'It didn't actually change what the employer was agreeing to do,' says employment lawyer on 'high bar' for frustrated employment contract arguments
A ruling by the British Columbia Court of Appeal, the highest level of provincial court, has set a limit on what constitutes a frustrated employment contract when a business is closed for unforeseen circumstance.
The decision will influence courts deciding on frustrated contracts in jurisdictions across the country, says labour and employment lawyer Matthew Allard, associate at Fasken in Vancouver.
“When an employer wants to rely on frustration, they need to be careful, in particular, when relying upon an intervening event that may have temporarily eliminated the business,” says Allard.
“While the court acknowledged this was going to be a very financial burdensome situation for the employer, it hadn't actually changed what they had agreed to, which was the employee to provide services and the employer to provide compensation for those services.”
Gift shop closed during COVID-19: frustrated employment contract?
The employer, Aldergrove Duty Free Shop on the Canadian side of the Canada/U.S. border crossing, closed temporarily in March 2020 when non-essential travel was halted during the COVID-19 pandemic.
Ninety-nine percent of the store’s customers were travellers crossing the border; the shop’s employees were temporarily laid off in March, and in August 2020, the layoffs became permanent and backdated to the original layoff date.
A longtime employee filed a civil claim of wrongful dismissal when the employer declined to pay severance. The employer argued that the employment contract had been frustrated due to the pandemic closure and the resultant and continuing financial hardship the shop had experienced.
While the court acknowledged that there was undeniable financial impact on the business, it disagreed that it constituted a frustrated contract, and issued a summary judgement order to pay the employee 10 months’ severance pay.
The employer appealed that decision, which has now been upheld by this ruling.
Employers face ‘high bar’ proving frustrated employment contracts
“This argument erroneously presupposes that it was a term of the employment contract that the shop would maintain a certain level of customers, or that the respondent would perform a certain volume of work or maintain a certain level of busyness,” the appeal panel wrote in their decision.
“It is also an argument that, taken to its logical conclusion, would arguably render the frustration defence available each time a retail operation experiences a substantial, non-fleeting reduction in its customer base due to an event beyond its control, on the basis that its employees had been left with less or, at times, nothing to do.”
This decision echoes earlier, similar cases in B.C. where businesses affected by the pandemic claimed that a reduction in customers constituted a frustrated employment contract when they faced wrongful dismissal claims from laid-off employees.
In both of those cases, one involving a pub and one a travel agency, the courts disagreed with the employers, saying the reduction of income had not altered the nature of the contracts.
In Fanzone v 516400 B.C. Ltd., 2022, a B.C. pub argued against a wrongful dismissal claim on the grounds that the employment contracts had been frustrated due to the closure ordered by the Provincial Health Officer, and the external event meant staff should not be owed severance pay. The Supreme Court upheld the wrongful dismissal claim because the pub had stayed closed when there were other options available such as take-out and limited dine-in.
Reduced customers not a reason for frustrated employment contracts
The Court of Appeal panel also struck down the employer’s appeal that the employee’s CERB (Canada Emergency Response Benefit) payments should be deducted from the severance pay owed to her.
“Laws coming out of the COVID-19 pandemic have not been favourable to employers,” says Allard.
“For them to have been able to rely on the defense of frustration, it would have meant that they could no longer viably operate. They found that an inability to pay an employee due to loss of customer demand and revenue during the pandemic was not frustration.”
The employee in this case — a 78-year-old woman who had been working for the employer since 2010 as a retail clerk and occasionally helped out with janitorial duties — was first employed as a buyer by the shop, then shifted to retail sales.
The president of the shop cited there being “essentially no work for employees to do,” as the reason for the closure at the time, but the court upheld the earlier judge’s decision, saying the closure had not “radically changed” the nature of the contract.
“Although it imposed some significant financial difficulties on the employer, it hadn’t resulted in a radically different nature of what was contemplated by the parties when they entered into [the contract],” Allard says.
“It didn't actually change what the employer was agreeing to do, which was to provide an hourly wage for the employee performing the services, and it didn't change the fact that she was required to effectively attend at the workplace to perform those services.”
