Can an employer retrench employees on a Fixed Term Contract?

Can an employer prematurely retrench employees on a fixed term contract of employment? It is often found that employers embark on the restructuring of their businesses, simultaneously, failing to be mindful of the legal pitfalls regarding the termination of fixed term contracts for operational reasons.

In Buthelezi vs Municipality Demarcation Board, the employer employed Mr. Buthelezi as a Deputy Manager in its financial operations on a five-year fixed term contract, between 24 January 2000 to 23 January 2005. However, on the 22nd of November 2000, the employer issued Mr. Buthelezi with a notice of retrenchment, inviting him to a consultation process. His position, among others, became redundant.

 Mr. Buthelezi, together with another employee, Mr. Monare, were invited to apply for a different, vacant, position within the employer’s structures. Both employees applied, however Mr. Monare was appointed and Mr. Buthelezi retrenched.

Mr. Buthelezi referred a dispute to the CCMA. When conciliation became unsuccessful, he approached the labour court and sought reinstatement together with payment of compensation. At the labour court, the appellant argued that the termination of his employment was substantively unfair as the employer could not terminate his employment for operational reasons as he was serving a fixed term contract of employment.

 The labour court found, in essence, that the dismissal was substantively unfair, but in a limited sense and only within context of the fact that he was employed on a fixed term contract of employment. The court found no issue with the fact that the employer restructured its operations nor with the selection criteria. In a bizarre argument (in my opinion), the court found that Mr. Buthelezi cannot claim compensation due to him allegedly being involved in misconduct prior to the date of the termination of his services. In the view of the Court, the misconduct committed, justified a dismissal in this instance and therefor he did not qualify for compensation beyond the time, in which, he would have been dismissed for misconduct . 

The appellant therefore appealed the decision of the labour court to the labour appeal court. The appellant argued that the dismissal was unfair as he was employed on a fixed term contract of employment and that the employer had no grounds, in law, to terminate his fixed term contract of employment prior to the expiry of his contractual term. Given that the Labour Court found his dismissal to be unfair, he should be awarded compensation. The respondent claimed that if there exist a fair reason to retrench an employee based on the legitimate operational requirements of the employer, then an employer can retrench such an employee even if employed on a fixed term contract of employment.

 The labour appeal court (LAC) argued from the point that it was common cause that the parties entered into a fixed term agreement, starting from January 2000, but terminated for operational reasons in December 2000. The LAC stated that the first question to answer is whether an employer was entitled to terminate the employment contract when it cancelled it. The LAC stated that in common law a party to a fixed term contract has no right to terminate such a contract in the absence of a repudiation or a material breach of the contract by the other party. There is thus no right to terminate such contract even on notice unless its terms provide for such a termination. 

The LAC stated:

 “The rationale for this is clear. When parties agree that their contract will endure for a certain period as opposed to a contract for an indefinite period, they bind themselves to honour and perform their respective obligations in terms of that contract for the duration of the contract and they plan, as they are entitled to in the light of their agreement, their lives on the basis that the obligations of the contract will be performed for the duration of that contract in the absence of a material breach of the contract. Each party is entitled to expect that the other has carefully looked into the future and has satisfied itself that it can meet its obligations for the entire term in the absence of any material breach. Accordingly, no party is entitled to later seek to escape its obligations in terms of the contract on the basis that its assessment of the future had been erroneous or had overlooked certain things.”

 Mr. Fabricius from the respondent argued that legislation has made inroads into common law and just as the LRA extended its effect, even after the termination of fixed term employment in the broadening of the definition of ‘dismissal’ to include circumstances whereby a reasonable expectation was created for the renewal of a fixed term contract, but was not renewed, that equally, common law, should be developed for employers in that they should be able to dismiss, for operational reasons, employees employed on a fixed term contract of employment. If not, it was argued, this would be regarded as unfair discrimination towards employers as prohibited by the Constitution. 

The LAC responded: 

“I have no hesitation in concluding that there is no unfairness in such a situation. This is so simply because the employer is free not to enter into a fixed term contract but to conclude a contract for an indefinite period if he thinks that there is a risk that he might have to dispense with the employee’s services before the expiry of the term. If he chooses to enter into a fixed term contract, he takes the risk that he might have need to dismiss the employee midterm but is prepared to take that risk. If he has elected to take such a risk, he cannot be heard to complain when the risk materializes. The employee also takes a risk that during the term of the contract he could be offered a more lucrative job while he has an obligation to complete the contract term. Both parties make a choice and there is no unfairness in the exercise of that choice.” 

Of note, the LAC referred to SA Breweries v Food & Allied Workers and Others 1990: 

“There is a presumption against the deprivation of, or interference with, common law rights, and in the case of ambiguity an interpretation which preserves those rights will be favoured …” 

The common law right to enforce prematurely terminated fixed term contracts of employment was not in conflict with the spirit, purport, and objects of the Bill of Rights and that such right remains intact. As such, the LAC found that the employer had no right in law to terminate the contract of employment between itself and Mr. Buthelezi. Accordingly, the premature termination of the fixed term contract of employment was unfair and constituted an unfair dismissal. The LAC further found that the dismissal was substantively unfair in the fullest possible sense.

 Considering that Mr. Buthelezi’s term was prematurely terminated by about four years, the LAC had to decide on compensation for damages, in circumstances whereby a fixed term contract of employment was terminated prematurely and relied on Meyers v Abrahamsom 1952 (3) SA 121(C), where it was held: 

“The measure of damages accorded such employee is, both in our law and in the English law, the actual loss suffered by him represented by the sum due to him of the unexpired period of the contract less any sum he earned or could reasonably have earned during such latter period in similar employment.”

 The LAC commented that the labour court’s view in terms of the employee’s anticipated dismissal for misconduct was mere speculation. Accordingly, the LAC ordered three months of compensation with cost.

What we learn from this case is that when entering into a fixed term contract of employment, both parties are locked into the term of operation of the agreement, unless if a material repudiation of the contract occurred. Terminating a fixed term agreement prematurely can only occur if it was provided for as a provision in the agreement.