Length of Long-Term Disability Benefits Can Frustrate Employment Contract

by & Ava Z Moradi, JD, Editor, First Reference Inc.

The Ontario Superior Court of Justice recently held that the continued receipt of long-term disability benefits can legally frustrate an employment contract.

The facts

A worker commenced his employment with the predecessor company of the employer in September 16, 2002. About ten years later, on September 28, 2012, the worker started a short-term disability (STD) leave of absence for a medical condition, which eventually turned into a long-term disability (LTD) leave as a result of the employee’s disability and inability to work.

In this case, the STD and LTD benefits were provided to the employee, subject to the terms of the employment benefit plan through a third-party insurer. According to the evidence submitted at trial, the third party insurer administers claims on behalf of the employer and makes all decisions and payments with respect to employee claims. The employer has no involvement in the third party insurer decision process and cannot legally challenge its decisions. Employee claims are submitted to the third party insurer and the employer has no access to the medical files. The employer is told when the STD and LTD claims are approved, but is not given the reason for the employee’s absence.

The third party insurer’s role is to manage the disability claim and adjust the file according to the available medical evidence.

On October 20, 2014, the employee completed a Return to Work Form which stated that he was unable to work and that his return to work date was “N/A.” The form was stamped by his general practitioner. Therefore, on December 5, 2014, the insurance provider advised the employer in writing that the worker was permanently disabled from his own occupation and any occupation, for that matter.

On September 15, 2015, after reviewing the employee’s file and the letter dated December 5, 2014, the employer terminated the worker claiming frustration of the employment contract and that the employee would continue to receive LTD benefits provided he remained totally disabled as defined in his insurance plan and that the employer would pay him his minimum entitlements pursuant to the Employment Standards Act, 2000.

The worker sued his former employer for wrongful dismissal, arguing that the employer failed to follow up with him before terminating his employment. Had the employer asked, the employer would have found out that the worker’s condition was improving at the time of the dismissal.

The employer filed a motion for summary judgment seeking to dismiss the worker’s claim for wrongful dismissal.

The analysis

The employer argued that at the time of the termination, neither the employee nor the third party insurer had provided any information to them to change a conclusion that the employee was permanently totally disabled and that there was no reasonable likelihood that he would be returning to work within a reasonable period of time.

The employer also argued that it had relied on determining that the employment contract was frustrated given the post-termination evidence from the insurance provider where the worker stated in January 2016 and February 2017 that his medical condition had not yet improved.

To this, the Court relied on the case of Ciszkowski v. Canac Kitchens, a division of Kohler Canada Co., 2015 ONSC 73, where it stated that:

[156] Frustration of an employee’s contract is always established with reference to the time of dismissal. In pleading frustration, an employer is entitled to rely on post-termination evidence not in its possession at the time of dismissal so long as it relates to the nature and extent of an employee’s disability at the time of dismissal. The “evidence subsequently disclosed” should shed light on the nature and extent of the employee’s disability at the time of an employee’s dismissal. An employer is not entitled to rely on evidence that relates to the post-termination nature and extent of an employee’s disability if that evidence is not relevant to the dismissal date. To allow an employer to succeed in pleading frustration on the basis of such evidence would be neither fair nor reasonable.

With this in mind, the Court was faced with determining “whether, on the basis of the evidence before it, a determination can be made on whether at the time of the Plaintiff’s termination of employment there was no reasonable likelihood that he would be able to return to work within a reasonable period of time.” [Bolded in original]

On the totality of the evidence that the insurance provider had determined the worker was sufficiently disabled to receive LTD benefits, the worker’s post-termination statements that his medical condition had not improved, and with the worker’s continued receipt of LTD benefits, the Court found that it was reasonable for the employer to conclude that at the time of termination of employment, there was no likelihood of the worker returning to work within a reasonable period of time.

Ultimately, the Court dismissed the worker’s application for wrongful dismissal.

Takeaways for employers

The doctrine of frustration applies when a party to a contract made the performance of the employment contract impossible and the obligations of the parties are therefore discharged without penalty.

This case illustrates that an employee on LTD can be terminated from employment if it believes there is no reasonable prospect the person will ever return to work in the foreseeable future. In legal terms, the employer claims the employment contract has been “frustrated.” However, you should always proceed with caution and not assume because the employee has been on LTD for a period of over two years or is disabled that an employment contract is frustrated. It depends on the facts of each case.

As best practice, employers should keep the lines of communication open when an employee is on leave due to a disability or on LTD, they should also request additional information from time to time from the worker directly, on the prognosis of their medical condition, and seek legal advice prior to making a determination of frustration to terminate the contract.

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