Fixed-term (‘temporary’) contracts expose employers to risk. No matter how the contract is worded, an employer who relies on the fact that a fixed-term contract has expired may face an unfair dismissal claim if the employee had a reasonable expectation of renewal.

Summary

• Avoid past practice: Before entering into or renewing a fixed-term contract, employers should not rely solely on what has been done previously.
• Contract wording not decisive: Do not rely on the wording of the contract alone, as there may be other considerations that give rise to a reasonable expectation of renewal.
• Question the rationale: The underlying reason for choosing a fixed-term arrangement must be carefully examined.
• Performance assessment excluded: Evaluating an employee’s performance is never a valid justification for a fixed-term contract.
• Record the reason: If there is a justifiable reason for entering into, or extending, a fixed-term contract, the underlying business reason should be recorded.

Clear rules govern the termination of most fixed-term contracts, particularly where employees earn below the applicable income threshold – currently R22 466.74 per month (see previous article at https://labourwise.co.za/labour-articles/fixed-contracts-update).

It may seem that terminating fixed-term contracts for higher earners carries fewer risks, but this assumption may be wrong. In reality, complacency and the higher stakes involved may actually increase the risks, as underscored in a recent Labour Appeal Court judgment.

Labour Appeal Court

The recent judgment of the Labour Appeal Court in Tshwane University of Technology v Naidoo & Others highlights a recurring problem in South African labour law, i.e. when does the termination of a fixed-term (‘temporary’) contract amount to a dismissal in terms of the LRA? Put differently, when can it be said that a temporary employee had a reasonable expectation of renewal of their contract on the same or similar terms? The answer does not depend solely on what the employment contract says.

Wording of contract

Dr. Naidoo was a senior executive at the TUT employed on a five-year fixed-term contract. The original contract stated explicitly that ‘… there shall be no expectations, rights or claims by the employee in regard to renewal or extension.’ It was later amended to provide for renewal for a further five-year term, subject to proof of satisfactory performance. The University – actually his immediate boss acting without authority – declined to renew the contract despite Dr Naidoo’s excellent performance record. A CCMA arbitrator found this to have constituted a dismissal and an unfair one at that while the Labour Court on review reversed the award.

On appeal, the Labour Appeal Court concurred with the arbitrator’s decision that Dr. Naidoo legitimately harboured a reasonable expectation of renewal, that the non-renewal of his contract amounted to a dismissal which had been unfair both substantively and procedurally. He received a seven-figure sum in compensation.

Other considerations

The Court rejected the TUT’s argument that the case could be decided by reference to the contract alone.

If the wording of the contract were the only consideration, the non-renewal would not have amounted to a dismissal but simply the termination of the contract through effluxion of time.

Instead, the court considered the employee’s performance, assurances given by senior management, the treatment of other executives (whose contracts were renewed), the continuing nature of the work performed and the purpose of the renewal clause which, viewed together, made Dr Naidoo’s expectation of renewal objectively reasonable.

The dismissal was found to be both procedurally and substantively unfair. Dr Naidoo received an astounding 7-figure sum as compensation for the unfair dismissal.

Is temporary employment justified?

The judgment reaffirmed that section 186(1)(b) of the Labour Relations Act is intended to prevent the misuse of fixed-term contracts where employees perform ongoing work but are denied employment security through temporary arrangements. This applies to all employees irrespective of whether they earn below or above the statutory income threshold.

The case also implicitly highlights the distinction between the nature of a job, task or project on the one hand, and the employment relationship established by the contract of employment on the other. The closer the connection between the contract and genuinely temporary work, such as a project of limited duration, a replacement for someone on sick or maternity leave, or a short-term externally funded initiative, the easier it will be to justify non-renewal unless, e.g. promises of renewal had been made by people with the necessary authority to do so.

The risks increase where the work itself is ongoing and the organisation continues to require the role after the employee leaves. In these circumstances, courts are more likely to scrutinise renewal clauses, organisational practices, management assurances and previous renewals. Employers ought to ask themselves, when considering appointing someone on a temporary basis, whether there is sufficient objective justification – i.e. a clear business rationale – for doing so.

Advice for employers

Before entering into or renewing a fixed-term contract, employers are advised against merely relying on past practice. Instead, the underlying reason for wanting to do so should be examined.

If there is indeed a justifiable reason for temporary employment, employers should document the business reason for using a fixed-term contract in the contract itself as well as supporting documentation (e.g. interview transcripts); ensure that employment contracts, policies and management conduct are aligned with the contract’s intention; communicate clearly and early about renewal decisions; and remind managers to refrain from doing or saying things that could be construed as a promise of renewal. The latter is probably the one area where employers are most vulnerable and that is also the most difficult to supervise and control.

Employers should also not assume that a standard ‘no expectation of renewal’ clause will provide complete protection. The LAC confirmed that such clauses should be taken into consideration, but that they are not decisive if the surrounding circumstances point to a reasonable expectation of continued employment.

The primary lesson for employers is simple: fixed-term contracts should be justified not only by their wording, but also by the operational reasons for using them in the first place.

Written by Barney Jordaan & Jan Truter for www.labourwise.co.za