The doctrine of frustration can be a powerful weapon between contracting parties. If applicable, it relieves each party of their respective legal obligations under the contract. This occurs if and when the terms of the contract become impossible to perform. In the context of an employment contract, frustration can occur in a number of circumstances, including: total disability on the part of the employee; death of a party; imprisonment; and destruction of an employer’s premises. Employers usually address the issue of frustration of contract when an employee becomes disabled, and as a result, the employee can no longer perform the essential duties of his or her position for the reasonably foreseeable future.
However, before employers start relying on the doctrine of frustration to terminate any employee on a medical leave, it should be aware that frustration is notoriously difficult to establish in the context of a medical leave of absence. Furthermore, even if it is established by the employer, it will not relieve the employer of all of its financial obligations to the employee.
What is the effect of frustration?
Where an employment contract is frustrated, the Employment Standards Act, 2000, (“ESA”) releases an employer from its obligation to provide the employee with notice of termination or pay in lieu thereof, except if the frustration is the result of the employee’s illness or disability (section 55, ESA). In the case of frustration arising from illness or disability, by virtue of the Termination and Severance of Employment Regulation (O.Reg.288/01), an employer must still comply with its statutory notice obligations. The statutory framework obligates employers, no matter what their contracts say, to provide notice of termination, termination pay, and severance where applicable, if the frustration of contract is the result of illness or disability.
Therefore, even if frustration has occurred, the employee will still be entitled to its minimum entitlements under the ESA. For a long-serving employee this entitlement can be significant. So, an employer should think very carefully before it invokes the doctrine of frustration and whether it is prepared to provide the employee with notice of termination and severance pay.
When does an employee’s illness give rise to a frustration of contract?
It is well-established that there is no obligation on an employer to continue employing an individual who is unlikely to return to work. However, determining whether an employee’s absence amounts to frustration of the employment contract is a highly contextual and fact-based analysis.
The issue was dealt with in the Ontario Superior Court case Dragone v. Riva Plumbing Limited, 2007 CanLII 40543. In that case, Justice Perell held that whether a contract of employment has been frustrated by an employee illness or incapacity depends on whether or not the illness or incapacity was of such a nature or likely to continue for such a period of time that either the employee would never be able to perform the duties contemplated by the original employment contract or that it would be unreasonable for the employer to wait any longer for the employee to recover. To determine if a contract has been frustrated, regard must be had to the relationship of the term of the incapacity or absence from work to the duration of the contract, and to the nature of the services to be performed.
For example, when the absent employee is a senior executive whose absence cannot be tolerated for long, then a relative short period of incapacity may frustrate a contract. However, a longer period of time before frustration occurs may be the case for employees with lesser roles in the business.
Ultimately, a decision maker must consider whether the employee’s illness prevents the employee from performing the core functions of his or her position for a significant part of the employment term. Again, the analysis is highly contextual. However, some general points can be made. For example, a contract may consider the potential for an employee’s prolonged absence due to illness or disability by providing for long term disability (“LTD”) benefits. If the employment contract has provided these benefits, it usually means that the parties have anticipated the alleged frustrating event and have determined it will not cause frustration to the contract as a whole. However, the presence of LTD is not a complete bar to a finding of frustration.
The Duty to Accommodate
Frustration of contract will not occur where the employer has failed to discharge its duty to accommodate under the Human Rights Code. Therefore, before frustration can occur, the employer must establish that continued employment and/or accommodation would amount to undue hardship on the business. What constitutes “undue hardship” is beyond the scope of this post. However, suffice to say, it is particularly high-bar that must be met. Indeed, it is not unusual for employees to be disabled for many years before the court will find that the employment contract has been frustrated.