the LRA. The same
applies to another form of fixed-term
contract, i.e. where the parties agree
that the contract will terminate automatically
if a specified event occurs
sometime in the future.
The drafters of the LRA accepted the
legitimacy of fixed-term contracts, at
least in principle, but also realised
that they could be utilised as a mechanism
to prevent employees from exercising
their statutory right not to be
unfairly dismissed. It was therefore
provided, in section 186(1)(b), that
an employee will be regarded as having
been dismissed if the employer
fails to renew a fixed-term contract
of employment in circumstances
where the employee had a reasonable
expectation that it would be renewed.
This provision did not prevent the legitimacy
of automatic termination clauses being challenged
on other grounds. The first really considered
decision to deal with this issue was
that in SA Post Office Ltd v Mampeule
(2009) 30 ILJ 664 (LC). The employee in this
case had been employed on a five year fixedterm
contract as chief executive officer. He
became involved in a dispute with his employer,
the Post Office, and was eventually
removed as a director. The Post Office then
sought to argue that his removal as a director
had also resulted in the automatic termination
of his contract of employment. This was
because the Post Office’s articles of association
provided that it was an inherent requirement
of his job that he be appointed as a director.
During the course of subsequent litigation
the Labour Court found that he had in
fact been dismissed. The Court also expressed
the view that the provision in the articles
of association (as incorporated into the
employee’s contract of employment) that
had the effect of automatically terminating
the contract of employment was impermissible
because it truncated the right not to be
unfairly dismissed, limited the right to fair
labour practices and was contrary to public
policy.
This view was upheld by the Labour Appeal
Court (LAC) in SA Post Office Ltd v Mampeule
(2010) 31 ILJ 2051 (LAC). In coming
to this decision the LAC relied, inter alia, on
sections 5(2) and 5(4) of the LRA.
Section 5(2) states that no person may prevent,
or threaten to prevent, an employee
from exercising any right conferred by the
LRA. Section 5(4) states that -
'A provision in any contract, whether entered
into before or after the commencement
of this Act, that directly or indirectly
contradicts or limits any provision of section
4, or this section, is invalid, unless
the contractual provision is permitted by
this Act.’
These decisions have been considered and
applied in a series of later decisions where
contractors or temporary employment services
(TES) had entered into contracts of
employment with their employees in terms
of which the contracts of employment would
expire automatically if the client terminated
the commercial contract between itself and
the contractor or TES, or informed the contractor
or TES that it no longer required part
of a service provided. In each of these cases
the legitimacy of the use of fixed-term contracts
was challenged. In some cases the legitimacy
was upheld, in others it was not upheld.
The tendency was, however, one of
some hostility to such forms of termination.
See in this regard CLL vol 24 no 4.
However, in the recent decision in
Enforce
Security Group v Mwelase and others (DA
24/15 25/2/2017) the LAC has adopted a
more accommodating approach to this type
of contract. The employer, the Enforce Security
Group (Enforce) had contracted to provide
a security service to the Boardwalk
Inkwazi Shopping Centre (Boardwalk) in
Richards Bay. The contracts of employment
it entered into with the employees hired to
perform the security services at Boardwalk
contained a clause in terms of which the employees
acknowledged that their employment
was dependent on the continuation of the
contract between Enforce and Boardwalk. It
also contained the following automatic termination
provision -
‘The period of the employment would endure
until the termination of the contract
which currently exists between BOARD
WALK or its successors (hereinafter referred
to as the CLIENT) and the COMPANY.
3.2.1 The Employee agrees that he/she
fully understands that the Company’s contract
with the Client might be terminated
by the Client at any time and for any cause
or might terminate through [e]ffluxion of
time and that in consequence hereof the
nature of the Employee’s employment with
the company and its duration is totally dependent
upon the duration of the Company’s
contract with the Client/s and that the
Employee’s contract of employment shall
automatically terminate. Such termination
shall not be construed as a retrenchment
but a completion of contract…’
In September 2011 Boardwalk gave notice
that it was terminating its contract with Enforce
with effect from 31 October 2011. Enforce
then met with the trade unions representing
its employees and informed them of this
development. The affected employees were
offered alternative employment in Durban.
This was rejected; they demanded that they be
retrenched and paid a severance package. The
result was that the employees’ employment
terminated on 31 October 2011.
The employees claimed that they had been unfairly
dismissed. At a subsequent arbitration
Enforce sought to rely on the automatic termination
provision to avoid liability. The CCMA
commissioner found that the employees had
not been dismissed and rejected their unfair
dismissal claim. On review the Labour Court
set aside the award and relied on the Mampeule
decisions in coming to the conclusion
that the employees concerned had been dismissed
and that their dismissals had been unfair.
Enforce appealed to the LAC. The LAC referred
to section 186 of the LRA, which sets
out six circumstances in which a dismissal
will be regarded as having taken place. It argued
that this meant that there were circumstances
in which an employment contract can
be terminated which do not constitute a dismissal
as defined. One of these instances is the
expiry of a fixed-term contract entered into for
a specified period or which terminates on the
happening of a specific event. The common
law position is that the expiry of the period for
which the contract was entered into, or the occurrence
of the specified event, results in the
automatic termination of the contract by the
operation of law and there is therefore no dismissal.
Section 186 had not amended the common
law position. In addition, the definition of
a dismissal set in section 186 requires that
there must be an act by the employer that terminates
the contract. It went on to find that –
‘[23] The factual matrix in this case supports
the view that the employees’ contracts
of employment were fixed-term contracts
where the end of the fixed term was
defined by the completion of a specified
task or project, that is, the termination of
the Boardwalk contract. The continued existence
of these contracts depended on the
continued existence of the contract between
the appellant and Boardwalk. The employees
were employed specifically for the contract
between the appellant and Boardwalk.
The termination of that contract is a
legitimate event that would by agreement,
give rise to automatic termination of the
employment contracts. It is Boardwalk that
cancelled the contract and not the appellant.
There was no direct or indirect act by
the appellant to cancel the contracts. There
is no evidence to suggest that cancellation
by Boardwalk was a device to rid the appellant
of the employees. Neither is there
evidence to suggest that it was a clandestine
move by the appellant to dismiss the
individual employees. On the facts of this
case the cancellation of the service contract
by Boardwalk is the proximate cause
for the termination of the employees’ contracts
of employment.’
The LAC then considered the provisions of
section 5 of the LRA and the lawfulness of
automatic termination clauses. It stated that it
is logical that parties to a contract of employment
cannot be permitted to agree that ‘what
is proved to be a dismissal should be regarded
as not being a dismissal’. However, a finding
as to whether there has been a dismissal in a
particular case constitutes a value judgment
which should be made on the facts of that
case.
The LAC further argued that the Mampeule
decisions could be distinguished from this
case on three grounds. The first was that the
termination of Mampeule’s employment was
due to an act of the employer. It was the action
of the Minister of Communications
(representing the State as shareholder in the
Post Office) which led to him being removed
as a director – this was the proximate cause of
the termination of employment. The second
was that the termination of Mampeule’s employment
was ‘directly related” to allegations
of misconduct. The Minister’s action denied
Mampeule the opportunity to contest the fairness
of the termination of his employment.
Thirdly, the termination of employment was
not linked to the termination of a fixed-term
contract.
The Court then referred to the decision in
Mahlamu v Commission for Conciliation, Mediation
and Arbitration and others (2011) 32
ILJ 1122 (LC) where the Court considered the
impact of section 5 of the LRA and, in particular,
the question of when contractual provisions
that directly or indirectly contradict or
limit section 4 (in effect the right not to be unfairly
dismissed) of the LRA are permitted by
the LRA.
It came to the conclusion that it does not necessarily
follow –
‘[41] …that in all cases an automatic termination
clause based on an event contained
in a fixed term contract of employment
will be visited with invalidity. It
would be necessary to determine whether
in the circumstances of a particular case
the clause was intended to circumvent the
fair dismissal obligations imposed on the
employer by the LRA and the Constitution.’
The Court then went on to list some of the
considerations that would be relevant in determining
the intention of the parties. These included
–
- the precise wording of the automatic termination
clause and the context of the entire
agreement;
- the relationship between the fixed-term
event and the purpose of the contract with
the client;
- whether it is left to the client of the contractor
or TES to choose and pick who is
to render the services under the service
agreement;
- whether the clause is used to unfairly target
a particular employee by either the client
or the employer; and,
- whether the event is based on proper economic
and commercial considerations.
The Court stated that this list was not an exhaustive
one and each case had to be determined
on its own circumstances.
It then found that the automatic termination
clause in this case met the requirement for validity.
It stated that –
‘[42] … It does not follow that the inclusion
in a contract of employment of a
clause similar to the one in this case
should automatically render a termination
of that contract based solely on its legitimate
terms, a dismissal. That would in my
view defeat the whole purpose of concluding
fixed-term contracts concluded for legitimate
reasons.’
Comment
This decision was based on the law prior to
the amendments to the LRA introduced in
2015. These amendments inserted a new section
198B into the LRA which regulates the
utilisation of fixed-term contracts in some detail.
Fixed-term contracts are defined to include
contracts that terminate on: the occurrence
of a specified event; the completion of a
specific task or project; or, a fixed date. It
further provides that fixed-term contracts entered
into with employees who earn less than
an amount specified in a ministerial determination
issued in terms of section 6(3) of the
Basic Conditions of Employment Act, 75 of
1995 (currently R205 433.30) and for a period
of more than three months, will be deemed to
be contracts entered into for an indefinite duration
unless the nature of the work for which
the employee is employed is of a limited or
defined duration or the employer can show
some other justifiable reason for entering into
the fixed-term contract. The section lists
eight circumstances where the use of a fixedterm
contract will be justified. However, this
is not a closed list.
Section198B will limit the applicability of the
Enforce decision but it remains relevant in
circumstances where the employee earns more
than that specified in a ministerial determination
or where the use of the contract complies
with the requirements of section 198B as described
above. In fact if the contract does
comply with these requirements there will
have been compliance with section 5 in the
sense that the contract will be permissible in
terms of the LRA.