Can employers terminate a soon-to-start employment relationship due to COVID-19?

Legally, no. Practically, let's discuss. Here's why.

Amidst the COVID-19 related business disruptions, employers may be finding that it is practically and logistically difficult to onboard new hires. Worse yet, employers may find the work that was expected to flow in has come to a halt. In light of these challenges, employers may wish to rescind the employment agreements. The question is, can they do that?

The starting point is that an employer's termination of a soon-to-start employment agreement is still a termination. It will give rise to severance-like entitlements for the employee. This means liability for the employer. The extent of the liability depends on factors including the employee's damages as a result of the loss of anticipated employment, whether the employment is for a fixed term or indefinite basis, the employee's re-employment prospects. The liability exposure may be significant.

There may be limited exceptions.

Prior to making any decision, employers should review the specific terms of the employment agreement. Are there any clauses that would allow the employer to set aside the contract? Although not common in employment agreements, an employer may have an "out" if their agreement contains either a force majeure clause or a material adverse change ("MAC") clause.

Force majeure clauses allow parties to a contract to be excused from performance where a specified event or occurrence take place. MAC clauses are more general, and allow for the termination of a contract in the event of a "material adverse change in circumstances". Both kinds of clauses are difficult to invoke. For either clause, the employer would have to prove that COVID-19 makes performance of the initial agreement impossible. Given the uncertainty around COVID-19 and its long-term impact on business, there will be complications in meeting that threshold. If your employment agreement contains one or both clauses, speak to your employment lawyer before acting on the clause to cover all legal and business considerations.

If the employment agreement does not contain force majeure or MAC clauses, the legal concept that might permit an employer terminating a soon-to-start employment agreement is frustration of contract.

Under the common law, a contract may be frustrated when an unforeseen event occurs that makes performance of the contract radically different or impossible. The unforeseen event cannot have been either party's fault. A frustrated contract will be automatically terminated.

For frustration to operate, it is not enough that performance of the employment contract is more onerous or unreasonably harsh. There must have been a radical transformation of the circumstances. In past cases, economic difficulties or lack of profit, even where not foreseeable, have not been sufficient for the Court to find that the contract was frustrated.

In line with the common law, the Ontario Employment Standards Act, 2000 provides that an employer will not have to provide termination notice or severance to an employee where the contract becomes impossible to perform or has been frustrated by an unforeseeable event or circumstances (s. 2(1)(4), O Reg 288/01). However, discontinuation of operations, economic hardship, or even long-term illness of an employee does not constitute frustration.

When will an employment contract be frustrated?

The Ontario Superior Court of Justice in Hoekstra v. Rehability Occupational Therapy Inc., 2019 ONSC 562 recently confirmed that an employment contract will be frustrated when "there is no reasonable likelihood of the employee being able to return to work within a reasonable time". In determining the likelihood of return to work, the Court will take a contextual approach and consider all of the unique facts of the case. There is no magic number as to when a contract will be frustrated - it will depend entirely on the individual circumstances.

For example, an employment contract was frustrated in one case where a fire destroyed the company's facility (Polyco Window Manufacturers Ltd. v. Saskatchewan (Director of Labour Standards),1994 CanLII 5008 (SK QB)), yet not in another case where the company's premises were destroyed by fire, as the employees could work from home or temporary arrangements could be made while the facility was being reconstructed (Davidson c. Craig Manufacturing Ltd., 2008 NBQB 302 (CanLII), 68 C.C.E.L. (3d) 223 (N.B.Q.B.), aff’d 2009 NBCA 42 (CanLII)). These cases demonstrate the fact-driven approach to frustration.

Supervening events, such as natural disasters or pandemics, might result in frustration of a contract. The question will always be whether the supervening event altered the nature of the party's obligation under the contract to such an extent that it is radically different from what was initially agreed to. We are not aware of any Ontario employment cases where this has been successfully argued yet.

Clearly, frustration is the rare exception, not the norm.

What does that mean to employers today? COVID-19 is certainly global, massive and uncharted - but whether it will pass the exception test will have to be on a case-by-case analysis.

For businesses where the majority of the workforce can work from home, business continuity is by and large possible. If the new hire is onboarding to perform such a role, COVID-19 may not be a sufficient exception. Even if the new hire is onboarding to a role that cannot be performed at home, it is relevant that many jurisdictions are offering to provide job protected leave, paid or unpaid, along with other enhanced employment benefits, for anyone impacted by COVID-19. Further, by looking at the parts of the world hit first by COVID-19, it appears that a gradual return to business as usual can be expected. Wuhan, ground zero of this global outbreak, began partial resumption to normalcy on March 18, 2020, three months after it became known to the world. Meaning, while it may take weeks or months for any sense of normality to be restored, the disruptions are not projected to be infinite in time.

It seems then, whether COVID-19 can trigger frustration would have to be assessed based on the ability of the business to continue operations and the ability of the employee to perform job duties as originally anticipated.

For businesses where continuity is simply not an option, COVID-19 may be a frustration trigger. This may include restaurants and bars being forced to close, as well as hair salons and the like that are not being forced to close but nonetheless as a matter of practicality have had to close shop. However, once again, it is relevant that many jurisdictions are offering to provide job protected leave, paid or unpaid, along with other enhanced employment benefits, for anyone impacted by COVID-19.

Uncertainty as to how COVID-19 will unfold in Canada adds to the employer's difficulty in assessing whether they may claim that the employment agreement has been frustrated.

Thus, for COVID-19, the conclusion remains, frustration is the rare exception, not the norm.

Legal analysis aside, consider a practical approach. Consider altering some terms of the employment contract instead, such as changing work circumstances, job description, scope of work, and even the start date. Creatively work with the new hire to find a mutually beneficial way to navigate through the circumstances. Where both the employer and the new hire can agree to amended terms of employment, be sure to document those changes properly.

As always, employers are encouraged to speak to their employment lawyers and learn what the legal and business considerations may be. Lee Workplace Law has extensive experience in employment matters and can help.