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Fixed-term contracts shocker

By William Maema

In a judgment delivered on 17 February 2023 in the case of Transparency International-Kenya versus Teresa Carlo Omondi, the top court cleared the air on a thorny issue that has been giving employers sleepless nights for quite some time. 

Some employers prefer fixed-term to open-ended employment contracts for a variety of reasons, among them the need to avoid the complicated but mandatory termination procedure required under Kenyan law including the obligation to give valid reasons for the termination. Failure to do so results in an automatic finding of unfair termination for which the employer could be condemned to pay the employee damages equivalent to 12 months’ pay. 

Donor-funded organisations are normally constrained by their budgets which are dictated by the grant conditions including the duration which is typically limited to a year or two. In such cases, it is only logical that the employment contracts should be limited to the term of the grant. 

Since the introduction of the current set of labour laws in 2007, Kenyan employees have been described as being among the most litigious in the world. 

This view has been buttressed by the widely held perception that the Employment & Labour Relations Court is too pro-employee in its ideology and the scales of justice are invariably tilted in favour of the employee throughout the proceedings. Employers, therefore, start at a disadvantage with a marginal chance of prevailing in a dispute with an employee, irrespective of the frivolity of the claim. This may be an exaggeration but, as they say, there’s some truth in every joke.

Kenyan employment courts are awash with cases in which employees who, with their express consent, were hired on fixed-term contracts but upon the expiry of the agreed term, turned around and sued their employers for unfair termination on grounds that they had a legitimate expectation of renewal.

Stripped to its barest essentials, legitimate expectation arises where a person induces another to have a reasonable expectation that some benefit will accrue to them at some point in the future. If the benefit does not materialize, the person who claims to have been induced can maintain a legal claim against the person who created the expectation and demand that it be fulfilled as a contractually binding promise. 

Employees serving on fixed-term contracts argue that in the absence of misconduct or proven poor performance to justify the termination of employment, they have an inherent entitlement to the renewal of the contract upon the expiry of its term. If, therefore, it is not so renewed, the employer should be held liable for unfair termination despite the existence of an express provision in the contract specifying the commencement and expiry dates. 

These claims have been fueled by some judges who have validated the view that unless the employer has, prior to the expiry date of the contract, notified the employee that the contract will not be renewed, the employee is entitled to expect a renewal automatically.

This erroneous application of the doctrine of legitimate expectation has left employers in a quandary, wondering what the essence of having a fixed-term contract is in the first place if the court will extend the term beyond the period expressly agreed by the parties.

The result is that it has become difficult for employers to let go of poor-performing employees and those with a history of misconduct despite the lapse of the contract period unless substantial compensation is paid to avert a frivolous claim of unfair termination. 

It is trite law that courts do not make contracts for the parties but only enforce what they have agreed upon.

In the above-cited case, the Employment & Labour Relations Court had found the employer liable for unfair termination by failing to renew the claimant’s contract upon its expiry without giving the employee notice or reasons for non-renewal. It proceeded to order the employer to pay the employee damages for unfair termination at the maximum rate of 12 months’ worth of salary plus interest. 

Aggrieved, the employer challenged the judgment in the Court of Appeal.  

The Court of Appeal unanimously overturned the judgment and made three landmark findings that hopefully have settled the law on the matter once and for all.

On whether the expiry of a fixed-term contract amounts to a dismissal or termination, the court answered emphatically in the negative, stating that an automatically renewable fixed-term contract is a contradiction in terms since the contract has definite commencement and expiry dates. Holding otherwise would subject the parties to an indefinite-term contract and negate the very essence of a fixed-term contract which is expressly allowed under the Employment Act.  

As to whether an employee has a legitimate expectation of renewal, the court found that in the absence of evidence to that effect, the default position is that no such expectation exists in a fixed-term contract.  Renewal is always at the discretion of the employer.

Finally, on whether at the expiry of a fixed-term contract, the employer is required to justify the non-renewal by giving reasons as would be required in the case of normal termination or dismissal, the court rightly found that no such obligation exists in the case of a fixed-term contract. 

This decision is an immense contribution to the development of Kenya’s labour jurisprudence. As a decision of the Court of Appeal, it is binding on the Employment & Labour Relations Court. Accordingly, those with pending cases premised on similar grounds should rethink their strategy.

The article was published in the Business Daily and can be accessed here