Employee Disability: When Does it Amount to Frustration of Contract?

September 15, 2023

“Employee Disability: When Does it Amount to Frustration of Contract?”

Employers have a duty to accommodate their employees to the level of undue hardship and must do so where an employee’s circumstances engage a code protected ground. The duty to accommodate ends “where the employee is no longer able to fulfil the basic obligations associated with the employment relationship for the foreseeable future.” (Hydro-Québec v. Syndicat des employé-e-s de techniques professionnelles et de bureau d’Hydro-Québec, section locale 2000 (SCFP-FTQ), 2008 SCC 43)

In the employment context, frustration of contract is most commonly used as a way for employers to terminate employees who are on leave due to illness or disability with limited liability, since, if an employee who is totally disabled and unable to work accommodation is not possible.

The test used to determine whether a contract of employment has been frustrated involves deciding whether there is a reasonable likelihood that the employee is able to return to work within a reasonable time (see Fraser v. UBS Global Asset Management, 2011 ONSC 5448 at para. 3). It requires proof that the employee’s illness or disability has risen to the level required to frustrate the employment agreement.

When assessing whether a contract has been frustrated the original job duties are considered and whether the disability will for the foreseeable future prevent the employee from performing those original duties or require that the job be performed in a “radically different manner” than originally envisioned. The fact that the employee could return to work if the job were modified in some manner of if offered a different job has been treated as irrelevant in the application the doctrine of frustration (see Wightman Estate v. 2774046 Canada Inc. 2006 BCCA 424 (CanLII) at paras 55- 56.)

The courts have applied a contextual analysis to determining what amount of time is reasonable, including, but not limited to:

a) The terms of the contract including any provisions as to sickness pay and whether the employee returns to work, or appears likely to return to work, within the period during which such sick pay is payable.

b) How long the employment was likely to last in the absence of sickness. The relationship is less likely to survive if the employment was inherently temporary in its nature or for the duration of a particular job, than if it was expected to be long term or even lifelong.

c) The nature of the employment- If the employee is one of many in the same category, the relationship is more likely to survive the period of incapacity than if he occupies a key post which must be filled and filled on a permanent basis if his absence is prolonged.

d) The nature of the illness or injury and how long it has already continued and the prospects of recovery -The greater the degree of incapacity and the longer the period over which it has persisted and is likely to persist, the more likely it is that the relationship has been destroyed.

e) The period of past employment -A relationship which is of long standing is not so easily destroyed as one which has but a short history. The legal basis is that over a long period of service the parties must be assumed to have contemplated longer period or periods of sickness than over a shorter period. (see Dragone v. Riva Plumbing Limited, 2007 CanLII 40543 (ON SC)

When an employment contract is frustrated due to illness or disability, the contract is deemed to be terminated and accordingly an employee is not owed common law entitlements, including reasonable notice of termination. However, a legislated exception allows for entitlements under the Employment Standards Act, 2000 (“ESA”) in such circumstances. Under regulation 288/01 of the ESA, where a contract of employment is frustrated due to illness, the employer remains obligated to pay the employee’s minimum termination pay, and severance pay as of the date of frustration.

In a recent case, Hoekstra v Rehability Occupational Therapy Inc., 2019 ONSC 562 (CanLII), the plaintiff went on leave and wished to return to work upon improvement. The plaintiff’s physician changed their opinion from an “unlikely return to work”, to a definitive view that the plaintiff would not be returning to work. The court relied on this shift from non-permanent to permanent disability in assessing when the contract became frustrated. This case clarifies that neither party must do anything to effect frustration and held that, “Frustration of contract occurs as a matter of law… Once circumstances exist that have the effect of frustration, the terms of the contract, the contract is deemed terminated… This is particular so in the case of frustration due to illness or injury which is presumptively beyond the control of both the employee and the employer.”

In this case, the court awarded the employee to be paid severance and termination pay in accordance with the ESA.