In some cases, employees may face medical conditions, illness, or injury requiring a leave of absence. These employees may be eligible for short-term or long-term benefits based on their insurance plan. However, issues may arise when it is unclear when the employee can return, if at all. An employee’s employment contract may be terminated if he or she can no longer work for the employer in any capacity. When an employment contract is frustrated, the employee can no longer perform the duties set out in the original contract. This would highly depend on the facts of the case, as illness itself is insufficient to find that an employment contract is frustrated. 

This post will discuss what can happen when an employee cannot return to work. We will discuss the factors determining if an employee’s leave may lead to a frustrated employment contract. In particular, we will examine a case example, Nagpal v. IBM Canada Ltd., 2019 ONSC 4547, in which the court found that the employment contract was not frustrated despite the employee’s leave of absence due to illness. This post will provide key takeaways for employees seeking to understand their rights, given a leave of absence for a medical condition, illness, or injury, and for employers seeking insights on addressing issues arising from an employee’s extended leave of absence.

Short-Term or Long-Term Benefits May Be Available For Employees Facing Illness or Injury 

Employees may be entitled to short-term or long-term benefits under their company’s insurance policy, depending on the employment contract. The policy typically sets out criteria for when an employee is entitled to these short-term or long-term benefits under the plan and what they would receive. For example, the benefits may cover some or all of the employee’s salary during the policy’s application, as was the case with Nagpal, which will be discussed further below. Furthermore, the employee will typically need to provide medical evidence of their inability to work due to illness or injury. 

A common scenario is for an employee to receive short-term or long-term benefits under an insurance provider while on a leave of absence. However, suppose the leave of absence is lengthy, and there is no foreseeable return to work. In that case, there may be frustration with the employment contract, meaning that the contract’s original terms can no longer be performed, and the contract is invalidated.

Overview of Frustration of Contract – When the Original Contract Can No Longer Be Performed 

Frustration of contract means that the original contract can no longer be performed, and it, therefore, cannot be upheld. This principle can also apply to employment contracts, and a common circumstance is when an employee cannot return to work for the foreseeable future.

However, frustration of contract should be understood carefully and analyzed based on the case’s specific facts because if an employee was terminated on this basis, there may be a wrongful dismissal case if the contract was found not to be frustrated at all.

When Is An Employment Contract Frustrated Due To An Employee’s Leave Of Absence?

An employment contract may be frustrating if the employee is not likely to return to work within a reasonable time. If an employer claims that the employment contract was frustrated by an employee’s illness or incapacity, this would only be successful given the context. In particular, an employee’s illness or incapacity would only frustrate the contract if it was likely to continue for such a period of time that the employee would never be able to perform the intended duties set out in the original contract. An employment contract could also be frustrated if it would be unreasonable for an employer to wait any longer for the employee’s recovery and return to work. In its analysis, the court must look at the connection between the term of incapacity or absence, the duration of the contract, and the nature of the employee’s duties.

In some cases, if the employer provides arrangements for long-term disability plans, this may suggest that the employer has a tolerance for long absences due to illness. In these cases, a longer absence may be required to find that the employment contract was frustrated. 

These considerations will be illustrated in the Nagpal case below, in which the court found that the employment contract was not frustrated due to the employee’s medical leave.

Employer Must Prove Employee Cannot Return To Work Within Reasonable Time

In Nagpal, by the time of the trial, the employee had worked for the employer for 23 years. He had received positive performance reviews until 2013 when he began his new leadership role and faced challenges with a difficult employee. He claimed that he was experiencing severe stress and mental health challenges during this time and raised this with management.

By March 2013, the employee called in sick with a recommendation from his doctor to take six weeks off. The employer referred him to the company’s insurance provider for short-term disability benefits. The plan set out that he would be compensated fully for his salary for the first 26 weeks of leave. He was required to provide evidence of his illness or injury that would prevent him from performing his essential duties. Under the plan, if the benefits are denied, the employee can choose to return to work or appeal the decision and take an unpaid leave of absence until the appeal is concluded. In this case, if the employee did not appeal the decision within one month of the start of unpaid leave, he was expected to return to work immediately, or it could be assumed that he had resigned. 

The employee provided evidence from his psychiatrist and psychologist, who said that he struggled to cope with stress, experienced cognitive impairment, and limited energy for an unknown duration. The doctors did not recommend that he return to work immediately. However, by July 2013, the employee was informed that his short-term disability benefits would be terminated. He did not appeal the decision, and the employer advised that this would mean that he was resigning from his position. The employee’s position remained that he required a leave of absence, as recommended by his doctors, and he was not prepared to return to work then.

In this case, the court found that the employer had not provided or sought out evidence that the employee could not return to work within a reasonable time. The employer could not rely on the fact that the employee could not work several years later, as this was not known until after the termination. Furthermore, the employer’s benefits plan included long-term benefits, suggesting that a longer absence period was required to find an employment contract would be frustrating. There was also no evidence that the employee’s absence had negatively impacted the business. The employer also made no efforts to inquire further and gather more information on the employee’s illness and the duration of his leave. Finally, when the employee was terminated, there was little evidence that the illness was permanent or long-term. As a result, the employee’s leave did not frustrate the contract. 

As the contract was not frustrated, the employee was wrongfully dismissed and entitled to damages from the employer. 

Contact Haynes Law Firm in Toronto for Advice on Termination and Wrongful Dismissal Claims

Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from termination. For employees, our goal is to ensure that they understand their rights and receive maximum compensation in wrongful dismissal cases. Haynes Law Firm also assists employers in avoiding liabilities that may arise from terminations that are not permitted by the legislation. We are dedicated to finding the best resolution for you.To book a consultation, please contact us online or by phone at 416-593-2731.