May 13, 2010
by Israel Foulon LLP

Employers involved in managing the disability of an employee whose absence from work due to illness creates an ongoing inability to perform their job will want to take guidance from the recent decision, Naccarato v. Costco Wholesale Canada Ltd. (2010), 2010 CarswellOnt 4108, 2010 ONSC 2651 (Ont. S.C.J.).

When an employee is terminated for frustration of the employment contract, the employer has the onus to prove that the contract has been frustrated. This case sets out what evidence an employer must have to meet that burden. It is important that an employer ensures that this evidence will be available and well documented in an effort to avoid costly litigation, or in the event that litigation ensues, to put the employer in a better position to establish that the employment contract was in fact frustrated.

Naccarato was a retail store clerk who had been absent from work due to illness for almost five years when his employment was terminated for frustration of the employment contract on May 13, 2006. The employer paid Naccarato 24.8 weeks’ notice and severance in accordance with the requirements under the Employment Standards Act. Naccarato was receiving disability benefits and had been receiving such benefits since July of 2002.

In formulating the Naccarato decision, the court followed the reasons in a recent Supreme Court of Canada decision Hydro?Québec v. Syndicat des employé?e?s de techniques professionnelles et de bureau d’Hydro?Québec, section locale 2000 (SCFP?FTQ), [2008] 2 S.C.R. 561, 2008 SCC 43, involving the termination of an employee for chronic absenteeism due to illness. The courts have noted that an employer has the duty to accommodate to the point of undue hardship and must prove that it has done so. This is accomplished by demonstrating that despite measures taken to accommodate, the employee remains unable to perform his or her work in the “reasonably foreseeable future”. The court explained that the duty to accommodate is not intended to “alter the essence” of the employment contract, the employee still has an obligation to perform work in exchange for wages. An employer must consider all factors in the particular circumstances they are dealing with when assessing whether they have fulfilled their duty to accommodate.

In this case, Mr. Naccarato’s physician reported to the employer that he remained depressed with poor function at home and indicated that another psychiatrist was being sought out for further treatment. The physician stated, “At the present condition, I can’t predict when Mr. Naccarato will be able to return to his job”.

The employer considered the response from the doctor, the lengthy duration of absence and the satisfaction of the disability insurer that Mr. Naccarato was totally disabled from performing any occupation, and concluded that it was unlikely that Mr. Naccarato would return to work in the reasonably foreseeable future. Somewhat surprisingly, the court did not agree with the employer’s analysis of the circumstances and noted that the doctor had indicated that Mr. Naccarato was still being treated and that it was the employer’s responsibility to follow-up with the doctor to ask specifically what the likelihood was of him returning to work in the foreseeable future.

Ultimately, the court concluded that the employer had failed to establish that the employee would be unable to return to work in the reasonably foreseeable future and therefore the contract of employment was not frustrated. The court awarded a reasonable notice period of ten months, less the ESA amounts already paid.

The reasoning in Naccarato supports the position that employment can be terminated for frustration of contract, after the employer has met its duty to accommodate, provided that an employer can prove that an employee’s disability prevents them from performing their work in the foreseeable future.

Employers should consider the following factors when assessing whether an employment contract has been frustrated:
1. What are the essential duties of the position the employee occupies?
2. How does the medical condition interfere with the employee’s ability to perform their work?
3. Have measures been taken to accommodate the employee?
4. How long has the employee been absent from work?
5. How many years of service does the employee have with the company?
6. Is the employee continuing to receive disability benefits?
7. Does the medical evidence establish that the employee will be unable to return to work in the reasonably foreseeable future?

Frustration of an employment contract will occur at different points in time based on the circumstances of the employment. For instance, if an employee is a professional ballet dancer and following an accident becomes a paraplegic, frustration will likely occur immediately.
Frustration of the employment contract may be accelerated if the employee is a key employee and cannot be replaced on a temporary basis. For example, if the Chief Financial Officer is absent due to illness, the employment contract may be frustrated earlier than in situations where an employee’s role has less of an impact on the company’s operations.
In Naccarato, the court is clear that the duration of illness is not determinative of finding frustration of an employment contract. Despite the court acknowledging that a 5 year absence due to illness is a significant duration, it nonetheless had to be satisfied with medical evidence that there was no reasonable likelihood that Mr. Naccarato would return to work in the reasonably foreseeable future.

The court in Naccarato suggested that employers should ask the employee’s treating physician, “what is the reasonable likelihood that the employee will return to work in the reasonably foreseeable future?” If the response received is not a clear and direct answer to that question, the employer should clarify any ambiguity with the physician prior to taking the position that the contract of employment has been frustrated.

Employers should also bear in mind that statutory notice and severance must be paid to the employee on termination in accordance with the Employment Standards Act when terminating for frustration of the employment contract for absence due to illness. As a result, employers should consider carefully whether triggering this liability makes economic sense in the given circumstances.