Employment contracts under review

Ontario ruling causes lawyers to take a hard look at a common provision in employment contracts

A recent Ontario Court of Appeal decision has some lawyers scratching their heads and leaves a question mark hanging over thousands of employment contracts.

As reported in the May 23, 2005 issue of Canadian HR Reporter, the ruling in O.N.A. v. Mount Sinai Hospital means employers are now on the hook for severance when a contract is frustrated due to injury or illness.

That’s because the court said the practice of not giving severance pay to terminated disabled workers is a violation of the Canadian Charter of Rights and Freedoms. The court also said that a section of Ontario’s legislation that allowed the refusal of severance to disabled workers is unconstitutional.

Peter Israel, an employment lawyer with the Toronto firm of Goodman Carr, said a good number of employment contracts include a provision that states the employment relationship will come to an end if the worker is unable to work for a certain period of time — for example, if the employee cannot work for six months in a 12-month period.

There’s a question now, based on the recent decision, of whether or not such provisions are enforceable, he said. An employer that has attempted to accommodate an employee to the breaking point might try to invoke the frustration provision to end the employment relationship and send the worker off to collect long-term disability.

But if the employee rejects that idea and takes the fight to court, and the court determines the employer cannot rely on such a clause in determining the contract has been frustrated because it violates human rights law, then the status of the employee is in question, said Israel. If the contract hasn’t been frustrated, the worker is still an employee of the company.

That raises a host of questions, said Israel, including how long an employer must try to accommodate a worker who is going to miss a lot of time.

“How long does the employer’s obligation run? Is there a time in fact where there is a frustration of the contract in light of the Human Rights Code?” said Israel.

Why not just fire the employee without cause?

An employer always has the option of terminating a worker without cause, as long as it gives the worker reasonable notice. That notice can be in the form of time or pay in lieu of notice.

But firing a worker who is disabled is a tricky proposition. It never looks good when a worker says he got sick, took time off and was fired — even if the employer gives reasonable notice. The employer might be acting nicely about the situation, but it’s still discriminatory, said Israel.

Natalie MacDonald, a lawyer with Grosman, Grosman and Gale in Toronto, said an employer that fires a disabled worker without cause could open itself up to damages. Depending on the facts of the case, and the forum it is being heard in, the damages could be significant, she said.

The Ontario Human Rights Commission tends to hand out smaller awards than courts typically do, though the amount the commission will award has been increasing, she said.

Frustration clauses not dead

Joe Conforti, an employment lawyer with Toronto-based Goodmans LLP, said he thinks frustration provisions will continue to be enforceable even after O.N.A. v Mount Sinai Hospital, as that case dealt only with minimum employment standards severance pay requirements and not contractual or common law obligations. It’s just that employers now have to pay statutory severance when a contract is frustrated due to a disability and must ensure that their contracts comply with minimum employment standards.

He said frustration clauses still have a role to play in employment relationships.

“You have to look at the particular employment relationship and the nature of the employment,” said Conforti. “There are cases where you need an employee to actually be there, and you have to assess what the impact will be if that employee can’t perform the job.”

He said frustration clauses are still open as long as both sides act voluntarily, get proper legal advice and come up with a fair agreement as to what level of absence will justify the end of the contract.

“In some workplaces a six-month absence could justify a termination by reason of frustration,” said Conforti. “There is also nothing that precludes an employer and an employee from saying the relationship will be at an end and the employee will get a specific severance payment, whether the statutory minimum or more.”

All three lawyers said employers should revisit employment contracts to see if there’s anything that needs to be changed in light of the recent decision.



Ruling dealt with old legislation

The ruling in O.N.A. v. Mount Sinai Hospital involved an outdated version of Ontario’s employment standards legislation.

Because the worker in that case was let go before the Employment Standards Act, 2000, came into force on Sept. 4, 2001, the judge was commenting on outdated legislation when the severance provision was recently ruled unconstitutional.

Stuart Rudner, an employment lawyer with Miller Thomson in Toronto, said a similar section in the new legislation hasn’t been declared unconstitutional.

“The court did not comment on the current version of the act,” said Rudner. “The comparable provisions in the Employment Standards Act 2000 arguably might still allow an employer to deny severance pay to an employee whose contract is frustrated.”

In a footnote in the ruling, the court did acknowledge there was a section in the new legislation that was “equivalent” to the section it declared unconstitutional in the old legislation. Until that notion is tested in court, it remains unclear whether the clause in the new legislation prohibiting severance pay for a disabled worker is also unconstitutional.

But Natalie MacDonald, a lawyer with Grosman, Grosman and Gale in Toronto, said the fact it was the old legislation is a technicality.

“I think someone is going to take a run at (the new legislation) pretty soon,” she said. “And I think they’re likely to be quite successful. It’s really a very fine technical distinction.”

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