Denial of Severance Pay for Disabled Employees is Ruled Discriminatory

EP Update - June 24, 2004

It is established law that employers may deem a contract of employment to have become frustrated due to unforeseen circumstances rendering the contract impossible to perform. Frustration of contract has been applied by employers to employees on long-term disability whose prognosis suggests they are unable to return to work even with accommodation. In such cases, employers have relied on an exception in the Employment Standards Act in Ontario which denies severance pay to employees who are terminated due to frustration of contract. However, a recent court decision suggests employers can no longer rely on this exemption as a basis of denying the payment of severance pay to a disabled employee terminated due to frustration of contract..

On January 19, 2004 the Ontario Divisional Court considered this exemption and held that s. 58(5)(c) of the Employment Standards Act (now section 9 of the Ontario Regulation 288/01 under the current legislation, the Employment Standards Act 2000) violates section 15 of the Canadian Charter of Rights and Freedoms (the "Charter"). In ONA v. Mount Sinai Hospital, a Toronto nurse was off work due to a long-term disability. Following a prolonged absence, her employment was terminated in 1988 after thirteen years of service. At the time of termination, she was receiving long-term disability benefits. The hospital invoked s. 58(5)(c) under the version of the Employment Standards Act ("ESA") in existence at that time, arguing it was exempt from severance pay obligations because the employee's contract of employment had become frustrated due to her disability. The employee grieved but the hospital was successful at arbitration. The majority of the arbitration panel found that the provision did not have the effect of depriving all disabled employees of severance pay, but rather only those whose employment contracts had become frustrated. Consequently, the majority held that the decision to deny statutory severance pay was not specifically attributable to disability but rather, due to frustration of contract.

The union challenged the decision of the employer and the case went to the Ontario Divisional Court for judicial review. The issue was whether the terminated nurse had received equal protection and benefit of the law, in accordance with section 15 of the Charter.

The court quashed the decision of the arbitration panel. The court found that the relevant provision of the ESA was unconstitutional and therefore of no force or effect. The court emphasized that the true purpose of severance pay under the ESA was to compensate a former employee for his or her past services. Epstein J. noted that subsection 58(5)(c) (as it was then) was grounded in the assumption that the employee's past contributions in her workplace were somehow worth less because of her disability, which was a violation of the equality rights under the Charter. The court was not satisfied that such a violation could be demonstrably justified as a reasonable limit under section 1 of the Charter. The court held that it was irrelevant to the analysis of discrimination whether or not disabled employees are financially protected by access to long-term disability benefits,

"In my view, the fact that the grievor received benefits under her disability insurance plan is irrelevant to a determination of whether or not it is discriminatory to deny her, on grounds of her disability, a different benefit with a different purpose. Moreover, long term disability benefits are negotiated collateral benefits to which disabled employees may or may not be entitled."

In essence, the court found that the impugned provision of the ESA created a class of workers whose rights were inferior to other employees. The court noted that "denying a benefit based on past contributions to employees who are unable to continue their employment due to disability cannot help but send the message that the contributions of those employees were not as valuable as the contributions of able-bodied employees". Further, to deprive employees of a benefit of employment relating to their investment in the business in which they have worked because of a severe disability, "goes to the very core of the values contemplated in section 15(1) of the Charter". Accordingly, the Court found that the employer could not rely on the impugned section of the ESA to justify not paying severance pay to the employee.

On May 5, 2004, leave to appeal was granted by the Ontario Court of Appeal. However, until judgment is rendered by the Court of Appeal, the Divisional Court decision above reflects the current state of the law.

It is important to note that the wording of the current version of the ESA (the Employment Standards Act 2000) differs from what was in place when the above-noted employee was terminated. Section 9(1) of Regulation 288/01 defines "employees not entitled to severance pay", as including employees whose contract has become frustrated or impossible to perform. Unlike the earlier version of the ESA, section 9(1) does not include "illness or injury" in its wording. As well, s. 9(2)(b) indicates s. 9(1) does not apply (i.e. the exclusion regarding employees terminated due to frustration of contract) if the "frustration of contract is the result of an illness or injury suffered by the employee and the Human Rights Code prohibits severing the employment". It remains to be seen whether the Court of Appeal will provide guidance on whether this difference in language is sufficient to render the current provision of the ESA constitutional.