Frustration of Employment Contract: What to Consider Before Throwing in the Towel

Like any contract, an employment contract can be “frustrated” when continued performance of the contract becomes impossible or would be radically different because of a dramatic change in circumstances. Employers typically raise frustration of contract to formally end the employment relationship with employees who have been away from work for a long time and are unlikely to return.

The most common reason an employee is unable to return to work and, therefore, where frustration of contract may come up, is when an employee is off work because of a disabling illness. Deciding how long to hold out for the employee’s return or fill their position permanently will always depend on the circumstances. In every situation, however, a few factors can help you assess your options:

1. Ask for updated medical documentation. Courts give careful consideration to the most current medical documentation as evidence of whether the employee’s return to work is reasonably foreseeable. Before taking the position that an employment contract has been frustrated, ask the employee on leave for updated medical information confirming their condition. Ideally, this information will indicate that there is no reasonable prospect of the employee ever returning to work, or at least in the near future.
2.  Consider the length of the absence. There is no one-size-fits-all timeline for frustration of an employment contract. Some organizations use a two-year rule, and one decision out of British Columbia suggests that frustration will generally occur somewhere between 18-24 months, but there is no hard-and-fast rule and frustration may occur outside this time range. A lengthy absence coupled with an uncertain prognosis for return may persuade a Court that the employment contract has become frustrated.
3. Consider the level of responsibility. How quickly employment can be deemed to be frustrated may also depend on the employee’s level of responsibility. For example, a small non-profit organization may not be able to manage without an Executive Director or recruit a temporary replacement. That organization might legitimately claim frustration fairly quickly. On the other hand, a large multi-national corporation would likely have no difficulty replacing a clerical worker with a temporary employee for a lengthy period and so would be expected to keep that position open for the employee on leave.
4. Pay attention to disability policies and benefits in place. As frustration of contract most often occurs while an employee is off work on disability, the existence of Long Term Disability Benefits and Short Term Disability Benefits in the employment contract may impact the ability to prove frustration of contract. The two-year rule usually matches up with many LTD programs which provide “own occupation” coverage for the first two years, then “any occupation” coverage thereafter. In at least one Ontario case, the court noted that the existence of LTD and STD benefits suggested that the parties had contracted for and anticipated that the employee may be off for a period of time with a disability and so that employer could not claim the employment contract had been frustrated by the employee’s leave.

A few other things to remember:

• Don’t skip accommodation. If there is a way an employee off work because of disability could return to work with accommodation, their employment cannot be deemed frustrated unless and until the employer can show that it made every reasonable effort to accommodate the employee’s disability to the point of undue hardship.
• Some entitlements may apply. Where an employment contract is frustrated, the employee is not owed common law notice or pay in lieu of notice. However, if frustration is the result of an injury or illness, the employer does owe the employee their minimum termination and severance entitlements under the Employment Standards Act, 2000.
• Policies can protect you. It’s always a good idea to have a policy stating that an absence of some period (e.g. two years) will trigger an assessment of the viability of a continuing employment relationship. This lets the employer consider the specific facts in each case but should avoid letting potential frustration situations lapse without attention.