Frustration of Contract: And the answer is: “It depends”

As published in Exchange Magazine December 2010

One of the most difficult issues my employer clients face is managing the employment relationship with employees who have been ill and off on an extended sick leave.  I am often asked the question “At what point can they terminate the employment relationship? Is there an obligation to pay severance?”.  A primary legal concern is to ensure that the employer’s actions do not violate the Ontario Human Rights Code which guarantees an individual’s right to equal treatment with respect to employment without discrimination because of disability (which has been broadly defined to include a handicap or illness).  If there is a violation of the Code in addition to damages for any wage loss, damages can be awarded to compensate for injury to dignity, feelings and self respect.

Under the common law, from which our law of wrongful dismissal is derived, when an employer ends the employment relationship there is an obligation to provide reasonable notice or payment in lieu of notice.   Does that obligation exist where an employee has been absent due to illness for a significant period of time.  As is often the case the answer is:  It depends.  There is a legal doctrine known as frustration of contract.  A contract of employment can be frustrated by an employee for illness or incapacity, but is dependent upon whether or not the illness or incapacity is 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 it would be unreasonable for the employer to wait any longer for the employee to recover.   In the recent decision of Naccarato v. Costco Wholesale Canada Ltd. (“Costco”), the Court was asked to determine whether Costco was entitled to end the employment of Naccarato after a continuing and lengthy absence from employment, without any common law pay in lieu of notice.

Naccarato commenced employment with Costco in 1990.  He worked as a clerk.  In 2002 he became ill and went on a medically approved sick leave.  He initially received short term disability benefits and then qualified for long term disability benefits.  After an absence from employment of almost five years, Costco terminated Naccarato’s employment on the basis of frustration of the employment contract.  It relied upon Naccarato’s family physician’s report which indicated that there was no prognosis of when Naccarato could return to employment.  Costco argued that based on Naccarato’s continued absence from work and his ongoing inability to return to work due to illness (confirmed by his physician) his contract of employment had become frustrated.  Naccarato sued for wrongful dismissal and argued at trial that Costco had not established that there was “no reasonable likelihood of him being able to return to employment in the foreseeable future”.  Naccarato argued that the response of his physician indicated that he was still attempting treatment through a referral to a new psychiatrist and it was unknown when he would be able to return to work.

In the Naccarato case, while the duration of the illness was significant, the trial Judge found that the medical evidence did not support a finding that there was no reasonable likelihood of the employee returning to work in the reasonably foreseeable future.  Rather, the evidence from the Court’s perspective supported that the employee was still being treated by his doctor and a new psychiatrist was being sought.

The Court also recognized that given the clerical position of Naccarato within the organization, there was no evidence that his absence was harmful to the company or that maintaining his employment status resulted in any disruption to Costco’s business.

Naccarato was successful in his wrongful dismissal action against Costco and was awarded damages equivalent to 10 months earnings.

Costco might have had more success if the position held by Naccarato would have been of a management or more senior level employee.  In a 2007 Court decision, it was recognized that if an absent employee is a senior executive whose absence cannot be tolerated for any extended period of time if the business is to succeed, then a relatively short period of incapacity may frustrate the employment contract.

In my experience these cases are rife with difficulty, exposing an employer to possible litigation in a wrongful dismissal action and/or an application to the Human Rights Tribunal.  Much patience is required by employers to navigate their way through these thorny issues, however that patience will avoid costly legal fees and court or administrative proceedings.

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About Melanie Reist

Melanie Reist has over 30 years of employment law expertise.

With her strong employment law background, Melanie is also an effective mediator who can assist parties in resolving workplace conflicts as well as disputes which have gone to litigation.

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