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Disability or Illegality Matters In Frustration of Employment Contract Cases


The Ontario Divisional Court has recently taken some of the “frustration” out of frustration of employment contract cases. In Cowie v. Great Blue Heron Casino, the Divisional Court overturned a trial decision which found no frustration of contract where a security guard’s continued employment was made illegal by a change in the law. The Divisional Court clarified the test for frustration of employment contract cases, finding that where an employee is unable to perform his or her contractual obligations because a change in the law makes his or her continued employment illegal, the employment contracted is frustrated at the point when the law takes effect.

Most frustration of employment contract cases arise from situations involving a prolonged disability or illness where an employer can spend years accommodating the employee before the employment contract is frustrated. In illness or disability cases, frustration is assessed by asking whether the disability prevents the performance of the essential functions of the employee’s job for a period of time sufficient to say that the employment contract is no longer capable of being fulfilled. The difficulty in illness and disability cases is figuring out at what point is the employment contract frustrated. Usually this is a case-by-case assessment taking into account the severity of the illness or disability, when or if recovery is expected, and the length of service of the employee. This analysis does little to pinpoint the moment of contract frustration, leaving employers without guidance on when the employment relationship can be severed due to frustration.

Cowie differentiates between illness and disability frustration cases and cases where frustration arises from a change in the law that makes an employee’s continued employment illegal.  The difference being that when a change in the law frustrates an employment contract, an employer is not obliged to consider whether the circumstances are temporary, or can be remedied within a reasonable length of time. The frustration of contract inquiry, where continued employment would be illegal, looks at the circumstances at the time the change in law makes it so one or the other party cannot complete its contractual obligations. If the change in law results in a situation where performance of the employment contract becomes illegal, the employment contract is frustrated at the point the law takes effect.  Unlike disability or illness cases, a future possibility that an employee may overcome the legal roadblock is not a consideration in determining whether performance of the employment contract is no longer possible when the new law takes effect.

In terms of notice and severance payments, the nature of the circumstance giving rise to the frustration of an employment contract can have serious financial implications. If an employment contract is frustrated, whether due to illness, disability or illegality, the affected employee is not entitled to common law notice. The distinction between frustration due to illness or disability and that due to illegality becomes very important in terms of statutory notice and severance pay. An employee whose contract is frustrated due to illegality will not be entitled to statutory notice or severance pay under the Ontario Employment Standards Act, 2000. Sections 2(1) and 9(1) of the Termination and Severance of Employment Regulation, O.Reg 288/01, exempt payment of statutory notice and severance pay where an employment contract “has become impossible to perform or has been frustrated.” These exemptions are then subject to sections 2(3) and 9(2)(b) which restore payment of statutory notice and severance pay if the “impossibility or frustration is the result of an illness or injury suffered by the employee.” It is important for employers to identify the circumstances giving rise to frustration in order to correctly comply with statutory requirements.

This case has important implications for employers who deal with regulated employees, like financial advisors, doctors or lawyers. If you suspect a new law may affect employees in your workplace, assess the core job functions of the affected position, and ask how the new law may impact on an employee’s ability to perform the fundamental aspects of the job. If an employee will be unable to continue his or her core job functions, it is likely the employment contract will be frustrated. Once contract frustration is established because of illegality, an employer will not be liable for common law or statutory notice or severance payments. If you believe an employee’s employment contract may have been frustrated, whether due to illness, disability or illegality, we recommend that you contact legal counsel to discuss the situation and your legal responsibilities before taking steps to terminate the individual’s employment.  

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