Outdated employment contracts put SMMEs at legal risk

In the ever-evolving landscape of South Africa's small and mid-sized enterprises (SMMEs), outdated employment contracts are transforming from an overlooked concern to a significant legal risk.

With compliance norms shifting dramatically, particularly in the sphere of labour law, SMMEs are finding themselves on precarious legal ground.

This predicament was underscored by the Commission for Conciliation, Mediation and Arbitration (CCMA)'s 2019 report, which revealed that a staggering 80% of its cases originated from small businesses.

Now, with impending changes to labour law coming into effect, the risk is poised to surge further.

The new Code of Practice on Dismissal, to be implemented in September 2025, heralds a new era of regulations that will replace previous guidelines.

Employment contracts that fail to reflect these changes may be rendered unenforceable.

“As of September 2025, we will see a heightened risk for SMMEs if their contracts are not updated,” Karabo Kopeka, Managing Director at Clientèle Legal said.

Recent data underscored the urgency of this issue, with Kopeka's firm having worked on an alarming 2,533 unfair dismissal claims by the close of September this year alone.

While the new Code aims to better accommodate the unique challenges faced by SMMEs permitting simpler, less formal processes for managing dismissals, it introduces complexities that require immediate attention.

Among these updates, the Code expands the definition of probation.

It now accounts not only for performance-related issues but also for broader suitability in employment, an adjustment that could significantly impact business hiring and dismissal strategies.

Furthermore, the definition of incapacity now considers factors such as incompatibility and situations like imprisonment, shifting the boundaries of traditional definitions.

Moreover, while not explicitly mentioned in the Code, the employment contracts that were crafted pre-remote work era have further complicated compliance.

Many such contracts fail to address critical elements relating to remote work, data usage outside the office, home performance management, and flexible working hours.

Kopeka added, “A dismissal of a remote worker for underperformance must comply with current labour laws and must be supported by remote work policies and an employment contract that sets out remote work expectations.”

Failing to establish clear policies increases any potential liability for employers facing unfair dismissal claims.

The regulatory landscape does not stop there; SMMEs must also consider compliance with the Employment Equity Amendment Act of 2022, which mandates stringent demographic targets for employers with 50 or more staff.

Non-compliance can incur hefty fines up to R2.7 million or up to 10% of turnover, a risk that no business can afford to underestimate.

Additionally, adherence to the POPI Act (Protection of Personal Information Act) of 2013 is non-negotiable.

This law compels businesses to meticulously manage how they collect, process, and store personal information.

Many SMMEs still rely on outdated privacy clauses that may not align with current requirements, exposing them to potential penalties of up to R10 million, or even imprisonment.

“It is critical to understand that the risk is multifaceted and extends beyond just one kind of document. Any clause, from supplier agreements to HR policies, that does not reflect current legislation leaves businesses vulnerable. As regulations continue to evolve, the extent of exposure often surpasses what business owners realise," Kopeka said.

To mitigate these risks, Kopeka proposed a proactive approach to compliance, suggesting that it be reframed as a strategic safeguard rather than a mere tick-box exercise.

“Regular reviews protect your business from avoidable shocks, and these reviews don’t need to be overwhelming or unaffordable,” he further added.

Simple yet effective steps, such as conducting annual audits of all contracts and ensuring teams remain informed about legislative changes, can significantly enhance compliance.

Enlisting the assistance of a seasoned legal expert can also aid SMMEs in navigating the complexities of evolving laws.

“The law is not static, and your contracts should not be either. Legal specialists can translate shifting regulations into practical, plain-language updates that keep your business compliant, effectively protecting you and your employees,” Kopeka added.

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