Frustration of employment contract warrants termination, severance pay

Ontario employer deemed disabled worker’s employment at an end with no prognosis for returning to work, but decision wasn’t made in bad faith: Court

Frustration of employment contract warrants termination, severance pay
The worker said he intended to return to work but there was no prognosis for when that might happen. Shutterstock

An Ontario employer who released a disabled worker with no prospect of returning from his employment didn’t act maliciously or egregiously but must pay him statutory termination and severance entitlements after his employment contract was frustrated, the Ontario Superior Court of Justice has ruled.

Ronald Hoekstra, 51, worked as a medical social worker for Rehability Occupational Therapy. Rehability hired Hoekstra in September 2005 under a written contract of employment.

In December 2008, Hoekstra went on short-term medical leave due to symptoms related to severe esophageal and stomach conditions, during which time he received group benefits from a third-party health-care provider. He remained off work for several months, returning in September 2009. Hoekstra worked for another couple of years while being able to manage his conditions until May 2012, when he once again had to take time off.

Hoekstra returned from this second medical leave in September 2012, but this was short-lived. His symptoms became too much too handle and he took another medical leave of absence, indicating he expected to return to work on Dec. 3 of that year. However, he had to extend his leave, providing a new return date of March 5, 2013. During the course of the leave, Hoekstra maintained regular contact with Rehability and made appearances at the company’s social events so he could continue feeling a part of the staff.

Once again, Hoekstra’s medical conditions prevented him from being able to work, so he was unable to return on the expected date. His leave stretched for a few more years with no new expected return-to-work date.

Prognosis for return not good

Hoekstra also received disability benefits through a private insurance policy he had. In January 2016, his family doctor completed a form for the private insurer that stated Hoekstra’s condition had not shown improvement to the point where gradual or full-time work was viable. The doctor also wrote on the form that Hoekstra had “ongoing disability since 2008 unlikely to return now.”

In January 2017, Rehability informed all of its employees that it would be changing health-care providers effective March 1. The company told Hoekstra — who was still on medical leave — that he wouldn’t be eligible for benefits with the new health-care provider. However, Hoekstra’s wife was also a Rehability employee and her spousal benefits would cover Hoekstra with the new provider.

Around the same time, Hoekstra’s doctor completed another assessment form based on an October 2016 assessment with the same prognosis — Hoekstra was unlikely to return to work due to his ongoing disability.

Hoekstra told Rehability that he wanted to return to work and intended to do so, asking why he was no longer eligible to receive group benefits as an employee. The company responded that it no longer considered him an employee since his contract of employment had been frustrated and he wouldn’t be able to return to work. Hoekstra accepted that his employment with Rehability had ended because of his ongoing medical issues, but he requested payment of termination entitlements.

Rehability didn’t meet Hoekstra’s request to his satisfaction, so he sued the company for wrongful dismissal damages — a regulation under the Ontario Employment Standards Act, 2000 (ESA) requires employers to pay “the employee’s minimum termination pay and severance pay as of the date of frustration” in the event of a frustration of employment contract — as well as damages for discrimination based on his disability and punitive and aggravated damages.

About one month after Hoekstra filed his suit, Rehability communicated through counsel that the employment contract was frustrated before Hoekstra’s allegations, but it was willing to offer him his job back effective immediately. Hoekstra refused the offer of re-employment.

The court noted that frustration of the contract employment doesn’t require an act by either the employer or the employee — “once circumstances exist that have the effect of frustrating the terms of a contract, the contract is deemed terminated” — particularly when the frustration is because of the employee’s illness, which is beyond the control of either party, said the court, adding that frustration occurs when “there is no reasonable likelihood of the employee being able to return to work within a reasonable time.”

By the time Rehability told Hoekstra he was no longer an employee, he hadn’t worked in three-and-one-half years and his most recent medical assessment showed no prognosis of returning to work. Therefore, as of the October 2016 medical assessment by the worker’s doctor, there was no reasonable likelihood that Hoekstra would be able to return to work within a reasonable time — frustrating the employment contract at that time, said the court.

Entitlement to termination pay follows frustration

The court found that, with the frustration, Hoekstra was entitled to termination pay under the ESA and, since Rehability had an annual payroll greater than $2.5 million, severance pay under the ESA as well. Since the company paid Hoekstra’s benefits until the health-care provider changed on March 1, 2017, there were no damages for lost benefits.

However, the court didn’t find any evidence that Rehability’s conduct was malicious or egregious enough to warrant punitive or aggravated damages. The company maintained regular contact with Hoekstra and kept a positive relationship the entire time he was on medical leave, up to the change in health-care providers. The company acted as though Hoekstra was a valued employee and even offered him his job back if he was capable of returning, after Hoekstra had filed the lawsuit.

The court found that the problem stemmed from Rehability’s decision to change its disability benefit and health-care provider — a decision that was made for the company as a whole and wasn’t intended to harm Hoekstra or terminate his employment. It was Hoekstra who saw his ineligibility as an attempt to termiante him, said the court.

“There is no evidence that [Rehability’s] offer of employment made after the action was commenced was a sham or not geniune,” the court said. “The offer was consistent with [Rehability’s] position that it never intended to terminate [Hoekstra’s] employment and was also consistent with (Hoekstra’s] stated desire to one day return to work.”

The court noted that Hoekstra continued to receive benefits from Rehability through his wife’s spousal coverage, so his financial circumstances weren’t significantly affected. In addition, it found that it was likely had the company not changed its benefits provider, Hoekstra would have continued to receive benefits as an employee.

Rehability was ordered to pay Hoekstra severance and termination pay under the ESA based on his regular salary when he worked with the company. Hoekstra’s claim for punitive and aggravated damages was denied.

For more information see:

•  Hoekstra v. Rehability Occupational Therapy Inc., 2019 ONSC 562 (Ont. S.C.J.).


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