Frustration of Contract: Employers Face a High Bar
Canadian employers often find it frustrating (both figuratively and literally) when they have employees on prolonged leaves of absence. A recent court decision has confirmed the ongoing challenges associated with ending employment for employees on leave.
The Ontario Court of Appeal’s decision in Hill v. 1359768 Ontario Inc. (B&B Towing), 2026 ONCA 577, provides an important reminder for employers dealing with employees who are unable to perform their jobs because of illness or disability: frustration of contract is not an easy defence to establish.
The doctrine of frustration can be important because, where an employment contract has genuinely been frustrated, the employment relationship comes to an end without the employer having to provide common law reasonable notice. But Hill demonstrates that employers cannot simply point to a lengthy absence, medical restrictions or an inability to perform some job duties and conclude that the contract has been frustrated. Instead, each case needs to be reviewed on a case-by-case basis.
What happened in Hill?
The employee had worked for B&B Towing for approximately 17 years as a “road boss.” He subsequently went on long-term disability leave following emergency surgery.
While he was away, the company’s principals took over his responsibilities. When the employee was preparing to return to work, the employer advised him that his road boss position had been eliminated because of financial constraints. He was offered work as a tow truck driver at a lower rate of pay.
The employee took the position that the position offered was a demotion, and that this amounted to constructive dismissal.
The employer argued, among other things, that the employment contract had been frustrated because the employee’s physical limitations prevented him from performing his former position.
The trial judge rejected the employer’s frustration of contract argument, and found that the employee had been constructively dismissed. The employer appealed.
The Ontario Court of Appeal upheld the trial judge’s conclusion that the contract had not been frustrated.
What is frustration?
Frustration of a contract occurs when, without the fault of either party, circumstances arise that make contractual performance fundamentally different from what the parties originally agreed to.
In the Canadian employment law context, illness or disability can potentially frustrate a contract. However, the threshold for establishing frustration is significant. In particular, the employer must demonstrate that the employee cannot perform the essential duties of the position and that there is no reasonable likelihood of the employee returning to work within a reasonable period.
The Court of Appeal’s decision in Hill emphasized that the disruption cannot simply be temporary, transitory or inconvenient. The party relying on frustration, which is most often the employer, bears the burden of proving it.
Accommodation remains critical
One of the most important aspects of the Hill decision is the connection between frustration and the employer’s duty to accommodate.
Before concluding that an employment contract has been frustrated, an employer needs to consider whether or not the employee can perform the essential duties of the position with reasonable accommodation, short of undue hardship.
In Hill, the Court found that the employee’s physical limitations could have been accommodated. The physical aspects of the road boss position that were affected by his restrictions represented only a portion of the job, while the managerial and administrative responsibilities remained central to the position.
The Court also considered the employee’s actual return to work. His ability to perform the more physically demanding tow truck driver position in January and February 2022 supported the conclusion that his limitations were temporary rather than a frustrating event.
What does this mean for employers?
Hill reinforces that employers should be cautious before relying on frustration as a reason for ending employment.
A lengthy disability leave does not automatically frustrate an employment contract. Nor does an employee’s inability to perform every duty they previously performed.
Employers should instead ask:
What are the essential duties of the employee’s position?
Can the employee perform those duties with reasonable accommodation?
What does the available medical information say about the employee’s prognosis and ability to return?
Are the employee’s restrictions temporary or ongoing?
What accommodation options have actually been considered?
Can the employer demonstrate undue hardship if accommodation is not possible?
The employer should also be careful about making assumptions based simply on the length of an absence.
The broader lesson from Hill is straightforward: frustration is a fact-specific defence, not a shortcut for dealing with a difficult employment situation.
For employers, properly documenting the essential duties of a position, obtaining appropriate medical information, considering accommodation and assessing the employee’s likely return to work are critical steps before concluding that frustration has brought the employment relationship to an end.
Where those steps are not supported by evidence, an employer relying on frustration may find itself facing a wrongful dismissal or constructive dismissal claim instead.