Employer’s Frustration of Contract Defense Frustrated: Termination for Inability/Restriction to Work can still be Wrongful Dismissal
By: Justin Tam & Sebastian Chern
What happens when an employee becomes unable to perform their job duties as a result of a permanent injury? In some cases, an employer may terminate the employment agreement under the doctrine of “frustration of contract”, which requires three elements:
- a supervening event that was not contemplated by the parties at the time they entered into the contract (e.g. it was unforeseeable);
- the event is not the fault of either party; and
- the event renders the contract impossible to perform or makes performance radically different.
In employment, the supervening event is oftentimes a permanent disability that prevents the employee from returning to work indefinitely or for the foreseeable future. Since the contract becomes impossible to perform, frustration relieves parties from their contractual obligations, including for the employer to provide termination pay. While this may seem simple enough, the devil is in the details. Whether an employment agreement has been frustrated is a nuanced and complex issue, and getting it wrong can result in significant liability for the employer.
Hedrick v. Johnson Meier Insurance
Recently, in the case Hedrick v. Johnson Meier Insurance, 2026 BCSC 1250, the British Columbia Supreme Court addressed circumstances where an employer could not rely on the doctrine of frustration of contract as a result of contributing to the employee’s permanent inability to work for them.
Ms. Hedrick was employed as an Insurance Producer with Johnston Meier Insurance Agencies (“JMI”) from 2014 to 2022. Around the summer of 2021, a representative of one of JMI’s biggest clients began intensely stalking Ms. Hedrick, causing severe mental distress to the extent that she developed suicidal ideations. When Ms. Hedrick brought the matter to her manager’s attention, they were initially sympathetic and promised to “come up with a plan.” However, they failed to take any steps to alleviate the situation. Over time, as JMI failed to revisit Ms. Hedrick’s concerns, the stalking and harassment continued, Ms. Hedrick’s mental health worsened, and the relationship between the parties broke down.
Eventually, Ms. Hedrick contacted WorkSafeBC, and commenced a sick leave on October 4, 2021. Ms. Hedrick qualified for both short-term and long-term disability benefits due to her deteriorating mental health from the continued stalking. On August 24, 2022, WorkSafeBC made a determination that Ms. Hedrick’s mental health injuries had stabilized into permanent conditions due to the actions of both the stalker and her manager. As a result, WorkSafeBC issued a letter permanently restricting Ms. Hedrick from working with JMI.
Following WorkSafeBC’s determination, JMI terminated Ms. Hedrick’s employment on September 16, 2022, alleging frustration of contract.
No Frustration Where Employer Contributes to the Disability
Ultimately, the court found that JMI directly contributed to Ms. Hedrick’s inability to return to work and thus could not rely on frustration and were liable for wrongful dismissal damages. The court reasoned that JMI had failed to provide the reasonable assistance that they could and should have to protect Ms. Hedrick. The courts stated employers have a moral and legal duty to employees to ensure their health and safety and to remedy workplace conditions that are hazardous to the health of its workers. The court suggested that her manager could have advised the Stalker or the client about the unwanted and inappropriate behaviour, explore any inclination that Ms. Hedrick may have had to keep the Stalker’s employer as a client, and/or dissuade her from retaining the client.
Are WorkSafeBC Benefits Deductible from Wrongful Dismissal Awards
The court also considered whether the Ms. Hedrick’s WorkSafeBC temporary wage-loss benefits and permanent disability award could be deducted from her wrongful dismissal damages for payment in lieu of common law reasonable notice.
Since common law severance is meant to represent compensation for wages over a specific period of time, then any compensation for lost wages received by an employee in that same period should be deductible. This prevents plaintiffs from essentially being compensated twice for their wages, once from WorkSafeBC (or another income source such as a new job) and once at common law.
Ms. Hedrick had received temporary wage-loss benefits up until the date that she was found to be permanently disabled, at which point she received a permanent disability award/pension.
The court held that only the temporary wage-loss benefits could be deductible from a wrongful dismissal award. The court drew a clear distinction between temporary wage-loss benefits and permanent disability awards as two forms of compensation with different purposes. On the one hand, temporary wage-loss benefits are clearly meant to replace an injured worker’s lost wages, and are therefore deductible if they overlap with wrongful dismissal damages. On the other hand, permanent disability benefits represent compensation for permanent injuries, the resulting loss of function, recovery, and return to work purposes – not lost wages. Thus, permanent disability benefits are not deductible from wrongful dismissal damages.
Key Takeaways for Employers
- Preventative Action: Employers should ensure that they take preventative steps to address health and safety concerns to avoid any potential claim they contributed to an employee’s injuries, even if by lack of action. These steps should be within reason, as there is a limit to what an employer can and should be expected to do. However, they should be demonstrable and documented.
- Assess the Cause of Injury or Event: If an employee becomes permanently injured and/or restricted from working, employers should assess whether they may have directly or indirectly contributed to that injury or restriction prior to relying on frustration of contract.
- To Terminate or Keep on Leave?: If you cannot rely on frustration of contract to terminate an employee, the employer should conduct a cost analysis on an employee’s potential wrongful dismissal damages against the cost of keeping the employee on leave.
- Termination Clause: Having an employment agreement with an enforceable termination clause would have allowed the employer to limit their liability to something other than common law reasonable notice. Where the clause validly restricts an employee to just the minimum notice or compensation in lieu under the Employment Standards Act, the liability can be substantially less than what they may otherwise have received for common law severance.
Note to reader: we would still recommend caution as there are other potential overlapping obligations under the Workers Compensation Act, Human Rights Code, and Employment Standards Act to consider prior to terminating a disabled employee, which we are unable to address in this short blog post.
- Deductibility of Temporary Disability Benefits vs. Permanent Disability Pension: Even if an employee is receiving compensation from WorkSafeBC, you may not be able to reduce your liability if it is a permanent disability pension.
In sum, navigating your obligations when an employee raises workplace health and safety concerns or becomes unable to perform their job duties can be a complex legal minefield. If you are experiencing such circumstances, we highly recommend speaking with us to minimize your risk.
If you want more information on this topic, you can contact us at:
Sebastian Chern: schern@howardchernlaw.ca
604 424-9688
Geoffrey Howard: ghoward@howardchernlaw.ca
604 424-9686
Justin Tam: jtam@howardchernlaw.ca
604 424-9683
