Long term disability - when will employment contract be “frustrated”?

Extended medical leaves of absence are one of the most difficult human resource challenges for employers today. Like any contract, an employment contract can be “frustrated” and come to an end. Basically, this may happen when it becomes impossible for one of the parties to perform their end of the bargain. One situation where an employment contract can be frustrated is when, due to an illness or injury, it becomes clear that an employee is no longer able to work. But it is not easy to define when that will become clear. 

Some useful guidance on this issue comes from the recent decision of the Human Rights Tribunal of Ontario (“HRTO”) in Gahagan v. James Campbell Inc. It decided that a two and one half year medical leave, with no prospect of medical improvement, was enough to find that an employment contract was legally frustrated.

The Employee’s Complaints Against JCI

James Campbell Inc. (“JCI”) operated a series of McDonald’s restaurants in Eastern Ontario. One such restaurant was a small operation connected to a gas station (the “Restaurant”). Ms. Gahagan had been working at the Restaurant for over seven years. She seriously injured her back at work in May 2009 when she lifted a pan from underneath a french fry vat. Gahagan immediately went on medical leave. She never returned to work.

Following her injury, Gahagan applied for and received Workplace Safety and Insurance Board (“WSIB”) benefits. She later underwent significant rehabilitation efforts, without much success. In November 2009, the WSIB said that Ms. Gahagan couldn’t lift above 10 pounds, couldn’t twist or bend, stand for more than 10 minutes, sit for more than 5 minutes, or work for more than 3 hours per day, 3 days per week. These restrictions never changed.

In light of the restrictions, the WSIB reviewed the workplace to see what accommodations might be available. JCI was not entirely cooperative. But the WSIB concluded that no suitable workplace accommodation was available. It then provided Ms. Gahagan with job retraining.

Ms. Gahagan brought an application to the HRTO (the “First Application”) because of JCI’s failure to cooperate in the WSIB’s accommodation review.

Ms. Gahagan also obtained Canada Pension Plan (“CPP”) disability benefits and Long Term Disability benefits (“LTD”) from her insurer.

On October 3, 2011, nearly two and a half years after Ms. Gahagan’s medical leave started, JCI terminated her employment. It said that her employment contract had been frustrated. There was no evidence that Ms. Gahagan would ever return to work.

Ms. Gahagan then filed a second application with the HRTO (the “Second Application”).  She claimed, among other things, that the termination was a reprisal for the First Application. The First and Second Applications were then decided together.

Decision of the HRTO

The HRTO decided that Ms. Gahagan was never medically able to return to work at the Restaurant. There was no way the employer could accommodate her medical restrictions.  This was so despite JCI’s failure to fully cooperate with the WSIB.

The HRTO agreed with JCI that the employment contract had been frustrated. Ms. Gahagan’s condition hadn’t improved during the two and one-half years since her injury.  The HRTO also took note of the fact that in order to qualify for CPP and LTD, Gahagan had confirmed she was unable to work.

As a result, both of Ms. Gahagan’s applications were dismissed.

Lessons on Frustration of Contract

This case gives us good insight into what evidence and situations will justify terminating an employment contract on the basis of frustration.

The medical evidence was critical. The fact that the medical restrictions remained unchanged for two and one half years weighed in favour of a finding that the employee’s injury would keep her away from work for the foreseeable future.

Employers may be appropriately vigilant with an employee on an extended medical leave.  One may seek clarification of restrictions at reasonable intervals. Keep track of any changes. Where there is no improvement over time, and there is no way to accommodate an employee’s restrictions, the probability of a frustrated contract increases.

Ms. Gahagan’s case also confirms that a reasonable period of time is required before frustration will likely be found. In this case, two and one-half years of leave with no medical improvement was enough.

Finally, employers may take note of the benefits obtained or declarations made by an employee. In this case, the employee’s applications for CPP and LTD benefits supported the finding that she would never be returning to the Restaurant.

On a final note, employers must be careful about monetary entitlements if terminating an employee due to a frustrated contract. While under the the common law of the courts, a genuinely frustrated contract will not typically result in the need to give notice or pay in lieu of notice, there may be statutory requirements to pay termination pay or severance pay. For example, Ontario requires statutory termination pay and severance pay if frustration is due to injury or illness. Furthermore, if the employee has a written employment contract, one must carefully analyze its termination clauses to see what if any entitlements the employee may have.