The Ontario Court of Appeal has provided important guidance on two issues that can significantly affect an employer’s liability when an employee’s employment ends: when an illness or disability will frustrate an employment contract, and when employer-provided vehicles, cellphones and other resources constitute compensable employment benefits.
In Hill v. 1359768 Ontario Inc. (B&B Towing), 2026 ONCA 577 the Court considered an employee who had been absent from work for an extended period because of physical limitations. His employer argued that his employment contract had been frustrated because he could no longer perform certain physical aspects of his former position.
The Court rejected that argument.
At the same time, however, the Court reduced the employee’s damages after concluding that a company tow truck and cellphone were primarily work tools rather than employment benefits for which compensation was payable during the notice period.
The decision is significant for both sides of the employment relationship. For employees, it reinforces that an employer cannot simply characterize a disability-related absence or limitation as the end of the employment relationship without properly considering the employee’s essential duties and accommodation. For employers, it provides useful guidance on documenting job duties, accommodation efforts and the distinction between compensation and business equipment.
What happened in Hill v. B&B Towing?
The employee had worked for B&B Towing for approximately 17 years as a road boss, a managerial position involving responsibility for tow truck drivers, vehicle maintenance, scheduling, hiring and other administrative and operational functions.
The position also involved some physical work, including driving and towing.
The employee subsequently went on long-term disability leave. During his absence, the employer’s owners assumed responsibility for his former duties.
When the employee was preparing to return to work, the employer told him that his road boss position had been eliminated and proposed that he return as a tow truck driver at a lower rate of pay.
The employee took the position that the proposed change amounted to constructive dismissal.
The employer responded, among other things, that the employment contract had already been frustrated because the employee’s physical limitations prevented him from performing his former role.
The trial judge rejected that argument and found that the employee had been constructively dismissed. The employee was awarded damages based on a 22-month reasonable notice period.
The employer appealed.
The Ontario Court of Appeal upheld the finding that the employment contract had not been frustrated, but it agreed with the employer on a separate issue concerning the value of the company truck and cellphone.
What is frustration of an employment contract?
Frustration is a legal doctrine that can bring an employment relationship to an end when circumstances arise that make continued performance of the contract fundamentally impossible.
In the context of illness or disability, an employer may argue that an employment contract has been frustrated where an employee is unable to perform the essential duties of the position and there is no reasonable likelihood that the employee will be able to return to work within a reasonable period.
This is a high threshold.
An employee being absent for a lengthy period does not automatically mean that the employment contract has been frustrated. Nor does the fact that an employee can no longer perform every component of a job necessarily establish frustration.
The analysis focuses on the essential duties of the position, the employee’s medical circumstances and prognosis, and whether accommodation is reasonably possible.
The employer bears the burden of establishing frustration.
Pelsmakher Law has previously examined the doctrine in When Can an Employer Rely on Frustration of Contract?, including the relationship between frustration, disability and the employer’s obligations under human rights legislation.
Why did the frustration argument fail?
The Court of Appeal agreed that the employer had not established that the employment contract was frustrated.
A central issue was the actual nature of the road boss position.
Although the employee performed some physical duties, the evidence established that the position was fundamentally managerial. His responsibilities included managing drivers, arranging maintenance, dealing with complaints, hiring and termination, scheduling and administrative work.
The physical aspects of the position were not the essential core of the job.
The medical evidence also supported the possibility that the employee could return to work with appropriate accommodation. The Court therefore concluded that the evidence did not establish that he was permanently incapable of performing the essential duties of the position within a reasonable period.
This distinction is important.
An employee does not necessarily have to be capable of performing every task they performed before an absence or disability. The relevant question is whether they can perform the essential duties of the job, with reasonable accommodation where required.
Accommodation must be considered
The decision also reinforces the relationship between frustration of contract and the employer’s duty to accommodate disability.
Employers have obligations under human rights legislation to accommodate employees with disabilities to the point of undue hardship.
That means an employer should not assume that a lengthy medical absence or physical restriction automatically permits it to declare the employment relationship over.
Before relying on frustration, an employer should understand:
- what the essential duties of the position actually are;
- what restrictions or limitations affect the employee’s ability to perform those duties;
- what medical evidence exists concerning the employee’s prognosis and ability to return;
- what accommodation options have been considered;
- whether modified duties or other adjustments are reasonably possible; and
- whether the employer can establish undue hardship if a proposed accommodation cannot reasonably be implemented.
Pelsmakher Law’s Duty to Accommodate Disability in Ontario: Undue Hardship Explained provides a more detailed discussion of these obligations.
The important point is that accommodation should be considered before an employer concludes that an employee’s disability has brought the employment contract to an end.
A demotion can create constructive dismissal liability
The employer in Hill proposed moving the employee from his managerial road boss position to a tow truck driver position, at a lower rate of pay.
That distinction mattered.
A substantial reduction in compensation, status, responsibilities or other fundamental terms of employment can constitute constructive dismissal, even where the employer has not formally terminated the employee.
Pelsmakher Law has previously examined this issue in Wrongful vs. Constructive Dismissal: What’s the Difference?.
For an employer, changing an employee’s position because the employee cannot perform one aspect of the job is therefore not necessarily a safe alternative to termination. The employer must first determine whether the change is permitted by the employment agreement and whether it could fundamentally alter the employee’s position.
For an employee, being moved to a substantially different or lower-paid position does not necessarily mean that the employer has lawfully changed the terms of employment.
The circumstances matter.
The employer succeeded on the value of the truck and cellphone
Although the employer lost on the frustration issue, it succeeded on an important damages issue.
At trial, the employee had been awarded compensation for the loss of use of a company tow truck and cellphone during the notice period.
The Court of Appeal overturned that portion of the award and removed approximately $125,000 from the damages.
The reason was straightforward but important: the employee had not established that the tow truck and cellphone were employment benefits forming part of his compensation.
Instead, the evidence established that they were primarily tools provided to allow him to perform his job.
The tow truck was a specialized work vehicle. Although the employee was permitted some incidental personal use, the Court concluded that its primary purpose was business use.
The cellphone was treated similarly.
The distinction is important because not everything an employee receives or uses during employment necessarily becomes part of their compensation package.
Employment benefits versus work tools
The case provides a useful distinction between two categories.
An item may be a compensable employment benefit where it provides a personal economic benefit to the employee and forms part of the employee’s overall compensation.
Examples might include:
- a vehicle allowance that the employee can use at their discretion;
- a company vehicle provided substantially as a personal benefit;
- an employer-paid benefit plan;
- certain pension or retirement contributions;
- bonuses or incentive compensation; or
- other contractual benefits that would have continued during the reasonable notice period.
By contrast, equipment supplied primarily so that an employee can perform their work may not be compensable simply because the employee had access to it during employment.
Examples can include:
- specialized work vehicles;
- tools and equipment;
- work computers;
- business-only telephones; or
- other equipment necessary to perform the employee’s duties.
The distinction will always depend on the facts and the evidence.
This issue can become particularly important in executive and professional employment, where compensation may include vehicles, allowances, bonuses, commissions, pension contributions, benefits and other forms of remuneration. Pelsmakher Law’s Executive Compensation resources address compensation issues that can arise when employment ends.
Why documentation matters for employers
One of the practical lessons from Hill is that the way an employer structures and documents a benefit or work tool can become important years later in a wrongful dismissal lawsuit.
Employers should consider whether employment agreements, policies and other documentation clearly identify:
- whether a vehicle is provided primarily for business or personal use;
- whether personal use is permitted;
- whether the employee receives a vehicle allowance rather than a company vehicle;
- whether a cellphone is provided for business purposes;
- whether an item forms part of the employee’s compensation; and
- how the arrangement is treated in payroll and tax records.
Consistency also matters.
If an employer describes a vehicle as a business tool in an employment agreement but routinely treats it as a substantial personal perk, the documentation may not tell the entire story.
Conversely, where an item is genuinely provided to allow an employee to perform their job and is consistently treated that way, an employer may have a stronger argument that its loss should not generate damages during the notice period.
Employers looking to address these issues proactively may wish to review their employment contracts and workplace policies to ensure that compensation, benefits and employer-provided equipment are clearly addressed.
What does Hill mean for employees?
Employees dealing with a disability, medical leave or restrictions should not assume that a lengthy absence automatically ends their employment.
The employer may have a continuing duty to consider reasonable accommodation.
An employee should also be cautious before accepting a substantial demotion or reduction in compensation following a medical leave.
A change in title, duties, compensation or status may potentially constitute constructive dismissal, depending on the circumstances.
At the same time, employees should not assume that every change to their duties constitutes constructive dismissal. The legal analysis is highly fact-specific, and resigning without obtaining advice can create significant consequences.
If your position, compensation or working conditions have changed significantly, it may be worth obtaining legal advice before deciding whether to remain in the position or treat the change as a dismissal.
Pelsmakher Law’s For Employees resource provides additional information about wrongful dismissal, constructive dismissal, severance and workplace rights.
What does Hill mean for employers?
For employers, the decision highlights the importance of making the right assessment before changing an employee’s position following a disability or extended absence.
Employers should consider:
- What are the essential duties of the position? A current and accurate job description can be extremely valuable.
- Can the employee perform those duties? The analysis should focus on essential duties rather than every incidental task.
- What does the medical evidence actually establish? Assumptions about an employee’s future ability to work should not replace appropriate medical information.
- What accommodation has been considered? An employer should be able to demonstrate that reasonable accommodation was genuinely considered.
- Would a proposed change fundamentally alter the employee’s position? A demotion or substantial reduction in compensation can create constructive dismissal exposure.
- Are company vehicles, phones and other resources actually benefits or work tools? Employment agreements and workplace policies should make the intended arrangement clear.
- Is the employment relationship actually frustrated? Frustration should not be treated as a convenient alternative to accommodation or a difficult workplace decision.
Pelsmakher Law provides employment law advice for employers concerning employment contracts, workplace policies, accommodation, terminations, severance and other workplace matters.
What should an employee do after being dismissed following medical leave?
If an employee is terminated, demoted or offered a substantially different position following a medical leave, there are several documents that may be important to preserve.
These can include:
- the employment agreement;
- job descriptions;
- termination or demotion letters;
- correspondence concerning the employee’s medical leave;
- accommodation correspondence;
- compensation information;
- benefits documentation;
- bonus or incentive plans; and
- any written communications concerning the employee’s return to work.
Employees should also be careful about signing a release or accepting a severance package before understanding what rights they may be giving up.
Pelsmakher Law’s severance calculator can provide a preliminary estimate of common-law reasonable notice. It is only a starting point because the calculation can be materially affected by the employment contract, compensation structure, benefits, mitigation and the particular circumstances of the termination.
For additional information, see Termination Pay, Severance Pay and Reasonable Notice in Ontario: What Employees Are Actually Entitled To.
Frequently Asked Questions
Can an employer terminate an employee because of a disability?
Not simply because the employee has a disability or because the employee has been absent from work. Human rights obligations may require the employer to accommodate the employee to the point of undue hardship.
In appropriate circumstances, an employment contract can be frustrated where an employee’s disability makes it impossible to perform the essential duties of the position and there is no reasonable likelihood of returning to work within a reasonable period. The employer bears the burden of establishing frustration.
What is frustration of contract in employment law?
Frustration occurs when circumstances fundamentally prevent the employment contract from continuing to be performed as contemplated.
In the context of illness or disability, an employer may rely on frustration where the employee cannot perform the essential duties of the position and there is no reasonable prospect of returning to work within a reasonable period.
The threshold is high and depends heavily on the medical evidence and circumstances of the particular employment relationship.
Did the Ontario Court of Appeal find that the employee’s contract was frustrated in Hill v. B&B Towing?
No.
In Hill v. 1359768 Ontario Inc. (B&B Towing), 2026 ONCA 577, the Ontario Court of Appeal upheld the finding that the employment contract had not been frustrated.
The Court found that the evidence did not establish that the employee was unable to perform the essential duties of his road boss position within a reasonable period, particularly because the managerial duties were central to the role and accommodation remained possible.
Can a demotion amount to constructive dismissal?
Yes. A substantial unilateral reduction in an employee’s compensation, responsibilities, status or other fundamental employment terms can potentially constitute constructive dismissal.
In Hill, the proposed move from road boss to tow truck driver involved a significant change in the employee’s position and compensation. The finding of constructive dismissal was upheld after the frustration argument failed.
Are company vehicles included in wrongful dismissal damages?
Not automatically.
An employee must establish that the vehicle constituted an employment benefit rather than simply a work tool.
In Hill, the Court of Appeal concluded that the tow truck was primarily a specialized work vehicle and therefore was not a compensable employment benefit during the notice period.
Is a company cellphone an employment benefit?
It depends on how the cellphone is provided and used.
A cellphone that forms part of an employee’s compensation or provides a meaningful personal benefit may potentially be compensable following a wrongful dismissal. A cellphone provided primarily as a business tool may not be.
The employee must establish that the item constituted a compensable employment benefit.
Does an employer have to accommodate an employee before relying on frustration?
The employer must consider its duty to accommodate where disability is involved. Frustration should not be used as a substitute for a proper accommodation analysis.
The precise accommodation obligations depend on the circumstances, including the employee’s restrictions, the essential duties of the position and whether accommodation would result in undue hardship.
How much severance is an employee entitled to after a constructive dismissal?
There is no fixed amount.
Where an employee establishes constructive dismissal and is entitled to common-law reasonable notice, the notice period is assessed based on the circumstances of the employment relationship, including factors such as age, length of service, position, compensation and the availability of comparable employment.
An enforceable employment agreement may also limit an employee’s entitlements.
Pelsmakher Law’s severance calculator provides a preliminary estimate of common-law reasonable notice.
What should an employer do when an employee cannot perform part of their job because of a disability?
The employer should first identify the essential duties of the position, obtain appropriate information about the employee’s functional limitations and prognosis, and consider reasonable accommodation.
The fact that an employee cannot perform one component of a position does not necessarily mean that the employment contract has been frustrated.
Before demoting, terminating or substantially changing the employee’s position, employers should obtain legal advice where the situation is complex.
The broader lesson from Hill
Hill v. B&B Towing demonstrates that employment termination liability can turn on decisions made well before a lawsuit begins.
For employers, accurate job descriptions, a documented accommodation process and clearly defined compensation and equipment arrangements can make an important difference.
For employees, the decision reinforces that a disability-related absence does not automatically terminate an employment relationship. Where an employer proposes a demotion, reduction in compensation or other substantial change following a medical leave, the employee’s contractual and human rights protections should be considered before accepting the change or resigning.
The case also demonstrates why employment benefits should not be viewed simply as salary. Vehicles, allowances, bonuses, benefits, pensions and other forms of compensation can all become relevant when calculating damages following a dismissal, although the employee must establish that the particular item is legally compensable.
If you have been dismissed, demoted or placed in a substantially different role, you can use the Pelsmakher Law severance calculator as a preliminary starting point and then book a consultation to discuss the specific circumstances of your employment.
Pelsmakher Law advises employees and employers across Ontario and Canada on wrongful dismissal, constructive dismissal, disability accommodation, employment contracts, severance and employment-related disputes.
This article provides general information about Ontario employment law and is not legal advice. Employment rights depend on the particular facts, applicable legislation and the terms of the employment agreement. Hill v. 1359768 Ontario Inc. (B&B Towing), 2026 ONCA 577 is a recent decision of the Ontario Court of Appeal, and the law may develop further.
