AUTOMATIC TERMINATION CLAUSES

  • Share

ARE THEY STILL VALID AND ENFORCEABLE?

DISCUSSION OF RECENT CASE LAW
By Venolan Naidoo (Senior Associate at Themis Law Chambers)

Automatic termination clauses feature in employment contracts, ostensibly intended to operate as a mechanism by which an employment relationship can be terminated.

Automatic termination clauses are per se not illegal and can actually, in certain respects, be permissible. For example, an automatic termination clause incorporated in a fixed term agreement that is invoked when a specific event occurs, the “terminating event”, would be permissible. Though, in this context, it is the occurrence of the specified event, as envisaged in the agreement, which would provide a basis to the automatic termination clause being lawfully implemented.

However, in some contracts, automatic termination clauses are inter alia ambiguous or are not drafted in a definitive sense that would provide a lawful and rational basis to its operation, as comparatively illustrated in the above paragraph. Automatic termination clauses that are vague and/or places an employee in a position of uncertainty, regarding an event or condition, could be construed as invalid and unenforceable. An employee whose services are terminated by an automatic termination clause in this sense may be found to be unfairly dismissed.

Thus, the Labour Court of South Africa (LC) in recent judgments has found against the validity and enforceability of certain automatic termination clauses. Particularly, in circumstances where a client or customer of an employer discontinues or no longer requires an employer’s goods or services. Hence it has been observed that, in the normal course, employers would terminate the services of an employee by invoking an automatic termination clause under such circumstances.

In the reported decision of South African Transport & Allied Workers Union obo Dube & Others v Fidelity Supercare Cleaning Services Group (Pty) Ltd [2015] JOL 33144 (LC) the court found that automatic termination clauses used to terminate the services’ of employees were unenforceable. The facts of the case are briefly as follows, the employer concluded a cleaning contract (service level agreement) with a client to provide cleaning services. The employer then concluded employment contracts with employee cleaners in order to render its (employer’s) services to the client. The client of the employer consequently terminated the service level agreement. As a result, the employer issued its employees with letters that, due to the said termination of the service level agreement, their employment contracts have in turn terminated. The employer did this by giving effect to its automatic termination clause as contained in the contracts of employment. The court found the terminations of employment were in fact dismissals based on the employer’s operational needs which required the employer to comply with section 189 of the Labour Relations Act (LRA) in respect of a retrenchment exercise. It was held that the employer, therefore, had no basis in law to apply such automatic termination clause to terminate its employees’ services.

In the reported decision of Pecton Outsourcing Solutions CC v Pillemer & Others [2016] 2 BLLR 186 (LC), similar to the Fidelity Supercare decision as discussed above, the court held that the automatic termination clauses contained in the fixed term agreements that were intrinsically linked to the service agreement between the employer and its only client were unenforceable. The employer’s basis in terminating its employees’ services by applying its automatic termination clauses under such circumstances were indeed held to be invalid and unenforceable. Moreover, the court held the employees were dismissed by way of the employer’s operational needs requiring compliance nonetheless as envisaged in terms of section 189 of the LRA (retrenchment).

In another more recently reported decision of National Union of Minewokers obo Milisa & Others v WBHO Construction (Pty) Ltd [2016] 6 BLLR 642 (LC) it was again found that the automatic termination clause used to terminate the employees’ services were unenforceable and it was held that the employees were deemed to be dismissed by the employer as a result of its operational needs. However, the facts of WBHO Construction were rather peculiar in contrast to Fidelity Supercare and Pecton Outsourcing Solutions. The employer, a construction company, employed construction workers on a fixed term contract that entitled the employer to terminate the employees’ services when the project ‘reached the stage’ (which in itself held uncertainty) when the employees’ services were no longer required. The fixed term of the contracts essentially rested on the employer’s “skills requirement of the project”. Pursuant to reaching a certain stage of the project, the employer terminated the employees’ services by issuing termination letters on the last working day. The court held that the automatic termination clause in the contracts of employment was “invalid as it is in flagrant disregard of provisions of the LRA which protect employees against unfair dismissal“. Further, it cited the findings in the seminal decision of South African Post Office v Mampeule (JA29/09) [2010] ZALAC 15; (2010) 31 ILJ 2051 (LAC); [2010] 10 BLLR 1052 (LAC) (04 JUNE 2010) where the court in such decision held that “a heavier onus rests on a party which contends that it is permissible to contract out of the right not to be unfairly dismissed in terms of the Act“, furthermore, that “parties to an employment cannot contract out of the protection against unfair dismissal afforded to employees whether through the device of automatic termination provisions or otherwise” referring to the rationale of public interest. In WBHO Construction the court held that the terminations’ of services were truly a consequence of the operational needs of the employer and found the termination to be both procedurally and substantively unfair.

Some of the findings in the above decisions have also referred to an employee’s overarching constitutional right to a fair labour practice when applying its mind on the validity and enforceability of automatic termination clauses.

In conclusion, it is crucial that an employer has a reasonably justifiable, lawful and rational basis to incorporate and apply an automatic termination clause in circumstances that would provide justification to such application, and that clauses are clearly worded giving effect to this. Employers ought to seek labour law advice when deciding to do so.

Back to articles

Newsletter subscription

Receive great advice delivered to your inbox.

Themis LawHayes Law