Limited duration employment contracts are being used by more employers in South Africa – how do they work?

Post-pandemic, it is expected that fixed-term employment contracts will become increasingly valuable business tools that allow employers the flexibility to manage the impacts of a volatile business environment.

This is according to Johan Botes, partner and head of the employment & compensation practice at Baker McKenzie in Johannesburg, who noted that employers are increasingly using limited duration contracts (LDCs) to create certainty and limit legal risk in respect of staffing solutions.

“Contracting an employee as cover for a team member who is on extended sick leave or maternity leave, or to increase team volumes during busier times, for example, is sound business practice. Facing an unfair dismissal claim or being saddled with additional headcount because no-one monitored the expiry of replacement employee’s contract, however, is decidedly not good for business,” he said.

Botes said that appointing an employee for a fixed period or defined project allows an employer to plan for the employee’s exit in advance.

This is because the contract will expire on a certain date or upon reaching a defined milestone, without the limitations of only being able to terminate the contract for valid reasons, and after following a fair procedure.

“But what happens when the work is not completed by the end date, the employee delivers such good work that the employer wishes to retain the employee past this period, or the employee is not keen on the contract terminating?

“The Labour Appeal Court (LAC) in South Africa recently confirmed some of the principles inherent in fixed-term employment contracts,” he said.

Botes noted that the South African legislature recognises the vulnerable position of employees on fixed-term employment contracts. As the termination of the limited duration contract does not constitute a dismissal, as a rule, the employee is deprived of the right to challenge the fairness of the termination of employment.

Employees have the right to a fair dismissal, but where the termination of employment does not constitute a dismissal for the purposes of employment law, ergo there can be no unfair dismissal that may be subject to legal challenge.

“Other typical examples of terminations that do not constitute dismissal include retirement, resignation and termination by agreement or mutual consent.

“However, limited duration employees receive statutory protection in that they may claim that the termination of their limited duration contract should be viewed as a dismissal where they can show that they had a reasonable expectation that their contracts would be renewed or converted into permanent agreements, but the employer then failed to satisfy this expectation.”

This claim, Botes said, also applies to limited duration employees whose contracts were renewed on less favourable terms.

Further, those employees earning below a statutory minimum (the Earnings Threshold) enjoy additional entitlements in respect of valid reasons for such agreements, equal treatment to indefinitely employed colleagues, and are deemed permanent employment after a period, he said.

Botes noted that the LAC recently had to consider the status of employees where the limited duration employment contracts had expired, but the employees were allowed to continue working past the contractual termination date.

“The LAC confirmed an earlier decision in which the employment contract was automatically converted into an agreement for open-ended employment. Having regard for the 2009 decision quoted by the LAC on this issue, employers should be aware that the facts of each case will determine the extent of the novation of limited duration agreements.”

Botes said that the LAC judgment should not be regarded as establishing an immutable position that all such agreements will become permanent where employees are continued to be employed after the expiry date.

Factors such as non-variation clauses, communication between the parties, and other evidence on the agreed intention of the parties, could defeat a claim of novation into indefinite employment. However, there is a clear risk that the court may accept that the employment contract continued on the same terms save for the expiry date, which no longer applies.

“To minimise their employment law risk, employers should ensure that their contract templates reflect the current legal thinking and best practice on the matter and that they deploy LDCs in respect of defendable projects or business needs only.

“Employers should also maintain an accurate register of contract expiry dates and ensure they do not continue to employ LDC staff after the expiry of their agreements, without putting in place a new contractual regime to deal with changes in circumstances.

“Employers should also train managers on the risks inherent in tacit promises or representations to LDC employees on the renewal or employment contracts.

“Employers that ensure they limit the avoidable legal risks associated with limited term employment will then be free to focus on their business operations and the essential role they play in South Africa’s post-pandemic recovery,” Botes said.

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Limited duration employment contracts are being used by more employers in South Africa – how do they work?