When Can Long-Term Disability Legally End an Employment Relationship?

Employment contracts are typically built on the expectation that both the employer and employee can fulfill their mutual obligations. But what happens when unforeseen circumstances, like a long-term disability, prevent an employee from continuing to work? In such cases, the legal doctrine of frustration of contract may come into play.

What Is Frustration of Contract?

Frustration of contract occurs when an unexpected event—outside the control of either party—makes it impossible to fulfill the terms of the contract. In employment law, this can apply when an employee becomes medically unable to work for an extended and indefinite period of time.

If frustration is found, the employment relationship ends automatically, and the employee is generally entitled only to the minimum termination benefits required under Ontario’s Employment Standards Act, 2000 (ESA). They would not be eligible for common law reasonable notice.

Can Long-Term Disability Lead to Frustration?

Yes—but not always. Frustration due to long-term disability depends heavily on the facts of each case. The courts require clear evidence that the employee is permanently unable to return to work, or that there’s no reasonable expectation of a return in the foreseeable future.

Merely receiving Long-Term Disability (LTD) benefits for an extended time—such as the common misconception of two years—is not, on its own, sufficient proof. The decisive factor is whether the disability makes it impossible to perform the core duties of the job for the foreseeable future.

Establishing Permanent Disability

To determine whether an employment contract has been frustrated, the focus must be on the employee’s medical condition at the time of termination. Medical evidence that arises after termination is only relevant if it sheds light on the employee’s health status at the point of dismissal. A finding of frustration is available where credible medical documentation indicates the employee is permanently or indefinitely unable to return to work.

Employers should ensure that they’ve fulfilled their duty to accommodate the employee to the point of undue hardship, as required by the Ontario Human Rights Code (“the Code”). A premature or insufficiently supported claim of frustration could expose an employer to liability for wrongful dismissal and human rights damages.

What Do the Courts Say?

Key Ontario decisions clarify how courts approach frustration in the context of long-term disability:

• Roskaft v. RONA Inc., 2018 ONSC 2934: The court held the primary question is whether, at the time of dismissal, there was no reasonable likelihood of the employee returning to work in a reasonable timeframe. In this case, the court accepted that the employer had sufficient evidence that the disability was ongoing to reasonably conclude the employee would not return to work. They still received LTD benefits, consistently indicated no improvement in their condition, and remained totally disabled from performing the duties of any occupation.

• Naccarato v. Costco, 2010 ONSC 2651: The court confirmed the key question in assessing frustration is whether there is evidence of permanent/indefinite disability with no reasonable likelihood of return to work in the foreseeable future, not the duration of an employee’s absence. Here, the employee had been off work for 5+ years, but the employer failed to provide sufficient evidence that the disability was permanent or that there was no foreseeable chance of the employee returning. The court ruled in the employee’s favour, finding there was still a possibility the employee could return. The length of the absence alone was not enough to prove frustration. As such, the termination amounted to wrongful dismissal.

• Katz et al. v. Clarke, 2019 ONSC 2188: The employer relied on undisputed medical documentation confirming the employee could not meet the basic duties of his job, now or in the foreseeable future. In such circumstances, the court held the employer's duty to accommodate the employee under the Code had ended. Medical evidence was clear the employee could not return to work. The court found frustration had occurred, and the employment relationship had ended.

• Fraser v. UBS Global Asset Management, 2011 ONSC 5448: The court reiterated that unless there’s an agreement to maintain employment indefinitely despite inability to work, a contract can be frustrated where medical evidence points to a permanent disability, and the employee is unable to work. In this case, the employer relied on medical assessments confirming there was no reasonable prospect of the employee returning to work in the foreseeable future.

Across these cases, one theme is clear: establishing frustration hinges on credible, contemporaneous medical evidence showing no realistic chance the employee will return to work in the foreseeable future. Employers must tread carefully—asserting frustration without sufficient proof can lead to costly legal consequences, including wrongful dismissal and human rights claims.

Final Thoughts

Frustration of an employment contract is a complex legal issue that hinges on detailed medical evidence and a fact-specific analysis. If you're an employer contemplating whether a long-term disability has frustrated an employment contract—or an employee whose job was terminated on this basis—it's critical to obtain legal advice before taking action.

Need help navigating frustration claims? Contact our team for a case-specific review and guidance tailored to your situation.