Dealing with employees who are on long-term disability is challenging at the best of times for employers. Employers often wonder “how long” they must wait before employment relationship with an employee on long term disability can be said to be frustrated, and concluded. In the recent decision of Naccarato v. Costco, the Court has stated that termination for frustration in employment contracts extends beyond a calculation of “how long” to a determination of a sick employees prognosis for future recovery and a possible return to work. The Court held that the employment relationship with an employee off on disability for 5 years without a certain return to work date was not frustrated.

In the June 15, 2010 decision of Naccarato v. Costco, Justice Pollak examined the wrongful dismissal claim of Mr. Naccarato, who was employed by Costco for over 17 years in various clerical roles. Costco asserted that the employment relationship with Mr. Naccarato was concluded by way of frustration, following his long-term disability leave totalling nearly five years.

Mr. Naccarato’s illness

Mr. Naccarato initially went on long-term disability on or about July, 2002. In January 2007, Costco questioned Mr. Naccarato’s physician and were told that Mr. Naccarato was still very depressed and poorly functioning, and that another psychiatrist was being sought for further treatment. In response to a question regarding Mr. Naccarato’s return to work, the physician replied that given Mr. Naccarato’s present condition he was unable to predict when Mr. Naccarato might return to his job.

Costco’s termination for cause

In July 2007, Costco concluded its employment relationship with Mr. Naccarato, claiming frustration of Mr. Naccarato’s employment contract due to his absence from work for approximately five years, and his ongoing inability to return to work. Mr. Naccarato received his minimum Employment Standards Act entitlements. Mr. Naccarato then filed a claim for wrongful dismissal in the amount of $50,000.

Trial Decision:

In examining the Claim, Justice Pollack followed a 2007 decision of Justice Perell, Dragone v. Riva Plumbing Limited, which held that the onus was on the employer to prove that the contract had become frustrated and that it was not the employee’s onus to provide medical evidence with respect to their ultimate prognosis.

On the facts, Justice Pollack found that although the duration of Mr. Naccarato’s illness was “significant”, the prognosis “did not support a finding that there was no reasonable likelihood of Mr. Naccarato returning to work in the reasonably foreseeable future.” Further, Justice Pollack found that there was no evidence of hardship or disruption to Costco’s business as a result of maintaining Mr. Naccarato’s employment status, such as would be found in the case of a senior employee who was irreplaceable. Mr. Naccarato’s lesser role within Costco meant that a longer absence could occur before frustration of the employment contract would occur.

Finally, Justice Pollack found the provision of short and long term benefits by Costco to Mr. Naccarato meant that illness (even a long term illness) was reasonably contemplated under the employment contract. In order to meet the level of frustration of contract, the benefits must have expired such that further illness was no longer reasonably contemplated, and went beyond the terms of the employment contract.

Damages Award

As just cause for frustration was not found on the facts, Mr. Naccarato was found to have been wrongfully dismissed. He was awarded an extended notice period of 10 months, less amounts previously paid by Costco, and costs in the amount of $5,000.

Our Views:

This case is notable for employers as it reinforces the trend in Ontario Courts to decline to apply the doctrine of frustration in circumstances where there is any “reasonable likelihood” that an employee may be able to return to work.

In establishing a case for frustration of an employment contract, it will be vital for the employer to push for a fulsome prognosis, something it does not appear Costco did.

This case is not helpful to the position of employers in matters of this nature. In the words of the Court, the disability must be “so substantial that an objective assessment of it leads to the conclusion that the contract of employment was frustrated, thereby justifying its termination”. An employer will have to ensure they have a clear prognosis before deciding to terminate an employee currently on a disability leave, no matter the length of time the employee has been off work.

It remains to be seen whether a factually similar case will be appealed to a higher court for a more substantial determination of the law of contract frustration. But for now, this precedent will stand, and employers beware!