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Can an Employment Contract be Frustrated by Pandemic?

The Legal Implications of COVID-19 and section 65(1)(d) of the Employment Standards Act: Can an Employment Contract be Frustrated by Pandemic?

One of the main principles of the Employment Standards Act (the “ESA”) is the legislated notice requirements that employees are entitled to be given upon a ‘without cause’ termination. The minimum reasonable notice periods identified in the ESA may be in the form of working notice or payment in lieu of notice.

Given the economic crisis created by COVID-19, employers are facing difficult choices as they decide whether they should close their businesses, temporarily layoff employees, or terminate their employment contracts altogether.

Sections 63 of the ESA sets out the required reasonable notice periods to be provided to terminated employees, and s. 64 describes the additional requirements that employers must meet when they are terminating 50 or more employees at a time.

However, section 65 of the ESA notably provides exceptions to these legislated and well-known notice requirements— one of them being s. 65(1)(d), which states that ss. 63 and 64 do not apply to an employee:

65(1)(d) employed under an employment contract that is impossible to perform due to an unforeseeable event or circumstance other than receivership, action under section 427 of the Bank Act (Canada) or a proceeding under an insolvency Act [emphasis added].”

This exception, if demonstrated to apply to the COVID-19 pandemic, may prove to be very important within upcoming employment-related litigation.

In essence, s. 65(d) legislates the common law doctrine of frustration of contract. Canadian jurisprudence does not provide a comprehensive discussion as to what constitutes frustration of an employment contract. The most notable decision providing guidance on this issue is a 1985 decision from the Supreme Court of British Columbia, Yeager v RH Hastings Agencies Ltd. This case references legal principles from the English National Industrial Relations Court, in Marshall v Harland and Wolff Ltd., in which the test for frustration of employment contract was stated to be the following question:

“Was the employee’s incapacity, looked at before the purported dismissal, of such a nature, or did it appear likely to continue for such a period, that further performance of his [or her] obligations in the future would either be impossible or would be a thing radically different from that undertaken by him and accepted by the employer under the agreed terms of his [or her] employment contract.”

The court in Yeager, citing Marshall, lists five factors that increase the likelihood of an employment contract being deemed frustrated by the courts:

  1. “the presence of a relatively short notice period;
  2. the fact that an entitlement to sick pay has expired (not, however, at all conclusive as a factor);
  3. a short expected duration for the employment in the absence of sickness;
  4. the fact that the employee occupies a key post in which he [or she] must be replaced on a permanent basis; and,
  5. the fact that the period of past employment is relatively short (i.e., seniority brings about an increase in elasticity in the relationship between an employer and employee so that longer periods of absence due to sickness may be deemed acceptable.)”

There is little to no jurisprudence in British Columbia offering an interpretation of s. 65(1)(d). In Skeena Cellulose Inc (Re), 2003 BCSC 27 the court references the section in paragraph 12, and reiterates its wording:

[12]        Section 65 of the Act provides for a number of circumstances where neither the individual termination benefits contained in section 63 nor the group termination benefits contained in section 64 apply; insolvency proceedings is not one of those.

Subsection 65(1)(d) explicitly removes insolvency proceedings as an unforeseeable event or circumstance that renders a contract of employment impossible to perform and which would otherwise trigger the exclusion of an employer’s obligation to pay individual and group termination benefits.  Simply put subsection 65(1)(d) prevents an employer from arguing that being subject to insolvency proceedings allows it to avoid paying benefits under both section 63 and section 64 to all employees who have been terminated, whether subject to a collective agreement or not.

The BC Government’s “Guide to Employment Standards Act & Regulation” provides more practical examples, which include:

“An example of such a change would be the destruction of a worksite by fire or flood. Such events are not foreseeable and would exclude affected employees from compensation for length of service and group termination.

A business failure caused by cancellation of orders, insolvency, landlord eviction or loss of key personnel could result in an employer not being able to provide continued employment to employees in a workplace. These events are considered to be a part of the normal business cycle and cannot be construed as “unforeseen”. A business failure for these reasons would not discharge an employer’s obligation to provide individual compensation for length of service or group termination under sections 63 and 64 of the Act.

Temporary illness, injury or disability is not considered to be an unforeseeable event or circumstance that would discharge an employer’s obligations under sections 63 and 64 of the Act. However, if medical evidence shows that an employee is permanently disabled as a result of illness or injury and will never be able to return to the workplace, this section may apply. The employer should be aware of the duty to accommodate under the Human Rights Code.

This begs the question—would the continuation of the COVID-19 pandemic constitute an unforeseen circumstance rendering an employee unable to perform their contract?

The answer is: it depends. As stated above, a temporary illness would not constitute an unforeseeable event or circumstance. However, the province of British Columbia has declared the COVID-19 pandemic to be a “state of emergency,” and the World Health Organization has proclaimed that it is “deeply concerned,” and has called for “urgent, aggressive actions to combat COVID-19.”

In considering s. 65(1)(d) of the ESA, it seems unlikely that an otherwise healthy employee who contracts COVID-19 would fall within a circumstance in which the doctrine of frustration of contract and s. 65(1)(d) would apply. However, if the ever-evolving responses to COVID-19 results in government-ordered shut down of businesses—I anticipate that a mass termination would constitute an unforeseen circumstance rendering an employment contract unable to be performed. Like most circumstances surrounding these uncertain times, this is a situation in which we need to wait and see.

 

If you have an employment law concern and require legal assistance, please contact our Employment Law Group at Doak Shirreff Lawyers LLP for more information by contacting Nikita Gush at [email protected], or call 250-763-4323, or through our toll-free number at 1-800-661-4959. We can consult with you remotely as needed.