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Ivan Israelstam

Fixed-term contracts now a double-edged sword at retrenchment time

Mon, 14 Mar 2011 19:55

During retrenchment exercises it has become a fairly common practice amongst employers to terminate temporary contracts as a first option; that is, as a means of reducing the number of permanent employees to be retrenched, the employer often terminates all temporary contracts and reallocates the work of the temps to permanent employees.

There could be a variety of factors contributing to the need for operational requirement dismissals - commonly known as retrenchments. These include:

• Faulty or archaic equipment or technology, ineffective management systems, or underskilled/demotivated employees can reduce productivity, increase financial losses, and affect jobs;
• Employers may need fewer employees due to labour saving devices or technology;
• A desire to evade labour legislation might result in the contracting out of work instead of giving it to employees;
• Bankruptcy or losses caused by mismanagement or misappropriation of funds;
• Strikes and lockouts that weaken your company and chase customers and work away;
• A drop in sales due to economic factors such as the strengthening of the Rand;
• Rationalisation to shed “surplus” employees resulting from buy-outs or mergers.

However, the above factors will not automatically render a retrenchment fair. For example, the courts have traditionally taken into account four key factors when deciding whether a retrenchment is fair: they are:

• Was there a sufficient operational reason for the retrenchment or was the retrenchment a sham?
• Was a fair criterion used for choosing the employees to be dismissed or should other employees have been retrenched instead?
• Before deciding to retrench, did the employer consult properly with the employees or trade union on measures to avoid or reduce the number of retrenchments as well, as on numerous other issues related to the retrenchment?
• Did the employer give the employees or union all the information relevant to the retrenchment and to the consulting process?

However, a fifth factor has suddenly come to the fore.

In the case of Buthelezi vs Municipal Demarcation Board (2005, 2 BLLR 115) the Labour Appeal Court found that retrenchment of an employee prior to the expiry of his/her fixed-term contract was unfair.

In this case Mr Buthelezi had a five-year fixed-term contract with the Demarcation Board but was retrenched one year after commencement. Prior to retrenchment he was invited to apply for an alternative post but was unsuccessful.

The Labour Appeal Court found that the employer did not have the right to terminate the fixed-term contract before its natural expiry date.

This decision is most surprising because, where the job of a fixed-term employee genuinely becomes redundant what is the employer required to do? Did the Court expect the employer to keep the employee on its books and, despite the absence of work, continue to pay the employee for four years until the contract expired?

Labour law gives an employer the right to retrench for good reason. The Court’s startling decision means that:

• as regards retrenchment, a temporary employee with a fixed-term contract may have stronger rights that a permanent employee
• the practice of terminating the contracts of temporary employees in a retrenchment exercise as a means of saving permanent jobs needs to be urgently reviewed
• the terms and wording of fixed-term contracts need to be radically revised.

In addition to the above the impending new legislation will further strengthen the rights of temporary employees. As a result no employer should enter into or terminate a fixed-term contract before consulting with a labour law expert.