The Regulation of Fixed-Term Employment Contracts Under Section 198B of The Labour Relations Act

The Regulation of Fixed-Term Employment Contracts Under Section 198B of The Labour Relations Act

Introduction

Fixed-term employment contracts remain a common feature of the South African labour market, particularly in industries that rely on project-based work, seasonal labour, temporary increases in operational demands, or externally funded positions.

While such contracts serve legitimate business purposes, they have historically been susceptible to abuse, with some employers utilising them to avoid the obligations associated with permanent employment.

In response to these concerns, the Labour Relations Amendment Act 6 of 2014 introduced significant reforms to the Labour Relations Act 66 of 1995 (LRA), most notably through the insertion of section 198B, which came into operation on 1 January 2015.

These amendments were intended to strengthen employee protections, prevent the exploitation of vulnerable workers, and ensure that fixed-term contracts are used only where objectively justified.

The legislative framework now imposes stricter obligations on employers and provides employees with enhanced remedies where fixed-term contracts are misused.

This article examines the legal nature of fixed-term contracts, the requirements imposed by section 198B of the LRA, the protections afforded to employees, relevant judicial developments, and the practical implications for employers.

Understanding Fixed-Term Contracts

A fixed-term contract is a temporary employment agreement that commences on a specified date and terminates upon the occurrence of a predetermined event, the completion of a specific task or project, or the arrival of a fixed end date.

Unlike an indefinite employment contract, which continues until terminated through resignation, retirement, retrenchment, or dismissal, a fixed-term contract contains an agreed mechanism for its termination.

The defining characteristic of a fixed-term contract is that both parties must understand and agree at the outset that the employment relationship is temporary.

The employer must therefore be able to demonstrate that the employee knowingly agreed to the duration of the contract and the circumstances under which it will terminate.

South African courts have consistently emphasised that the substance of an employment relationship prevails over its form.

Consequently, employers cannot avoid statutory obligations merely by labelling a contract as "fixed-term" where the reality of the relationship reflects permanent employment.

Attempts to disguise permanent employment relationships through successive fixed-term contracts are likely to attract judicial scrutiny and may result in findings that the employee is, in fact, permanently employed.

The introduction of section 198B sought to achieve several important objectives:

Preventing the abuse of fixed-term contracts.

Protecting vulnerable employees from exploitation.

Promoting fair labour practices in accordance with section 23 of the Constitution.

Ensuring equal treatment between fixed-term and permanent employees.

Discouraging employers from using temporary contracts to avoid employment obligations.

Regulating employment relationships that are effectively permanent despite being presented as temporary.

The amendments reflect the legislature's recognition that employees engaged on successive fixed-term contracts often perform work indistinguishable from that performed by permanent employees while enjoying significantly fewer employment protections.

Applicability of Section 198B

Section 198B does not apply universally.

The provisions are limited to certain categories of employees and employers and specifically exclude:

Employees earning above the earnings threshold determined under the Basic Conditions of Employment Act 75 of 1997 (currently R261,748.45 per annum).

Employers employing fewer than ten employees.

New businesses employing fewer than fifty employees and operating for less than two years, provided the business was not formed through the division or dissolution of an existing enterprise.

Fixed-term contracts expressly authorised by legislation, a sectoral determination, or a collective agreement.

Furthermore, the provisions generally apply only to fixed-term contracts that exceed three months in duration.

Formal Requirements for Fixed-Term Contracts

Written Agreements

Section 198B requires that fixed-term contracts exceeding three months be reduced to writing.

The written contract must clearly identify:

The duration of the contract.

The event, project, task, or date upon which the contract will terminate.

The objective justification for the fixed-term nature of the employment.

Where a contract is renewed, each renewal should similarly be documented in writing and should contain a fresh justification for the continued use of a fixed-term arrangement.

Justification Requirement

An employer may only employ an individual on a fixed-term contract exceeding three months where:

The work is genuinely of a limited or definite duration.

There exists another objectively justifiable reason for fixing the term of the contract.

The LRA provides several examples of justifiable reasons, including:

Replacing an employee who is temporarily absent.

Addressing a temporary increase in workload that is not expected to endure beyond twelve months.

Providing work experience to students or recent graduates.

Employment linked to a specific project of limited duration.

Seasonal employment.

Employment funded by an external source for a limited period.

Employment of individuals who have reached the normal retirement age.

Importantly, this list is not exhaustive.

Employers may rely on other objectively justifiable reasons, provided they can demonstrate that the temporary nature of the work necessitates the use of a fixed-term contract.

Examples may include testing the viability of a new business venture, opening a new branch, or assessing the need for a newly created position before committing to permanent employment.

The Three-Month Limitation

One of the most significant reforms introduced by section 198B is the restriction on the use of fixed-term contracts beyond three months.

Where an employee remains employed for longer than three months on a fixed-term basis without a legitimate justification, the contract may be deemed inconsistent with section 198B.

In such circumstances, the employee may be regarded as permanently employed, exposing the employer to substantial legal risks.

The purpose of this limitation is to prevent employers from engaging employees indefinitely through a succession of temporary contracts where the work itself is ongoing and permanent in nature.

Protection Against Unfair Dismissal

Reasonable Expectation of Renewal

One of the most important protections afforded to fixed-term employees is found in section 186(1)(b) of the LRA.

This protection applies irrespective of whether the exclusions under section 198B apply.

The LRA provides that a dismissal occurs where an employee employed on a fixed-term contract reasonably expected:

The contract to be renewed on the same or similar terms.

The contract to be converted into indefinite employment.

and the employer fails to meet that expectation.

The test is objective.

The question is whether a reasonable employee in the circumstances would have expected renewal or permanent appointment.

Several factors may contribute to such an expectation, including:

Repeated renewals of fixed-term contracts.

Verbal assurances by management.

Employer conduct suggesting continued employment.

A workplace practice of routinely renewing contracts.

Communications indicating that renewal is likely.

Employers must therefore exercise caution when dealing with fixed-term employees and should avoid making representations that could create an expectation of ongoing employment.

Providing written notice of non-renewal before the expiry of the contract may assist in reducing the risk of disputes.

Equal Treatment of Fixed-Term Employees

Section 198B further requires that employees employed on fixed-term contracts for longer than three months must not be treated less favourably than comparable permanent employees performing the same or similar work.

Differences in treatment are permissible only where there is an objectively justifiable reason.

This protection extends to matters such as:

Remuneration.

Benefits.

Access to training opportunities.

Promotion opportunities.

Career development initiatives.

General employment conditions.

The principle reflects the broader constitutional commitment to equality and fairness in the workplace.

Severance Pay Entitlement

Employees employed on fixed-term contracts exceeding twenty-four months may become entitled to severance pay upon termination of the contract.

Section 198B provides that such employees are entitled to receive severance pay calculated at one week's remuneration for every completed year of service, unless:

The employer offers alternative employment.

The employee accepts permanent employment with the employer.

This provision recognises that employees engaged on lengthy fixed-term contracts often develop a legitimate expectation of continued economic security and should not be left without protection upon termination.

Judicial Interpretation and Case Law

Loliwe v Hanover Cleaning Services (2019)

In this matter, the employee was engaged on a succession of monthly fixed-term contracts for more than three years.

The CCMA concluded that the employer had failed to establish a valid justification for the continued use of fixed-term contracts and found that the employee should be regarded as permanently employed.

The employee was accordingly reinstated on an indefinite basis.

The case illustrates the dangers associated with repeatedly renewing fixed-term contracts without a legitimate operational reason.

Price v National Health Laboratory Service

The court emphasised the importance of clear contractual drafting and communication regarding the non-renewal of fixed-term contracts.

Employers were cautioned against creating circumstances that could generate a reasonable expectation of renewal.

Gubevu Security Group (Pty) Ltd v Ruggiero NO and Others

The Labour Court confirmed that a reasonable expectation of renewal may arise not only from contractual provisions but also from the conduct and statements of the employer.

Even where a contract expressly states that renewal is not guaranteed, inconsistent conduct by the employer may give rise to an unfair dismissal claim.

Owen and Others v Department of Health, KwaZulu-Natal

The court reaffirmed that employees may challenge the non-renewal of fixed-term contracts where an expectation of renewal was created through the employer's conduct or established workplace practices.

Practical Considerations for Employers

To ensure compliance with the LRA and minimise litigation risks, employers should:

Ensure that all fixed-term contracts are concluded in writing.

Clearly identify the objective reason for the fixed-term arrangement.

Avoid using successive fixed-term contracts where the work is permanent in nature.

Regularly review existing fixed-term employment arrangements.

Provide advance written notice of non-renewal where appropriate.

Avoid making promises or assurances regarding future employment.

Ensure equal treatment of fixed-term and permanent employees.

Obtain specialised labour law advice before implementing long-term fixed-term employment arrangements.

Failure to comply with these requirements may result in findings that employees are permanently employed, exposing employers to unfair dismissal claims, reinstatement orders, compensation awards, and other adverse consequences.

Conclusion

Fixed-term contracts remain a legitimate and valuable mechanism for addressing temporary staffing requirements within South African workplaces.

However, the enactment of section 198B of the Labour Relations Act has significantly curtailed the circumstances in which such contracts may be utilised and has introduced substantial protections for employees.

Employers can no longer rely on fixed-term contracts as a means of avoiding the obligations associated with permanent employment.

Instead, they must demonstrate that the temporary nature of the employment is objectively justified, ensure compliance with statutory requirements, and avoid conduct that may create expectations of renewal or permanent appointment.

The jurisprudence emerging from the Labour Court and the CCMA demonstrates a clear commitment to protecting employees from the misuse of temporary employment arrangements.

Employers who adopt transparent employment practices, maintain properly drafted contracts, and comply with the requirements of section 198B will be best positioned to utilise fixed-term contracts effectively while minimising legal risk and promoting fair labour practices.

Contact

For more information or assistance, visit:

https://schoemanlaw.co.za/our-services/employment-law/

Ross Hendriks | SchoemanLaw Inc

Specialist Employment and Labour Law