When we ask our employer clients what employment law issue they find the most vexing, it always seems to be managing the employee on disability leave. Tensions often become particularly heightened when an employee’s disability continues for a prolonged period of time. Employers typically invest much time and energy in attempting to accommodate the employee, but when this continues for an extended period, we inevitably get asked whether there ever comes a point where the employer can terminate the employment relationship.

Frustration of Contract: Can it be done?

In employment law, there is a concept called “frustration of contract” which refers to the point in time when the employment relationship becomes impossible to continue or would be radically different than what the parties originally intended. In such cases, the employer may be in a position to bring the relationship to an end and pay only minimum severance, if any at all. The challenge in these cases is always determining the exact point at which the contract becomes frustrated.

In the recent Ontario case of Duong v. Linamar Corporation, 2010 ONSC 3159 (CanLII), the Superior Court of Justice dealt with just such an issue. Mr. Duong sued for wrongful dismissal after he was fired by his employer for frustration of contract following Mr. Duong having been on disability leave for more than three years.

Mr. Duong suffered from a long history of back pain, and following exacerbations of his condition and various attempts to return to work, in modified and unmodified capacities, he eventually left work altogether, stating to his supervisor that he continued to suffer from significant pain. He qualified for Long Term Disability (“LTD”) benefits and was ultimately advised that he was totally disabled from performing any occupation and that his benefits would continue to age 65. However, his LTD benefits were subsequently cut off because Mr. Duong failed to sufficiently co-operate in a rehabilitation program as required. Further medical reports indicated that there were no significant improvements in his condition. Based on all of these factors, the decision was made to terminate Mr. Duong’s employment for frustration of contract.

The Court found in favour of the employer and agreed that Mr. Duong’s employment contract had become frustrated. One of the key reasons supporting this finding was the fact that Mr. Duong had not worked in more than three years. Reference was made to the 2006 B.C. Court of Appeal decision in Wightman Estate in which it was held that, “Sickness will not frustrate an employment contract when the employee appears likely to return to work, but the longer the sickness persists, the more likely the employment relationship has been destroyed.”

In addition to the length of time that Mr. Duong had been disabled, the Court pointed to other factors as having influenced its decision. There was no evidence that Mr. Duong had any prospect of returning to work in the near future. In fact, all the evidence before the Court seemed to suggest that he was permanently disabled. The Court noted Mr. Duong’s failure to appeal the discontinuation of his LTD benefits, saying that this seemed to support the employer’s determination that there was no reasonable prospect of Mr. Duong returning to work.

Finally, Mr. Duong’s lawyer argued that as long as there was an LTD policy in place, the employer could not argue frustration of contract. The Court disagreed, noting that the policy itself contemplated employees receiving LTD benefits after severance. In addition, there was nothing in the policy which stated that employment would continue throughout a period of long term disability, nor could it as the policy was between Mr. Duong and the insurance company – not the employer.  

What does this mean for employers?

1. Assess medical documentation

In the Duong case, the most current medical documentation and evidence was given careful consideration. Employers are wise not to even consider taking the position that an employment contract has been frustrated unless they have sought and obtained updated medical information from the employee on leave.  

2. Consider the length of absence

There is no magic period of time after which an employment contract is considered frustrated. Ideally, the updated medical information will provide that there is no reasonable prospect of the employee ever returning to work, or at least in the near future. A lengthy absence coupled with an uncertain prognosis for return may also persuade a Court that the employment contract has become frustrated.  

3. Pay particular attention to disability policies and other written contracts in place

Counsel acting for employees will be looking closely for any written documentation which seems to imply that an employment relationship should not be discontinued at any point during a period of disability. A careful review of any and all disability policies should be undertaken, along with any other documents that govern the employment relationship, such as employment contracts, shareholder agreements, etc. Language in these policies which suggests that the employment relationship should continue during any period of disability may hinder an employer’s claim of frustration of contract.