The 3 Month Trap: What Employers Need to Know About Fixed Term Contracts

 

The 3-Month Trap: What Employers Need to Know About Fixed-Term Contracts

Fixed-term employment contracts are an important tool for employers that need flexibility to meet temporary, project-based or otherwise time-limited staffing requirements. However, South African labour law places important restrictions on their use, particularly where section 198B of the Labour Relations Act 66 of 1995 (LRA) applies.

These protections are intended to prevent employers from using successive fixed-term contracts to avoid the security of employment associated with indefinite employment.

A failure to comply with the statutory requirements can result in a fixed-term contract being deemed to be of indefinite duration and can expose an employer to labour disputes, including proceedings before the Commission for Conciliation, Mediation and Arbitration (CCMA).

The Core Rule: The Three-Month Threshold

Section 198B of the LRA regulates fixed-term contracts for employees earning below the prescribed earnings threshold, subject to the statutory exclusions discussed below.

Where section 198B applies, an employer may employ an employee on a fixed-term contract, or successive fixed-term contracts, for longer than three months only if:

  • the nature of the work is of a limited or definite duration; or
  • the employer can demonstrate another justifiable reason for fixing the term of the contract.

The three-month period should therefore not be understood as meaning that every employee who works for more than three months automatically becomes permanent. The correct question is whether the employee falls within section 198B and, if so, whether the requirements of section 198B have been satisfied.

Where a fixed-term contract is concluded or renewed in contravention of section 198B(3), the contract is deemed to be of indefinite duration in terms of section 198B(5). 

What Is a Fixed-Term Contract?

Section 198B defines a fixed-term contract as a contract of employment that terminates:

  • when a specified event occurs;
  • when a specified task or project is completed; or
  • on a specified fixed date, other than an employee’s normal or agreed retirement age.

The contract should therefore contain a genuine and identifiable basis for its fixed duration. Simply labelling an employment relationship “fixed-term” does not necessarily make it legally so. 

When May a Fixed-Term Contract Exceed Three Months?

Section 198B(3) permits a fixed-term contract exceeding three months where the nature of the work is of a limited or definite duration, or where the employer can demonstrate another justifiable reason for fixing the term.

Examples of circumstances in which the conclusion of a fixed-term contract may be justified. These include where an employee:

1. Replaces an employee who is temporarily absent

For example, an employee may be appointed to replace someone who is temporarily absent because of maternity or parental leave, illness, study leave.

2. Is employed because of a temporary increase in work

A fixed-term contract may be justified where there is a temporary increase in the volume of work that is not expected to continue for more than 12 months.

3. Is employed for a specific project

A fixed-term arrangement may be appropriate where the employee is engaged for a defined project or task with a genuine and identifiable endpoint.

4. Is employed for seasonal work

Employment linked to genuine seasonal work may justify a fixed-term arrangement, such as work that arises only during a particular harvesting season or other predictable seasonal period.

Important Exemptions from Section 198B

The three-month requirements do not apply to every employer or employee.

Section 198B(2) excludes:

Employees earning above the prescribed earnings threshold

Section 198B does not apply to an employer that employs fewer than 10 employees.

It also generally does not apply to an employer that employs fewer than 50 employees where the business has been in operation for less than two years.

The Employer Must Be Able to Prove the Justification

The contract should therefore clearly record the reason for the fixed-term appointment rather than merely stating that the contract will expire on a particular date. 

The Risk of a Reasonable Expectation of Renewal

Even where a fixed-term contract is validly concluded, an employee may in certain circumstances have a claim based on a reasonable expectation that the employer would:

  • renew the fixed-term contract on the same or similar terms; or
  • retain the employee on an indefinite basis on the same or similar terms.

Failure to renew a contract in circumstances where such a reasonable expectation has been established can constitute a dismissal for purposes of the LRA. 

Importantly, repeated renewals do not automatically create a right to permanent employment.

The question is whether, objectively considered in all the circumstances, the employee had a reasonable expectation of renewal or indefinite employment.

Factors that may be relevant include:

  • representations or assurances made by management;
  • the wording of the contract;
  • the reason for previous renewals;
  • whether the underlying work remained genuinely temporary; and
  • whether the employer gave notice that the contract would not be renewed.

Conclusion

Fixed-term contracts remain a legitimate and useful employment tool in South Africa. The law does not prohibit employers from using them for genuine temporary work.

The difficulty arises when fixed-term contracts are used to perform what is, in substance, ongoing and indefinite work without a legally sufficient justification.

For employers to use fixed-term contracts fairly and lawfully, employers should be able to demonstrate why the employment is genuinely of a temporary nature.