‘Drastic’ changes for disabled employees

Landmark Ontario decision, if not overturned, means employers will have to pay severance to employees whose contracts are frustrated due to disability

Stuart Rudner
A recent decision of the Ontario Divisional Court may have drastically changed employer obligations when it loses an employee due to disability. Up until recently the doctrine of frustration relieved an employer of its obligations to provide severance pay and notice or pay in lieu. However, if the recent decision is not overturned, the law will require an employer in those circumstances to provide severance pay to the employee. Since severance pay can be as much as half a year’s salary, this obligation can be substantial.

The decision of the Divisional Court makes sense when one considers the purpose of severance pay, as opposed to other obligations such as notice of termination. As set out by the Divisional Court in O.N.A. v. Mount Sinai Hospital, “severance pay is an earned benefit that compensates long-serving employees for their past services and for their investment in the employer’s business.” It is different from notice of termination or pay in lieu, which is provided to assist the employee to find new employment.

Generally speaking the doctrine of frustration of contract governs situations where circumstances render the performance of a contract impossible. In such a case the contract is deemed to be at an end and the obligations of all parties are terminated. For example an old British case revolved around an individual that had rented a room along a parade route, with the goal of having a prime view of the parade. Due to illness the parade was cancelled. The court found the purpose of the contract had been frustrated, and the individual did not have to rent the room.

In the context of employment, frustration of contract can occur when the employee is no longer able to provide the services for which he has contracted. That can arise, for example, when the employee has an illness or disability and is unable to attend at work. It is difficult to know precisely when the contract has been frustrated, although the case law suggests frustration occurs when it is clear the employee will not be able to return in the future. At the point when the contract has been frustrated, the employer can treat the agreement as being at an end. The Employment Standards Act of Ontario specifically exempts employers in those circumstances from notice and severance obligations.

In the O.N.A. case, Christine Tilley was an intensive care nurse who had been employed by the hospital for 13 years commencing in 1985. After 10 years of employment, she was away from August 1995 to November 1995 due to illness. She returned to work briefly on modified duties, but experienced a relapse in January 1996 and stopped working. She subsequently commenced receiving long-term disability benefits.

The hospital terminated Tilley’s employment in June 1998. Shortly before that, her doctor indicated she would eventually be able to return to work, although he could not provide an estimated date of return.

A board of arbitration found the contract of employment had been frustrated and the hospital’s duty to accommodate Tilley did not extend to maintaining her employment indefinitely. Given that the ESA states that no severance pay is owing to an employee whose employment contract has been frustrated by a disability, the board found the plaintiff had no severance entitlement. The board specifically considered the applicability of the Canadian Charter of Human Rights and Freedoms to this provision of the ESA, and found the ESA did not violate the charter.

An appeal was brought before the Divisional Court, which considered the facts of the case and the legislative history of the severance pay provisions. The court specifically recognized the legislative intention that severance pay be an earned benefit, recognizing long-term service, as opposed to obligations such as pay in lieu of notice of termination. The court found that severance pay is “properly payable for any non-culpable cessation of employment.” It then considered whether the ESA’s severance law section, which treats disabled employees differently than employees whose contracts have been frustrated for other reasons, violated the charter.

Unlike the board of arbitration, the Divisional Court found a violation of the charter that could not be justified. The court considered the fact that employees whose contracts of employment are frustrated for reasons other than disability are entitled to severance pay, and found the ESA created a formal distinction between Tilley and others that was based upon her disability. Finally, the court found the discriminatory nature of the provision could not be justified. The hospital was therefore ordered to pay Tilley’s severance entitlement.

This decision, which was released only recently, has not yet received further judicial consideration. But it seems to be a reasonable approach in light of the purpose of severance pay. In any event, it is the law in Ontario at this time. Therefore employers should be aware that, despite the wording of the ESA, they may have to pay severance when an employee’s contract has been frustrated due to a disability. But the other criteria set out in the ESA remain in force, so that severance pay is only required where the employer has a payroll of $2.5 million or more and the employee has more than five years of service.

For more information see:

• O.N.A. v. Mount Sinai Hospital, 2004 CarswellOnt 171 (Ont. Div. Ct.)

Stuart Rudner practices civil litigation and employment law with Miller Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or via e-mail at srudner@millerthomson.ca.

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