When can Canadian employment contracts be terminated for ‘frustration’?

March 09, 2014 - by: Marc Rodrigue 0 COMMENTS

By Marc Rodrigue

Like any contract, an employment contract can be legally “frustrated” and come to an end. Basically, this may happen when it becomes impossible for one of the parties to perform his or her end of the bargain. For example an employment contract can be frustrated when, because of 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 to us from the recent decision of the Human Rights Tribunal of Ontario (HRTO) in Gahagan v. James Campbell Inc. In that case, a 2½-year medical leave, with no prospect of medical improvement, was enough to find that the employment contract was legally frustrated.

Employee’s complaints

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. Cathy Gahagan had been working at that restaurant over seven years. She seriously injured her back at work in May 2009. It happened when she bent to lift 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 she couldn’t lift above 10 pounds, couldn’t twist or bend, stand for more than 10 minutes, sit for more than five minutes, or work for more than three hours per day, three 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 Gahagan with job retraining.

Gahagan brought an application against JCI before the HRTO (the First Application). She complained of JCI’s failure to cooperate in the WSIB’s accommodation review.

Gahagan also obtained Long Term Disability benefits (LTD) from her insurer and from the Canadian government’s Canada Pension Plan (CPP).

On October 3, 2011, nearly 2½ years after Gahagan’s medical leave started, JCI terminated her employment. It said that her employment contract had been frustrated because there was no evidence that she would ever return to work.

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.

Decision of the HRTO

The First and Second Applications were decided together. The HRTO decided that 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 found despite JCI’s failure to fully cooperate with the WSIB.

The HRTO agreed with JCI that the employment contract had been frustrated. Gahagan’s condition hadn’t improved during the 2½ years since her injury. The HRTO also took note of the fact that in order to qualify for private and CPP LTD benefits, Gahagan had confirmed she was unable to work.

As a result, both of Gahagan’s applications to the HRTO 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 under Canadian law.

The medical evidence was critical. The fact that the medical restrictions remained unchanged for 2½ years weighed in favor 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.

Gahagan’s case also confirms that a reasonable period of time is required before frustration will likely be found. In this case, 2½ 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 private 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 because of a frustrated contract. While under the common law of Canadian 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 because of 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.

About Marc Rodrigue:
Marc Rodrigue is an Associate with the Firm's Labour, Employment and Human Rights practice group. He maintains a broad practice including matters relating to human rights, employment agreements and terminations, departing employee litigation, labour relations and collective agreement interpretation. Prior to joining Fasken Martineau as an associate, Marc articled with the Firm in 2011/2012. During that time, he represented Toronto articling students on the Ontario Bar Association Council. He also summered with the Firm in 2010, during which time he was seconded to the Ontario Human Rights Commission.
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