The key is whether continued employment has been rendered impossible in the pandemic
The economy has been devastated, some businesses have been ordered to close and others have dramatically reduced staffing needs. As we have already pointed out, in most cases, businesses do not have the right to temporarily lay employees off.
Unless the employee voluntarily agrees to a layoff, what is an employer to do? For many, continuing to pay them will not be a viable option. Yet terminating their employment will often come with a hefty severance price tag.
Can they claim frustration of contract in order to get through this unprecedented scenario? The answer, not surprisingly, is that “it depends.”
Frustration of contract occurs when unanticipated circumstances, through no fault of either party, make it impossible for a contract to be fulfilled. The classic example is an apartment building burning down before a rental agreement can proceed.
When there is a frustration of contract, the contract effectively comes to an end, and neither party has any further obligation to the other. In the apartment example, they would both simply walk away.
The doctrine of frustration applies to employment contracts as well. Usually, the issue arises in the case of a disability that prevents someone from working. However, the current circumstances certainly lend themselves to a discussion of frustration of the employment contract. In some cases, it has become impossible to continue with the employment relationship, at least temporarily.
The key is whether continued employment has been rendered impossible. Courts have been clear in the past that economic challenges will not justify a reduction in severance. Similarly, they will not, in and of themselves, constitute frustration of contract. Would a global pandemic? It is certainly possible, but if a business is able to continue operating, the argument may not succeed.
If, on the other hand, a business is ordered to shut down, that would be a much more compelling argument in favour of frustration. I expect that we will see this issue debated quite a bit over the next few months, and judicially considered at some point.
To be clear, taking the position that the contract of employment has been frustrated means that you are ending the employment relationship, just as you would if you terminate their employment. The difference is that the cost to the company will be much less if frustration can be established.
At common law, there would be no obligation to provide notice or compensation in the event of frustration of contract. Some employment standards legislation, including Ontario’s Employment Standards Act, 2000, provide for compensation even in circumstances that would constitute frustration of contract at common law. However, the statutory amounts will be far less than the notice required by common law in the event of dismissal.
Of course, it must be kept in mind that if you take the position that a contract of employment has been frustrated, you are ending the contract. This is very different from a temporary layoff (if permissible), where the employer anticipates that the employee would be recalled to work in the relatively near future.
We are working with many employers to help them weather this storm. If we prepared their employment agreements, chances are that they include a temporary layoff provision that no one expected would be relevant. In that case, they can impose a temporary layoff.
Otherwise, many of our clients have had candid discussions with their staff to find solutions. So far, many are cooperating on short-term plans that can include wage reductions, hour reductions, or temporary layoffs. We are encouraging everyone to cooperate to the extent possible. However, people should understand their rights and obligations so they can make an informed decision.
The situation is particularly frustrating for businesses that have been ordered to close. On one hand, they are told to cease operations. On the other hand, they are told they don’t have the right to temporarily lay people off. It is possible that federal or provincial governments will announce further financial support for employers in these circumstances, but right now, they are stuck between the proverbial rock and hard place.
Many of us are frustrated, but that does not necessarily mean that contracts of employment have been.
