When an employee is absent due to long-term disability, employers naturally wonder how long they must wait before the employment contract has been "frustrated". If it has, the employment contract can be terminated. According to the recent Ontario decision of Naccarato v. Costco Wholesale Canada Ltd., however, the question is not "how long" but rather "what is the prognosis"?

Background

Costco terminated Frank Naccarato's employment, claiming frustration of contract due to disability. Mr. Naccarato had been employed with Costco as a Return-to-Vendor clerk for 12 years. Then he began long-term disability leave in November, 2002.

After a four year absence, a letter from Mr. Naccarato's doctor stated that he could not predict when Mr. Naccarato would be able to return to work. It also noted that Mr. Naccarato was still under psychiatric treatment but that his previous psychiatrist had left and a replacement was being sought.

In 2006 Costco terminated Mr. Naccarato's employment contract. It paid him the minimum statutory termination and severance pay. Naccarato filed an action for wrongful dismissal. He claimed that Costco should pay him the greater amount of pay in lieu of notice available under court-made law.

Limits on the Duty to Accommodate

Costco relied on the Supreme Court of Canada's 2008 decision in Hydro-Quebec v. Syndicat des employees de techniques, professionelles et de bureau d'Hydro-Quebec, section locale 2000. In that case, the employee was terminated after a disability caused her to miss 960 days of work over a seven and half year period. Her doctors were not optimistic that she would ever recover enough to return to work on a regular basis. The Supreme Court upheld the termination, finding that the duty to accommodate ended when the employee was unable to work for the "foreseeable future."

Naccarato Decision

Unlike Hydro-Quebec, the Court in Naccarato found in favour of the employee. Why the difference? The Court's consideration of the medical evidence relating to future employment prospects was pivotal. In Hydro-Quebec, the doctors predicted that the employee would likely not be able to return to work. In Naccarato, on the other hand, there was no clear prognosis.

Costco encouraged the Court to consider the situation as a whole. It argued the Court could infer that Mr. Naccarato would be unlikely to return to work in the foreseeable future. The Court declined to do so. It noted that Mr. Naccarato might still be able to return to work. Although a five year illness was "significant", the lack of a medical prognosis, coupled with the fact that he was still in psychiatric treatment, left open that possibility. Costco could have followed up with Mr. Naccarato's doctor and obtained a more precise prognosis, but had not.

The Court also dismissed the idea that it would be unreasonable for Costco to wait any longer for Mr. Naccarato to recover. It noted that his lesser role in the business meant that a longer absence could occur before frustration of the employment contract would be found. There was no evidence that maintaining Mr. Naccarato's employment status was causing Costco hardship. They thus they had no grounds for termination. He was therefore entitled to 10 months' pay in lieu of notice of termination.

What Naccarato Means for Employers

Often employers focus on how long an employee has been absent when considering if they can terminate the employment relationship. They assume that an absence of a significant duration must eventually lead to the conclusion that the employment contract has been frustrated. While this is only one trial judge's decision, the message of Naccarato is that prognosis, not length of absence, is what matters most. Even after a relatively short absence, if it is clear the employee can never return to work, the employment agreement may be frustrated. Likewise a very long absence (even 5 years) with a murky prognosis may not amount to frustration of the employment contract. Employers should ensure they have a clear prognosis before considering termination in such circumstances.

It will be interesting to see whether higher courts re-visit this issue. It will also be interesting to see the extent to which this approach might be adopted by labour arbitrators under union agreements