Any employer making use of fixed term contracts should review their policies and practices particularly where the employees are earning less than R205 433, 30 per annum and the periods of the contract together with any renewal exceeds three months.

In "The Labour Relations Amendment Act, 2014 and non-standard Employment" we dealt with some general provisions and concepts which are important to an understanding of the amendments as a whole. These included the idea of non-standard employment, avoidance and justifiable reasons for different treatment. In "The Labour Relations Amendment Act, 2014 and Non-Standard Employment: The Use of Labour Brokers" we reviewed the use of labour brokers.

In this note, we consider the use of fixed term employment contracts.

The note does not purport to be a detailed or complete explanation of the amendments or their significance. It must not therefore be read as constituting legal advice but rather as a means for employers to identify and respond to the most obvious risk areas.

Setting the scene

To begin with we set the scene by looking at the present position.

An employment contract comes to an end as a result of:

  • the act of the employer – “dismissal”;
  • the act of the employee – “resignation”; or
  • the effluxion of time. “Time” in this context means either that the fixed time for which the contract was entered into has elapsed, or that the particular task or reason in respect of which the employee was employed has been completed. This is the typical “part-time employee” or “fixed term contract” situation. Ordinarily, it does not constitute dismissal.

Other methods would include the death of the employee or mutual agreement but these are not relevant for present purposes.

Employers know that a dismissal will be unfair unless the employer is able to prove that:

  • it was for a fair reason related to the employee’s conduct or capacity, or the employer’s operational requirements; and
  • was effected in accordance with a fair procedure.

The complication with termination of fixed term contracts, by effluxion of time, arises because of the extended definition of dismissal in the LRA. It goes beyond what one would ordinarily expect.

“Dismissal” is defined to include the situation where an employee reasonably expects the employer to renew a fixed term contract on the same or similar terms but the employer offered to renew it on less favourable terms, or did not renew it. (The amendments now extend this to the employer’s failure to meet the employee’s expectation that the employee would be retained on an indefinite basis.)

Care had therefore to be taken to ensure that the employer did and said nothing, directly or indirectly, which might have led the employee to expect the renewal of the contract. However, even explicit wording in a contract would not assist an employer where the employer’s actual conduct led to a reasonable expectation on the part of the employee that the contract would in fact be renewed, notwithstanding the express words.

The difficulty arose particularly if the fixed term contract was to be renewed. For, unless the circumstances were appropriate, the mere renewal of the contract may tend to have suggested that its temporary nature was not genuinely meant.

In practice, we have for a long time advised that:

  • a fixed term or temporary employment contract must be related to an “external” business imperative such as, for example, the absence of another employee, a temporary fluctuation in workload or a particular project which has a clear beginning and a clear end; and
  • subject to compliance with this principle, there was no reason why an employer should not engage employees either for a defined period (for example "two days", "three weeks" etc), or, until the happening of a defined event (for example "the completion of the project etc"). When the time of these contracts had elapsed, the employment terminated but no question of "dismissal" arose, unless a reasonable expectation of renewal had been created.

Although this part of the definition of ‘dismissal’ is amended, the principles set out above continue to apply and the risk of non-renewal ending in an unfair dismissal claim not only remains but is added to. What the amendments do is to articulate these principles expressly.

The amendments

The amendments to the law affecting fixed term contracts are introduced by the new section 198B. In this note, we do not cover each and every sub-section of section 198B, but focus on the central ideas. Employers intending to enter into a fixed term contract would be well advised to take proper advice.

We start by noting two apparent concessions tosmall businessand one other where the provisions of the section do not apply.

First, the section does not apply to employees earning more than the prescribed Basic Conditions of Employment Act threshold (currently R205 433, 30). So, if an employee is to earn more than R17 119. 44 per month the restrictions of the amendments will not apply.

Second, the provisions will not apply to an employer:

  • that employs less than 10 employees, or
  • that employs less than 50 employees and whose business has been in operation for less than two years, unless:
    • the employer conducts more than one business; or
    • the business was formed by the division or dissolution for any reason of an existing business.

Third, the provisions do not apply where the employee is employed in terms of a fixed term contract which is permitted by any statute, sectoral determination or collective agreement.

With those preliminary remarks, we must now consider how the amendments define a fixed term contract.

A fixed term contract means a contract of employment that terminates on:

  • the occurrence of a specified event;
  • the completion of a specified task or project;
  • a fixed date (other than an employee’s normal or agreed retirement age).

This is exactly what we have always understood as “the effluxion of time” which is mentioned earlier. What is new is what follows, namely, the regulation of the legitimate period and the idea of justification.

So, an employer may offer a fixed term contract or successive fixed term contracts as long as it is for less than three months.

If either the original contract or successive contracts, or their collective duration, will be for a period longer than three months, then a fixed term contract or successive contracts is permissible only if:

  • the nature of the work for which the employee is employed is of a limited or definite duration; or
  • the employer can demonstrate any other justifiable reason for fixing the term of the contract.

You can see the idea we previously expressed that a fixed term contract must be related to an “external” business imperative such as, for example, the absence of another employee, a temporary fluctuation in workload or a particular project which has a clear beginning and a clear end.

The amendments go on to list a number of circumstances in which the use of a fixed term contract will be justified. We list a few:

  • if the employee is replacing another employee who is temporarily absent from work;
  • if the employee is employed on account of a temporary increase in the volume of work which is not expected to endure beyond 12 months;
  • if the employee is employed to work exclusively on a specific project that has a limited or defined duration; and
  • if the employee is employed to perform seasonal work.

So far, there is very little in the amendments which would hinder the use of fixed term contracts in those circumstances where they have always been justifiable.

But now to risk. First, if the period of the contract or its renewals is to exceed three months, the employer will have to be able to demonstrate a justifiable reason for that period and for the use of a fixed term contract.

Second, as pointed out earlier, the definition of dismissal is, in broad terms, unchanged. An employee engaged on any fixed term contract which is not renewed when the employee reasonably expected it to be renewed or converted into an indefinite period contract is deemed to have been dismissed. If the employer is not able to prove that this was done for a fair reason and in accordance with a fair procedure, then the dismissal will have been unfair. Remedies include re-instatement, re-employment or compensation.

Third, and what is new, is sub-section (5). If you conclude a fixed term contract where:

  • it is for a period longer than three months; and
  • the nature of the work for which the employee is employed is NOT of a limited or definite duration; or
  • the employer CANNOT demonstrate any other justifiable reason for fixing the term of the contract –

then the fixed term will fall away and the contract will be deemed to be of indefinite duration.

Similarly, if you renew a fixed term contract where:

  • it is for a period longer than three months; and
  • the nature of the work for which the employee is employed is NOT of a limited or definite duration; or
  • the employer CANNOT demonstrate any other justifiable reason for fixing the term of the contract –

then the fixed term will fall away and the contract will be deemed to be of indefinite duration.

So the risk in using fixed term contracts for longer than three months (including renewals) is twofold: first unfair dismissal, and second, the conversion of a fixed term contact into an indefinite period one. Both risks can be managed provided the contract is used for a proper purpose having regard to the list of justifiable reasons.

Fourth, where an employee is employed on a fixed term contract of longer than three months, he or she must be treated no less favourably than an employee employed on a permanent basis performing the same or similar work, unless there is a justifiable reason for different treatment.

In our first note, we discussed what the concept of a justifiable reason involves, as well as drawing attention to the implications of using fixed term contract employees for the determination of organizational rights.