Employers have the right to retrench employees. This is regulated by Section 189 and 189A of the Labour Relations Act 66 of 1995. Due to the current economic climate, retrenchments have become more frequent for obvious reasons. Employers should ensure that their fixed-term contracts are managed correctly to avoid disputes, should they need to make the difficult decision to start retrenchment proceedings.

Having employees on fixed-term contracts complicates the retrenchment process somewhat. This is because the law provides more protection to those employed on a fixed-term basis due to the nature of their contracts. When starting the retrenchment process, employers should peruse the agreements they have with their fixed-term employees as the employer is bound by law to honour the terms of these employment agreements. Generally, a fixed-term contract can only be terminated for the following reasons:

  • A material breach of the contract,
  • Repudiation of the contract; and
  • By way of the contract coming to a natural end (effluxion of time).

Considering the above, we can see that retrenchment or dismissal due to operational requirements is not a reason to terminate the fixed-term contract. However, if the terms of the contract stipulate that the contract could be terminated before the expiration date due to operational requirements, then the employee can be retrenched even if the fixed period has not ended or the specific task or project which the employee was employed for has not been completed.

In the case of Buthtulezi v Municipal Demarcation Board (JA37/2002) [2004] ZALAC 15 (22 July 2004), the Labour Appeal Court found that the retrenchment of an employee prior to the expiry of their fixed-term contract was unfair. The employee was employed on a five-year fixed-term contract. The Respondent issued the employee with a notice of retrenchment just more than a year after entering into the contract, stating that the Respondent had embarked upon an institutional restructuring process which would render certain positions redundant, with the appellant’s position being one of them.

The Court held that the Respondent had no right in law to terminate the employment contract and that the termination of such contract before the end of its term was unfair and constituted unfair dismissal.

The Court further held that when parties agree that a contract will be for a certain period, they bind themselves to honour and perform their respective obligations in terms of that contract for the duration of the contract; this is because for the time of entering the agreement they plan their lives on the basis that they will be able to meet the obligations set out in the contract. The Court stated that each party is entitled to expect that the other can meet its obligations for the entire term in the absence of any material breach.

For this reason, an employee on a fixed-term contract cannot simply be retrenched unless there is a clause in the contract which makes provision for the termination of the contract, before the date of expiration, due to operational requirements.

In the absence of such a clause, the Court held that the Municipal Demarcation Board had to pay Buthelezi for the remainder of his employment contract, this amounted to almost four (4) years’ salary in compensation.

It is important to include a termination clause in all fixed-term contracts stating that the contract could be terminated before it expires. The inclusion of such a term would clear up any confusion and complications on who you can or cannot retrench, should the company enter retrenchment proceedings, and protect the employer from the dismissal being held to be unfair when legally challenged. Failing to include the clause would render the dismissal due to operational requirements substantively unfair. The employer would need to pay out the employee the full value of the fixed-term contract.

Article by: Shannen Brown
Dispute Resolution Official – Gqeberha