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The Use of Automatic Termination Clauses: Not Dismissed Just Yet?

FEBRUARY 28, 2017
The Use of Automatic Termination Clauses: Not Dismissed Just Yet?

The Labour Appeal Court recently dealt with the issue of automatic termination clauses in fixed-term employment contracts in Enforce Security Group v. Mwelase Fikile and Others (DA24/15) [2017] ZALAC 9.

The Court's Recent Position on Automatic Termination Clauses

The question of whether automatic termination clauses are valid has come before the courts a number of times of late. The most notable of the recent judgments were:

  • Petcon Outsourcing Solutions CC and Pillemer B N.O. and CCMA and Thulasizwe Shozi & 205 others (D1256/13) [2015] ZALCD, which involved the use of an automatic termination clause to terminate employment on the client's termination of the services agreement. The Labour Court held that the automatic termination clause had the effect of depriving the employees of the right to have an operational requirements termination ventilated in court. The Court found that the clause as it was, was contrary to public policy, unconstitutional and unenforceable; and that it deprived the employees of their rights in terms of the Labour Relations Act No 66 of 1995.
  • NUM obo Milisa and others v. WBHO Construction (Pty) Ltd [2016] 6 BLLR 642 (LC), which involved the use of an automatic termination clause to terminate employees when their specific skill was no longer required for a construction project. The Labour Court held that the automatic termination provision was invalid, as it disregarded the provisions of the LRA that preclude employers from terminating employees’ contracts at will.

Facts of Enforce Decision

The employer, Enforce Security Group, is a private security service provider that contracts security officers to its clients under service agreements. Enforce employs its security guards on the basis that their period of employment is linked to a service agreement. Thus, the employees' employment will continue and automatically come to an end on the termination of the agreement.

In this case, the client gave notice to Enforce of the termination of the services under the agreement. Relying the automatic termination clause in its employees' contracts, Enforce subsequently gave notice to its security officers of the termination of their employment. The employees were of the view that their termination constituted a dismissal for operational requirements in terms of section 189 of the LRA.

The employees referred an unfair dismissal dispute relating to their alleged dismissal for operational requirements to the Commission for Conciliation, Mediation and Arbitration. The Commissioner found that the duration of the contracts was clearly delineated and that the termination of the service agreement between Enforce and its client automatically terminated the employees' employment. He found that the employees were not entitled to any compensation.

On review, the Labour Court set aside the CCMA’s award and held that the employees had been dismissed. The Court concluded that the dismissal constituted a retrenchment and that it was both substantively and procedurally unfair. Enforce was ordered to pay each employee six months’ compensation and severance pay.

Subsequently, Enforce appealed the decision to the Labour Appeal Court , which was required to determine

  • whether the employees had been dismissed (as opposed to the contract coming to an automatic end); and
  • the effect of the automatic termination clause on the rights of the employees.

Labour Appeal Court's Decision

The LAC held that the employment contracts were fixed-term contracts where the end of the fixed term was defined by the completion of a specific project, that being the termination of the service level agreement. It found that Enforce had not terminated the employees' service but rather the contracts came to an automatic end.

The LAC, in coming to its conclusion to allow the automatic termination clause, stated that automatic termination clauses based on an event indicated in a fixed-term contract are not necessarily invalid. When deciding whether the clauses are valid, consideration must be given to whether clause is intended to circumvent the employer’s obligations under the LRA. This determination includes inquiry into the following:

  • the relationship between the fixed-term event and the purpose of the contract with the client;
  • whether it is left to the client to pick and choose who will 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 LAC considered two cases that deal with the use of automatic termination clauses. Sindane v. Prestige Cleaning Services (2010) 31 ILJ 733 (LC) and South African Post Office v. Mampeule (2010) 31 ILJ 2051 (LAC).

In Prestige Cleaning, the Court accepted that automatic termination clauses are permissible and do not give rise to a dismissal in terms of the LRA. This is on the premise that the wording of section 186 of the LRA defines dismissal as the termination of the contract of employment by the employer. In this case, the contract terminated due to the result of a specific event.

In South African Post Office, the Court found, however, that of Mampeule's employment was directly related to allegations of misconduct. In this instance, the termination of the contract of employment gave rise to an unfair dismissal as the termination was by the employer.

In the Enforce decision, the LAC aligned its decision with that of Sindane in that it found that the contract terminated as a result of a specified event as opposed to an overt act on the part of the employer. The LAC rejected the decision of South African Post Office, as the termination of employment was not linked to the expiry of a fixed term contract but rather to a decision by the employer. Accordingly, the appeal was upheld.

Practical Lesson

Due to the courts' varying attitudes towards automatic termination clauses, employers must approach them with caution. When including an automatic termination clause in a contract of employment, it is important to keep the LRA in mind as any clause that has the potential to deprive an employee of his rights in terms of the LRA is likely to be declared invalid.