The recent decision of Roskaft v. RONA Inc., 2018 ONSC 2934, sheds some light on when an employer can successfully claim frustration of contract when an employee is in receipt of long-term disability benefits.
The facts of this case were fairly straight forward. The Plaintiff began working for RONA in 2002 in a clerical role. In 2012, he started a leave of absence due to a medical condition. The Plaintiff had access to short term and long-term disability benefits provided by Sun Life. Sun Life approved the Plaintiff’s claim for LTD benefits. RONA had no involvement with the Plaintiff’s LTD claim. In December, 2014, Sun Life allegedly advised RONA that the Plaintiff was “permanently” disabled from his own occupation and any occupation. In September, 2015, three years after the onset of his disability, RONA terminated the Plaintiff’s employment due to frustration of contract. RONA relied on Sun Life’s December, 2014 letter and the fact the Plaintiff continued to receive LTD benefits. He was paid his statutory minimum entitlements under the Employment Standards Act, 2000. The Plaintiff commenced an action for wrongful dismissal. He alleged that RONA failed to obtain information from the Plaintiff which would have indicated his condition was improving at the time of dismissal.
On a summary judgment motion, Pollak J., found that the contract of employment between RONA and its employee of 13 years was frustrated by the employee’s 3 year absence.
Interestingly, Pollack J., concluded that the December, 2014 letter from Sun life, on its own, was insufficient to conclude that the Plaintiff was “permanently” disabled. Notably, there was apparently no reference to “permanent” disability in the correspondence. However, due to the following points, he found that it was reasonable to conclude that there was “no reasonable likelihood” that the plaintiff would return to work within a reasonable period of time:
Sun Life’s determination that the plaintiff was sufficiently disabled to receive long term disability benefits;
The Plaintiff’s post termination representations to Sun Life that his medical condition had not improved; and
The Plaintiff’s continued receipt of LTD benefits.
While employers are usually unable to rely on post termination medical documentation to support their claim for frustration, Pollack J., allowed the representations to Sun Life in as evidence. It is likely this post termination evidence that carried the day for the employer. Pollack J., specifically indicated it directly contradicted the plaintiff’s assertion that he would have provided further evidence had RONA asked and have been able to return to work in a reasonable period of time.
It is apparent that Pollack J., was unwilling to let the Plaintiff have his cake and eat it too. On the one hand, the Plaintiff was reporting to Sun Life that his condition remained stable and unchanged. On the other hand, he alleged that had RONA asked for additional medical information, he would have advised that he was improving. Both were unlikely to be accurate.
It is unfortunate that Pollack J. sidestepped the issue of which party had the obligation it is to submit or request medical information. Notably, the Plaintiff dropped his claim under the Human Rights Code, and so Pollack J., did not have to address the issue of accommodation by RONA. While there is case law that suggests an employer may suffer repercussions if they request information too frequently, many employment lawyers will vehemently argue that simply relying on the conclusion of the LTD insurer is insufficient to justify a claim of frustration without more. This decision would suggest that that a determination by the LTD carrier of ongoing disability, coupled with the continued receipt of LTD benefits may be a sufficient basis for employers to allege frustration of contract.
The Plaintiff’s receipt of long-term disability benefits for three years suggests his disability was severe enough that he was unable to engage in any employment for which he was reasonably suited. Those in the long-term disability industry recognize that this is a stringent test to meet and would be compelling evidence for employers to consider a frustration argument. However, as best practices, employers should request additional information from time to time from their employee and seek legal advice prior to making a final determination. While RONA was ultimately successful, their decision to dismiss the employee resulted in costly litigation.
Two recent decisions from Ontario highlight that unlike fine wine, wrongful dismissal claims do not get better with age. The Superior Court decision of Kennedy v. RBC, and the Court of Appeal decision of Bailey v. Milo-Food & Agricultural Infrastructure & Services Inc, highlight that limitation periods can be live issues where employees engage in protracted pre-litigation negotiations or are provided a long period of working notice. These decisions re-affirm the general rule that once proper notice of an employee’s termination is given, the limitation clock starts to run.
In Kennedy, the defendant brought a summary judgment motion to dismiss the plaintiff’s action as limitation barred. The plaintiff had been an employee of Royal Bank of Canada in Toronto. She moved to work at a Royal Bank in Trinidad and Tobago. For reasons that are unclear, sometime prior to November 27, 2009, the plaintiff resigned from the company. She subsequently retained counsel and attempted to rescind her resignation. On December 17, 2009, RBC determined that the employment relationship was irreparably damaged and advised that they would be offering her a severance package. What followed was several months of back and forth negotiations between lawyers for the parties. Eventually, no settlement was reached and the plaintiff issued a claim sometime after May 26, 2012.
The plaintiff attempted to rely on s. 5(1)(b) of the Limitations Act to claim she had not “discovered” her full claim until July or November 2010, when certain run-off payments from RBC were not received. Nakatsuru J. disagreed. The correspondence between the parties made it abundantly clear that by May 26, 2010, the plaintiff was aware of her claims and was explicitly threatening litigation. In finding that the plaintiff’s claim was limitation barred, the judge outlined several basic principles:
Generally speaking, a cause of action in contract arises when the alleged breach occurs;
In wrongful dismissal claims, the breach occurs when insufficient notice is provided upon termination;
A plaintiff does not need to know the full extent of the damages suffered, but merely that they are aware some loss occurred due to the defendant’s actions;
When addressing the issue of discoverability, the test is objective. It requires a determination of when a reasonable person in the plaintiff’s position with her abilities and circumstances would have been alerted to the elements of the claim; and
Engaging in negotiations to extract a tactical advantage from a party does not stop the limitation clock.
Nakatsuru J. also noted that the plaintiff was represented by counsel prior to her dismissal from RBC. This was far removed from the situation where an unsophisticated lawyer-less ex-employee was strong along by her employer and then failed to commence litigation in a timely fashion. Accordingly, the plaintiff missed the limitation period. Her clam was dismissed.
A similar result was confirmed in Bailey by the Ontario Court of Appeal. In that case, the plaintiff was advised on March 7, 2013 that his position was no longer sustainable. On March 18, 2013, he was given two years of working notice ending on March 22, 2015. He worked until that date and then commenced his claim on December 21, 2015. On a motion for summary judgment, the judge found that the limitation period began to run on the day he was provided notice, March 18, 2013, not the last day he worked. The Court of Appeal confirmed that this was the correct approach to take.
The take away from these decisions is that both employers and employees should be aware of when the notice of termination was given. If the notice is clear and unequivocal, the clock starts to run. Employees who wait too long may find themselves shut out of an otherwise meritorious claim. Similarly, employers should be cognizant that an employee’s attempt to enter into protracted settlement negotiations does not stop the limitation clock. As long as the employer does not take steps that might support a discoverability argument under section 5(1)(b) of the Limitations Act, this may be a strong defence to raise.
With the expansion of Employment Practices Liability Policies (“HR Malpractice Insurance”) and employment practices endorsements in CGL policies, employment related disputes are becoming a growing portion of claim handlers’ workloads. The most common dispute that arises is the provision of proper notice of termination or pay in lieu. Generally, employers are entitled to dismiss an employee for any lawful reason, so long as they provide sufficient notice of termination or payment in lieu of notice. When an employer gives insufficient notice or payment in lieu, an employee may bring a claim for “wrongful dismissal”.
All contracts of employment are presumed to contain an unwritten term requiring “reasonable notice” upon termination. What is “reasonable” will depend on several factors including the employee’s age, length of service, character of employment, and availability of suitable employment in the workforce. Some cases have found particularly long-term employees to be entitled to over 120 weeks of notice upon termination of their employment.
During the period of notice, or pay in lieu of notice, employers are obligated to provide all compensation to the employee that they would have received had they been actively working. This can often include bonuses, commissions, or stock options that would accrue during the notice period.
The presumption of “reasonable notice” can be rebutted by a termination clause. The employer and employee can agree on a specific period of notice required upon termination. This is often lower than what the common law would normally grant. However, whatever period of notice is agreed upon, it must comply with the minimum requires of Ontario’s Employment Standards Act, 2000 (“ESA”).
When doing an initial review of a claim, it is important to determine if there is a termination clause in place, and whether it is valid. Where a clause violates the ESA it is considered void for all purposes and unenforceable. Most termination clauses are unenforceable when the employer:
Attempts to limit payments upon termination and fails to specifically mention entitlement to severance pay, or benefit continuation;
Creates a formula that could result in entitlements less than the ESA minimums;
Contains ambiguous language which fails to explicitly exclude entitlement to reasonable notice;
Fails to provide sufficient consideration when the clause was agreed to.
Determining whether a clause is valid continues to be a difficult exercise. A recent Ontario Court of Appeal decision, Wood v. Fred Deeley Imports, 2017 ONCA 158, found a termination clause to be invalid for failure to mention entitlement to severance pay, despite the employer having paid the required severance pay under the Employment Standards Act 2000. The plaintiff was accordingly entitled to “reasonable notice.” In contrast, in early 2018 the Ontario Court of Appeal released the decision of Nemeth v. Hatch Ltd., 2018 ONCA 7. In Nemeth, the Court found that where a termination clause does not mention specific entitlements, but does not specifically exclude them, the termination clause can be considered valid. Ironically, despite the employer being successful in upholding the provision’s validity, it was unsuccessful in having the clause interpreted as only providing a maximum of 8 weeks of notice as provided under the ESA and was required to pay 19 weeks. In Wood and Nemeth, neither termination clause mentioned entitlement to severance pay. However, in Wood, the clause specifically excluded any other payments that were not explicitly mentioned in the termination clause. In contrast, the clause in Nemeth did not contain this limiting provision and so silence on the issue of severance was not considered fatal.
To further complicate matters, a 2018 decision of Alberta’s Court of appeal, Holm v. AGAT Labs, 2018 ABCA 23, dealt with a clause that said that upon termination the employee would only receive the notice "in accordance with the provincial legislation for the province of employment". The Alberta Employment Standards Code, just like the Ontario ESA, says that an employer must give "at least" the number of weeks set out in the Act, in this case 1 week. The Court noted that the use of “at least” meant it was also permissible under the Act to pay more than the one week. Based on this ambiguity, the Court preferred the interpretation favourable. The Court quoted the Ontario case of Wood and found the plaintiff was entitled to “reasonable notice.” Notably, the Alberta Code and the Ontario Act use the same language.
While none of these decisions necessarily contradict each other based on the specific clauses in each case, they are a cogent example of why the validity of termination clauses continues to be the primary battleground in employment practice claims. When addressing a claim covered by an Employment Practices Liability Policy or endorsement to a pre-existing CGL policy, it is prudent to take a hard look at whether the policyholder has written employment agreements, whether they contain a termination clause, and whether that termination clause is likely to hold up to a challenge. The answers to those questions may significantly alter the insurer’s level of exposure to protracted litigation and an adverse award against their insured.
Devan Marr’s practice has focused on bodily injury, long term disability, statutory accident benefits, and employment claims.
It is a common, if unexpected, scenario. You run a business. For good business reasons, you dismiss an employee. He or she is paid what is owed under their contract of employment and the Employment Standards Act 2000. Next, you get a letter from a lawyer demanding more, or else. You are advised by your Insurer that your Commercial General Liability insurance policy does not cover these sorts of claims. You are responsible for the costs of defending the action. If you are a smaller employer without in-house counsel, these costs could be significant.
Due to situations like this, Employment Practices Liability Policies, often called “HR Malpractice Insurance” has become increasing popular. This line of insurance, although common in the United States, has only recently gained traction in Canada with several large Insurer’s presently carrying some variation of this product. Traditional Commercial General Liability policies often walled off coverage relating to any negligence or errors in terminating employees unless specific optional coverage was obtained. In contrast, EPL policies have been designed specifically to cover and indemnify employers from claims brought by their former (or current) employees for actions arising from the conduct of employers, and its employees, during the course of an employment relationship. The most common claims are wrongful dismissal, harassment, and discrimination by an employer. Although the specific coverage varies from policy to policy, most EPL policies will cover the legal fees associated with defending a claim as well as any damages stemming from the manner in which an employee was dismissed. Notably, EPL policies will usually not cover damages attributed to insufficient notice of termination.
Recent legislative changes and jurisprudence make the purchase of EPL insurance particularly attractive to employers. A recent Court of Appeal decision, Wood v. Fred Deeley Imports, 2017 ONCA 158, found a longstanding termination clause to be invalid for failure to mention entitlement to severance pay, despite the employer having paid the required amounts under the Employment Standards Act 2000. In early 2018, the Court of Appeal released the decision, Nemeth v. Hatch LTD, 2018 ONCA 7, which suggested that unlike in Wood, silence on issues of severance and benefits continuation would not necessarily render the clause invalid where it did not explicitly limit these entitlements. These two decisions are not necessarily incompatible with each other due to the specific facts in each case. However, they have continued to muddy the waters around the validity of termination clauses.
With the Supreme Court of Canada’s explicit endorsement in Hryniak v Mauldin, 2014 SCC 7, that summary judgment motions should be utilized in the employment context, claims can be resolved by a judge within months of the claim being issued. While these motions are an effective way of resolving a dispute, they are resource intensive and add increased upfront costs to the employer. A recent decision on costs by Perell J., in Cosolo v. Geo. A. Kelson Limited, 2017 ONCS 4928 found an employer liable for $96,013.32 in legal fees in addition to its own counsel’s fees, after the employee’s successful summary judgment motion.
While administrative tribunals usually do not provide for an order of costs against an employer, Ontario has removed the monetary limits on claims at the Human Rights Tribunal and Labour Relations Board. Employers are now faced with greater exposure to large awards. A prime example is the Ontario Human Rights Tribunal decision of Fair v. Hamilton-Wentworth District School Board,2013 HRTO 440, which was upheld by the Ontario Court of Appeal in 2016. In that decision, the employer’s failure to accommodate a teacher resulted in an Order for reinstatement, with back pay, after 10 years, in addition to $30,000.00 for injury to dignity, feelings, and self-respect.
With the proliferation of increasingly accessible judicial and administrative forums, litigation arising out of the employment relationship is on the rise. While the best offence is a timely consultation with an employment lawyer prior to a dispute, recourse to an EPL policy will be a welcome advantage the next time your business receives a demand letter.
Devan Marr’s practice has focused on bodily injury, long term disability, statutory accident benefits, and employment claims.