• Ontario Court Clarifies Test for Frustration of Employment Contracts Due To Illegality
  • November 28, 2011 | Authors: Sarah C. Crossley; Michael Kotrly
  • Law Firm: Norton Rose Canada LLP - Toronto Office
  • The Ontario Divisional Court was recently faced with the question of an employer’s right to terminate an employee for cause when an employee’s continued employment is illegal. In distinguishing the test for frustration for reason of illegality from cases where an employee is ill or injured, the Cowie1 decision will provide future guidance for employers, especially for those whose employees must be licensed or registered to carry out their duties, such as employees of financial institutions.

    The plaintiff had worked for the defendant casino in a variety of security positions since 2000. All his positions required him to be licensed by the Gaming Control Act, 1992. In August 2007, however, the Private Security and Investigative Services Act, 2005 (PSISA) came into effect. The PSISA provided that no person could act as a security guard without the appropriate PSISA licence and no person is eligible to hold such a licence unless the person “possesses a clean criminal record.” The PSISA applies to the casino industry even though most casino employees are already licensed under the Gaming Control Act.

    Employees already performing security functions were provided a year’s grace, and as such required a licence by August 23, 2008. As found by the trial judge, the plaintiff had not learned until June 2008 that he would need a PSISA licence. The plaintiff applied for the licence around June 2008, which was rejected on August 13, 2008, as he had been convicted of break and enter and had not received a pardon.

    On August 25, 2008, the casino terminated the plaintiff’s employment without notice or pay in lieu of notice by virtue of frustration of his employment contract: as at August 23, 2008, the plaintiff was unable to perform his duties as team leader in security. In addition, no other positions were available at the casino which the plaintiff was qualified to perform. The casino advised the plaintiff that if he received a pardon and a security licence under the PSISA he would be eligible for re-employment in security positions available at that time based on his experience, skills, knowledge and ability.

    At the time of termination, both parties understood it could take up to two years to obtain a pardon. The plaintiff applied for a pardon sometime after he was terminated, but surprisingly obtained the pardon in December 2008, much earlier than everyone’s expectations. However, the plaintiff never applied for his PSISA licence. Instead, on May 15, 2009, the plaintiff commenced an action against the casino for damages for wrongful dismissal.

    The trial decision
    The trial judge found that the plaintiff was wrongfully dismissed and entitled to the equivalent of eight months’ pay in lieu of notice and benefits.

    The trial judge found as a matter of fact that the plaintiff required the licence to work in his position as team leader and that he was not eligible to be licensed at the time of termination.

    However, she also concluded that the employer had an obligation to: (a) suspend the plaintiff; (b) hire a temporary replacement; and (c) grant the plaintiff a “reasonable period of time to obtain the pardon.” Relying on the fact that the pardon was obtained within four months, the trial judge concluded that suspension was an option the casino should have taken.

    The decision on appeal
    The Divisional Court allowed the appeal and dismissed the action against the casino. The court concluded that the change in the law in respect of licensing and the plaintiff’s inability to obtain a PSISA licence rendered the employment contract frustrated.

    The court agreed with the casino’s submission on appeal that the question of whether a contract was frustrated requires an assessment of the situation at the time of termination, rather than considering information only available after the termination (or based on events that could transpire after the termination). The court concluded that there was no evidence relevant to the period up to the plaintiff’s termination that would support the conclusion that plaintiff’s failure to obtain the PSISA licence was only a “temporary inconvenience” (emphasis in original).

    The Cowie decision confirmed that the law of frustration applies to the employment context. More importantly, the court also recognized that most frustration cases in this context arise where an employee is unable to work due to illness or injury. In such cases, the question is whether the employee’s condition prevents “the performance of the essential functions of the employee’s job for a period of time sufficient to say that, in a practical or business sense, the object of the employment has been frustrated.”2 There are fundamental distinctions to be made when discussing frustration due to illness or injury and frustration due to illegality. For one thing, human rights concerns are more likely to arise in illness/injury cases, whereas they are less likely to arise in illegality cases. Indeed, the Ontario Regulations under the Employment Standards Act, 2000 provide that termination pay and severance pay are still due where a contract’s frustration arises from an employee’s illness or injury.3

    As such, in allowing the appeal the panel was solely concerned about how frustration is approached in the context of illegality. The court noted, "In cases where the performance of personal services became illegal due to a change in the law, the focus is... on the impossibility of the services contemplated under the contract continuing to be performed due to a change in the law." As a result, where the provision of services can no longer be done legally, "[T]he contract is immediately frustrated."

    The court’s decision was not explicit, however, in how it would have addressed the question of frustration if it was evident on termination that the illegality would only transpire for a brief and definite period. The court took pains to point out in this case that the frustration would occur "for an indefinite period of time" or "for what appears to be a lengthy and open-ended period of time" (emphasis added). It did not expressly comment, however, on what the proper course of employer conduct would have been where the issue of illegality could be accommodated or resolved within a very short period of time.

    1 Cowie v. Great Blue Heron Charity Casino, 2011 ONSC 6357 (Div. Ct.). Sarah Crossley, a partner in employment and labour, acted for the Casino. Michael Kotrly, an associate in litigation, assisted Ms. Crossley at the appeal.

    2 Reasons, at para. 24, quoting Wightman Estate v. 2774046 Canada Inc., 2006 BCCA 424 at para. 21.

    3 See ss. 2(3) & 9(2)(b) of Ontario Regulation 288/01. It is unclear whether the test for frustration pursuant to the ESA is the same as the test under common law: see Heynen v. Frito Lay Canada Ltd. (1999), 45 O.R. (3d) 776 (C.A.) at para. 23, but see also Algonquin Lumber Inc. v. Industrial, Wood and Allied Workers of Canada, Local 1000 (Termination Grievance) [2001] O.L.A.A. No. 620 at paras. 28-29.