Automatic termination clauses have been a contentious issue in employment law for some time. Central to the issue is whether such clauses offend the provisions of the Labour Relations Act 66 of 1995, as amended (‘the LRA’) and in particular section 5 which prohibits any person from, inter alia, preventing an employee from exercising any right conferred by the LRA, such as the right not to be unfairly dismissed.

The Labour Appeal Court recently dealt with this issue in Enforce Security Group v Fikile & Others (DA24/15) [2017] ZALCD 2 (25 January 2017).  In this case, the employer provided security services to the Boardwalk Inkwazi Shopping Centre in Richards Bay. In order to perform the security services required, the employer employed several employees for purposes of being stationed at the shopping centre. In essence, the contracts of employment contained a clause which provided that the employees’ employment with the employer was dependent upon the existence of the service level agreement between the employer and Boardwalk Inkwazi Shopping Centre. It stated that if the service level agreement between the employer and Boardwalk Inkwazi was terminated, then the employees’ employment with the employer would terminate automatically.

On 30 September 2011 Boardwalk Inkwazi gave notice of its termination of the service level agreement. The employer held meetings with the relevant unions shortly thereafter to inform them of the termination and to discuss the consequences of this termination. The employer’s offer of alternative employment in Durban was rejected by the employees’ representatives, who were of the view that a retrenchment process in terms of section 189 of the LRA should be followed since the employees believed that they were in fact permanent employees. A second meeting took place, but the parties maintained their positions and the employer then issued notices of termination on 31 October 2011.

After receiving notices of termination, the employees referred an unfair dismissal dispute to the CCMA. The Commissioner found that the termination of the service level agreement by Boardwalk Inkwazi automatically terminated the employment of the employees and therefore the employees were not entitled to any compensation. The Labour Court subsequently reviewed and set aside the CCMA’s award and found that the employees had in fact been dismissed, that their dismissal was both substantively and procedurally unfair and ordered the employer to pay six months’ compensation as well as severance packages to each of the employees.

On appeal, the Labour Appeal Court found that it had to determine, inter alia, whether the employees had in fact been ‘dismissed’ as provided for in terms of the LRA and the effect of the automatic termination clause on the rights of those employees.

The Court found that the LRA provides in section 186(1) for specific acts which constitute a ‘dismissal’. This meant that there are other ways that an employment contract could be terminated without a ‘dismissal’ arising, such as the expiry of a fixed-term contract upon the occurrence of a specified event. In other words, upon the occurrence of a specified event, the contract would terminate automatically and this would not constitute a ‘dismissal’ for purposes of the LRA. The Court further found that section 186(1) requires an act by an employer that terminates a contract of employment. In this case, the evidence showed that the proximate cause of the termination of the contracts of employment had been the termination of the service level agreement by Boardwalk Inkwazi and not the employer. Consequently, the Court found that the termination of the employees’ employment was not a ‘dismissal’ for purposes of the LRA.

The Court then considered the lawfulness of automatic termination clauses and found that not every automatic termination clause would be contrary to the provisions of the LRA. It held that the termination of a contract of employment upon the occurrence of a specified event was permitted by the LRA and that the operation of such clauses does not automatically render the termination of the employment contract a ‘dismissal’ for purposes of the LRA. The Court expressed its view that each case should be determined on its merits and a range of factors such as the precise wording of the clause and the context and purpose of the contract of employment could have an impact on the final assessment.

The Court accordingly found that the employees had not been dismissed and granted the appeal by the employer.

It appears from the Judgment that the Court distinguished between two scenarios in regard to automatic termination clauses. The first instance deals with automatic termination clauses that are triggered by a third party, such as in this case and in the case of Sindane v Prestige Cleaning Services (2010) 31 ILJ 733 (LC). The Court appears to have accepted that such clauses are permissible and do not give rise to a ‘dismissal’ in terms of the LRA. The second instance, however, deals with situations where the automatic termination clause is triggered by the employer. In those circumstances, misconduct may be involved and employers intend to circumvent the provisions of the LRA by relying on automatic termination clauses. In support of this the Court referred to its earlier judgment in South African Post Office v Mampeule (2010) 31 ILJ 2051 (LAC) and found that in those circumstances, the termination of the contract of employment would give rise to an unfair dismissal.

Written By Neil Coetzer, Partner, Employment Law, Benefits & Industrial Relations, Cowan-Harper Attorneys

For more information please contact Neil Coetzer at ncoetzer@chlegal.co.za or (011) 783 8711 / (011) 048 3000