Automatic termination clauses have been a touchy issue in employment law for some time. An essential issue is whether such clauses go against the provisions of 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.

It may be argued that automatic termination clauses offer employers the opportunity to effectively circumvent their obligations under the LRA with regards to fairness of dismissals, as automatic termination clauses are often used as a mechanism to do this.

It may further be argued that by depriving employees of their protection against an unfair dismissal, their fundamental rights to fair labour practices are infringed.

What are automatic termination clauses
Automatic termination clauses are clauses that automatically terminate a fixed-term contract of employment upon the occurrence of a specific event, for example, the completion of a project for a client or the termination of the employment relationship between the employer and its client. Such contracts are therefore terminated ex lege and not by an act of the employer.

Section 186(1) of the Labour Relations Act 66 of 1995 (LRA) provides for specific acts which constitute a dismissal. The definition in terms of this section generally requires an act by the employer that results in the termination of the contract between the parties. However, if the termination of the contract does not fit the definition, no dismissal claim is possible under the LRA. Employees will therefore not be able to challenge the fairness of such terminations based on the provisions of the LRA. These provisions, and consequently the LRA, will therefore be effectively circumvented.

Are automatic termination clauses valid?
It has become practice by employers to insert automatic termination clauses into contracts of employment, where factors outside the employer’s control are at play. It makes sense in such circumstances for the employee and employer to sign a contract allowing for automatic termination of employment should the potential obstacle to employment become a reality.

This principle was confirmed as being acceptable by the Labour Court in the case of Sindane vs Prestige Cleaning Services (2009, 12 BALR 1249). Therefore, until and including 2009, the courts have accepted such automatic terminations of employment not as dismissals but as mutually agreed terminations of the employment. Automatic termination clauses were considered to be fair and just because of the employer’s lack of control of the problem factor, the employee’s awareness of the lack of control and the fact that the employee has consequently agreed to the automatic termination provision of the employment contract.

There are many instances in which an employee’s continued employment with an employer is dependent on the requirements of a client of the employer. In such instances, the employer links the duration of the employee’s employment contract to the contract between it and its client. Automatic termination clauses which are used in this way usually raise questions as to whether reliance on them results in a dismissal as well as uncertainty around the validity of the clauses.

The Labour Appeal Court recently dealt with this issue in the case of Enforce Security Group v Fikile & Others (DA24/15) [2017] ZALCD 2. In this case, the employees were hired under a contract with the specific purpose of providing security services to Enforce’s client, the Boardwalk Inkwazi Shopping Centre in Richards Bay. In order to perform the security services required, Enforce employed several employees for purposes of being stationed at the shopping centre. The contracts of the employees had automatic termination clauses to the effect that if the employment relationship between Enforce and its client terminated, then the contract between Enforce and its employees would automatically terminate. The client then gave notice of the termination to Enforce, which resulted in Enforce terminating its contract with its employees. The matter proceeded to the CCMA, was then referred to Labour Court and finally the Labour Appeal Court. The Employees representatives argued that they were dismissed due to the invalidity of the automatic termination clauses. The argument from Enforce was that the termination of the contracts did not constitute a dismissal in line with Section 186 of the Labour relations Act, as the proximate cause of the cancellation was due to the client of the employer cancelling the contract between the parties (Enforce and Boardwalk Inkwazi Shopping Centre), which in turn triggered the automatic termination clauses in the contracts between the employer and its employees. Enforce submitted a further argument that the automatic termination clause does not go against the protection afforded by the LRA.

The Labour Appeal Court 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 agreed with the reasoning of the employer, stating that the employer had not taken any action to trigger the automatic termination clause. Further that it was clearly the client of the employer that had terminated the contract between the parties (Boardwalk Inkwezi Shopping Centre and Enforce), and that this, in turn, was the proximate cause which had triggered the automatic termination clauses of the contracts between the employer and its employees, therefore no dismissal had occurred. The Court further stated that there had been a termination of the contract upon the occurring of a specific event, namely the terminating of the contract between the client and the employer, which was allowed as per the LRA.

It appears from the judgment that the Court in the above case creates a divided line of reasoning along two views regarding automatic termination clauses. The first view 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. However, the second view, 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.

The second view was recently dealt with in Khum MK Investments and Bie Joint Venture (Pty) Ltd v Commission for Conciliation, Mediation and Arbitration and Others (JA52/2018) [2020] ZALAC 1.

In this case, the employer attempted to rely on an implied automatic clause to justify termination of employees fixed-term contracts. The Court, however, found that no provision existed in the employment contract for the automatic termination of the contract if the client terminated the contract with the employer. It held further that provision is made in the contract for the automatic termination by effluxion of time but that the employer issued letters of termination to its employees prior to the time stipulated in the contract and by doing so, it terminated the employment contract with notice, which conduct fell within the definition of a dismissal in section 186(1)(a) of the LRA.

Not all automatic termination clauses will be contrary to the LRA. The termination of a contract of employment upon the occurrence of a specific event is permitted by the LRA, and the operation of such clauses does not automatically render the termination of the employment contract a ‘dismissal’ for the purposes of the LRA.

The courts have highlighted the fact that each case should be determined on its own merits, and a range of factors such as the precise wording of the clause and the content of the contract of employment has an impact on the final assessment of each case.

Case law has determined that two scenarios need to be considered when evaluating the effect of an automatic termination clause on a dismissal.

Firstly, where the automatic termination clause is triggered by a third party, such clauses do not give rise to a dismissal in terms of the LRA.

Secondly, where the automatic termination clause is triggered by the employer in situations where the employer attempts to circumvent the provisions of the LRA by relying on the automatic termination clause. In such circumstances, the termination of the contract of employment would give rise to an unfair dismissal.

It is, therefore, essential for employers to, prior to exercising automatic termination clauses, consider the circumstances surrounding each case and the role they have played, which resulted in the triggering of such clauses. Employers should also consider the purpose of the contracts, more specifically whether the contracts are being legitimately used, or being used to negate the protection afforded to employees in terms of the Labour Relations Act. It is also especially important for employers to ensure that employment contracts contain express and unambiguous provisions stating that an employee’s employment with the employer and its duration is entirely dependent on the duration of the employer’s contract with its client/s, or the happening of specified events such as cancellation of services by a client.

Article by: Jodi-Leigh Erasmus
Dispute Resolution Official – Port Elizabeth