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As a result of a very recent decision of the Ontario Divisional Court, employers will no longer be able to refuse to pay statutory severance to employees whose contracts of employment have been frustrated by disability.

A. INTRODUCTION

Subsection 58(5)(c) of the former Employment Standards Act,1  ("ESA") provided that an employee who was otherwise qualified would not be entitled to severance pay if his or her employment contract had "become impossible of performance or frustrated" by illness or injury.  On January 19, 2004, the Ontario Divisional Court, in Ontario Nurses' Association v. Mount Sinai Hospital,2  held that subsection 58(5)(c) was unconstitutional because it violated the equality guarantees in section 15(1) of the Canadian Charter of Rights and Freedoms.  Specifically, the Court held that subsection 58(5)(c) violated the right to equality under the law without discrimination based on mental or physical disability.  A similar provision appears in section 9 of Ontario Regulation 288/01 under the current legislation, the Employment Standards Act, 2000 (the "ESA 2000").

B. FACTS

The employee, Ms. T, began her employment with Mount Sinai Hospital in Toronto as a neonatal intensive care unit nurse in June 1985.  In January 1996, Ms. T discontinued her work with the hospital due to illness.  Two and a half years later, the hospital terminated her employment because of her lengthy, innocent absenteeism.  At the time of her termination Ms. T was in receipt of long-term disability benefits.  Prior to her termination, her doctor had indicated that Ms. T could eventually return to work, but was unable to provide an estimated date of return.

Relying upon subsection 58(5)(c) of the former ESA, the Hospital did not pay Ms. T severance pay at termination.  In the hospital's view, Ms. T's employment contract had "become impossible of performance or frustrated" and therefore no severance entitlement arose.

Ms. T filed a grievance with respect to the hospital's denial of severance pay.  A Board of Arbitration agreed with the hospital, concluding that Ms. T's contract of employment had been frustrated due to her prolonged illness and that pursuant to subsection 58(5)(c) she was not entitled to severance pay.3   In reaching this conclusion, the Board considered the hospital's duty to accommodate Ms. T to the point of undue hardship, as required under Ontario's Human Rights Code R.S.O. 1990 c. H. 19.  The Board held that the duty to accommodate did not require the hospital to maintain Ms. T's employment for an indefinite period.  This decision was consistent with the vast majority of arbitral cases dealing with innocent (or non-culpable) absenteeism.

The Board was later reconvened4  and asked to determine whether subsection 58(5)(c) of the former ESA violated the equality guarantees in section 15(1) of the Charter.  The Board concluded that the subsection was constitutional as it did not deprive all disabled employees of severance pay, only those whose employment contracts could no longer be fulfilled.  The Board held that severance pay was denied based on the frustration of the contract and not the disability of the individual employee.

C. DECISION OF THE DIVISIONAL COURT

The Court overturned the decision of the Board and held that subsection 58(5)(c) of the former ESA was unconstitutional as it violated the equality guarantees in section 15(1) of the Charter.

The Court described severance pay as an "earned benefit" which is intended to recognize an employee's past service.  The effect of the subsection was to deprive employees of this earned benefit, to which they were otherwise entitled, by reason of disability.  The Court wrote that, "to deprive a person of a benefit of employment relating to their investment in the business for which they have worked, based on severe disability, goes to the very core of the values contemplated in subsection 15(1) of the Charter."

The Court found that the subsection treated severely disabled employees differently from all other employees.  It rejected the argument that the differential treatment was based only on frustration of contract and held that the differential treatment was "based exclusively on frustration because of serious and prolonged disability."  The Court expressed specific concern that the subsection deprived the most disadvantaged group of disabled employees an earned benefit as it denied severance pay exclusively to those employees who "are so seriously disabled that they are not able to continue their current employment."

The denial of this earned benefit was found to devalue this most disadvantaged group of disabled employees.  The Court held that the denial was based on assumptions and negative stereotypes that the contributions of this group are worth less than the contributions of other employees.

While the language of the current legislation differs from the former subsection 58(5)(c), it has the same effect.  It is very likely, therefore, that the Court's decision on the constitutionality of subsection 58(5)(c) will apply equally to the current provision.

D. IMPACT ON EMPLOYERS

The decision of the Court may have a significant impact on employers who want to terminate employees who have been absent for a prolonged period as a result of an illness, injury or disability.

It is important to note that the Court's decision should not prohibit the termination of an employee for innocent absenteeism, a common concept in both unionized and non-unionized contexts, or otherwise prevent an employer from claiming that an employee's contract of employment has been frustrated.  Instead, the decision prohibits an employer from refusing to pay statutory severance pay in circumstances where the employer claims that an employee's contract of employment has been frustrated by his or her inability to attend work.

Severance pay is calculated under the ESA 2000 as one week's pay per year of service to a maximum of 26 weeks (provided the employee has a minimum of 5 years' service and the employer has a minimum annual payroll in Ontario of $2.5 million or is terminating 50 or more persons within a 6-month period).  As a result of this decision, employers will want to factor in the cost of severance pay, which for long-service employees can be significant, when determining whether to terminate an employee for frustration of contract.

The decision of the Divisional Court may also have broader implications.  By confirming that severance pay is an "earned benefit" to which an employee is entitled because of past contributions to his or her employer, the Court may have created a stepping stone for future litigation.

In addition to the obligations imposed by employment standards legislation, employers are generally required to give employees reasonable notice of termination, unless they are terminated for just cause or their employment contract has become frustrated.  The concept of reasonable notice takes into account an employee's past service with his or her employer. Based on this retrospective aspect of reasonable notice and the Court's decision, it may now be possible for long-service employees to argue that they are entitled to such notice as an earned benefit upon termination, even if their employment contracts have been frustrated due to their inability to attend work.

1. R.S.O. 1990, c. E.14
2. [2004] O.J. No. 162
3. (2000), 91 L.A.C. (4th) 215 (Ontario) (Devlin)
4. (2002), 107 L.A.C. (4th) 211 (Ontario) (Devlin)

The purpose of this document is to provide information as to developments in the law.  It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

©OGILVY RENAULT 2004 - All Rights Reserved

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