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A further nail in the coffin of the “automatic termination clause” in the labour broker relationship

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Labour, Employment & Human Rights Bulletin

Last month we wrote a brief on the Labour Courts rejecting automatic termination clauses. This case in the next line in those cases and makes it even clearer that such clauses will not be accepted by the Labour Court, particularly in the context of a labour broker relationship.

In Pecton Outsourcing Solutions CC v Pillemer N.O. and others the Labour Court held that Pecton, a labour broker, could not rely on a clause stating that the employment contract would terminate automatically in the event of Pecton’s client, Unilever, terminating the contract with Pecton to claim that the employee had not been dismissed.

Pecton was a labour broker. They provided labour to one client only, Unilever. At a point, and for various reasons, Unilever terminated the contract with Pecton.

Pecton’s contracts with its employees had a clause that provide that –

“On cancellation of the service contract between Pecton Outsourcing Services and the client (Unilever), this employment contract shall automatically terminate. Such termination shall not be construed as a retrenchment, but shall be a completion of the contract.”

Relying on this clause, Pecton informed its employees that as a consequence of the termination of the contract by Unilever their employment with Pecton was also terminated.

The employees claimed that they had been dismissed and that their dismissals were unfair. Pecton argued that the employees had not been dismissed as they had been employed on fixed term contracts, the period of which was determined by the currency of the contract with Unilever, and that as a result their employment had terminated by operation of the contract.

On review, the Labour Court found that Pecton could not rely on the automatic termination clause to claim that the employees were employed on fixed term contracts. The court held that in determining whether there had been a dismissal of the employees where the employment contract has terminated as a result of the decision of the client of the labour broker to terminate the contract with the labour broker the courts should recognise the content of the reason for the termination over the form of the contractual device covering it. If the facts show that the reason for termination of the contract is one that typically constitutes a reason for dismissal, then … this is a clue that there may be an attempt to contract out of section 188 of the LRA. In the absence of evidence to the contrary, the termination thus becomes a dismissal and the fairness of the reason for that dismissal and the procedure that was followed need to be tested.

In considering the reason for termination, the court found that, in relation to Pecton, the reason was financial as it had lost its only client and could no longer afford to retain its employees. Whether Pecton acted to ‘dismiss’ the employees after losing the contract with Unilever was, in the court’s mind, irrelevant. The automatic termination clause had the effect of depriving the employees of the right to have an operational requirements termination ventilated in court and a such a clause should not be enforced.

The court did, however, acknowledge that automatic termination clauses based on an event such as a fixed term contract that terminates when a permanent employee returns to work after absence, are legitimate. This, the court held, is because there is no mischief of a client exercising its will against the employee whose fixed term contract is terminated and because the return of the absent employee is not a reason for termination plausibly situated in the realm of dismissal.

What this means is that fixed term contracts and the automatic termination clauses contained therein which rely on happenings other than the unilateral exercise of a client’s will are still enforceable. But, where the court gets a sense that the clause may be used to attempt to circumvent the employee’s right to challenge the fairness of their dismissal, the court will look beyond the term of the agreement to the true reason for the termination of the employment contract.

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