Frustration of contracts frustrating for employers

It’s possible to terminate a worker who can’t come back to work – but it’s not easy

Managing disability in the workplace remains one of the most challenging areas of employment law for managers, HR professionals and lawyers alike. A common — and difficult — question is how long can an employee be off work due to illness or injury before an employer can safely terminate the employment relationship without liability?

Absence from work due to legitimate illness or injury is non-blameworthy conduct and will never constitute just cause for dismissal. There are circumstances, however, where an absence due to disability can frustrate the employment contract.

What is ‘frustration?’

A contract is frustrated when it becomes impossible to perform through no fault of either party. A frustrated contract terminates without liability. Whether or not an employee’s absence and incapacity will result in frustration of an employment contract depends on a careful assessment of the relationship between the severity and scope of the incapacity and the terms of the employment contract.

To determine whether a contract of employment has become frustrated due to disability, Canadian courts consider several factors that originated with the English Court of Appeal decision of Marshall v. Harland & Wolff in 1972 and were affirmed by the British Columbia Supreme Court in Yeager v. R.J. Hastings Agencies Ltd in 1984.

The terms of the contract, including any provision for sick pay: An employment contract will not be frustrated during a period of time for which the contract provides “sick pay” or “weekly indemnity.” Sick pay should not be confused with disability benefits (under an insurance plan) for this purpose. If contractual disability benefits do not commence for a fixed waiting period — typically three to six months — it is not likely the employment contract has been frustrated during the waiting period, as this would unfairly deprive the employee of access to the benefit.

While some Canadian judges have opined an employment contract cannot become frustrated during any period where an employee is entitled to receive disability benefits, the better view, expressed by the British Columbia Supreme Court in 2005 in Wightman Estate v. 2774046 Canada Inc., is the mere presence of disability benefits does not preclude a finding of frustration.

The length of the contract: If a contract is of a short or fixed duration, it is more easily frustrated by a serious illness or injury than a contract of indefinite duration.

The nature of the employment: If an employee holds a key position in an organization, prolonged absence due to disability could more likely result in frustration than in the case of a lower level employee performing functions similar to other employees whose roles may be seen as interchangeable.

The nature and duration of the illness or injury: The greater the degree of incapacity and the longer a period of time over which it has persisted or is expected to persist, the more likely an employment contract has been frustrated. An obviously permanent disability resulting in the inability of an employee to return to work will frustrate a contract. A temporary illness or injury will rarely do so.

If the severity of a disability and prognosis for recovery are less than certain, an employer must act on medical evidence available at the time it asserts frustration of the contract. The evidence must demonstrate an employee is either unable to return to work in the foreseeable future or can only return in a capacity that is radically different than the one originally agreed to.

The period of past employment: An employment relationship of short duration is more easily frustrated than one of long duration.

Tips for employers

It is risky to take the position an employment relationship has been frustrated in the absence of timely medical evidence meeting the legal test. Aside from exposure to liability for payments in lieu of notice, an employer may be exposed to human rights liability for failure to accommodate a disability to the point of undue hardship. However, an allegation of failure to accommodate can be successfully defended if an employer can show accommodation is impossible due to frustration.

Frustration of an employment contract does not necessarily result in forfeiture of statutory termination entitlements. Ontario’s Employment Standards Act, for example, specifically excludes frustration due to “an illness or injury” from the types of frustration that would otherwise disentitle employees to termination and severance pay under that act.

Older forms of employment contracts — particularly for more senior positions — contained clauses deeming employment to be terminated after a fixed length of absence due to illness. These clauses have more recently been struck down as a violation of human rights legislation.

Employers sometimes make the mistake of confusing a denial or termination of long-term disability benefits with evidence of fitness for return to work, demanding an employee’s return and asserting abandonment when she fails to do so. The fact an employee’s illness or injury does not qualify for benefits does not mean she is necessarily fit to return.

Employers should make an educated assessment of the nature and extent of an employee’s disability, exercising the right to request adequate medical information supporting her continued absence. In this regard, employers should maintain direct contact with employees on leave and require updated medical information be provided on a reasonable, periodic basis.

For more information see:

Yeager v. R.J. Hastings Agencies Ltd., 1984 CarswellBC 768 (B.C. S.C.).

Marshall v. Harland & Wolff Ltd., [1972] 2 All E.R. 715 (N.I.R.C.).

Wightman Estate v. 2774046 Canada Inc., 2005 CarswellBC 2480 (B.C. S.C.).

Peter Straszynski practises labour relations and employment law at Torkin Manes in Toronto, representing both private and public sector employers. He can be reached at (416) 777-5447 or [email protected].

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