Case In Point
Employer Conduct, Frustrated Contracts, and the Limits of Benefit Deductibility
Date: August 13, 2026
In Hedrick v. Johnston Meier Insurance Agencies Ltd., Justice Bennett of the Supreme Court of British Columbia addressed two issues that will be of interest to employers: when an employer may rely on frustration of contract, and when statutory benefit payments may be deducted from wrongful dismissal damages. The Court held that an employer cannot rely on frustration where its own conduct contributed to the employee’s inability to work. It also held that WorkSafeBC benefits paid for permanent injury and loss of function, as opposed to wage loss, were not deductible from wrongful dismissal damages. Although a British Columbia decision, the deductibility analysis is relevant to Ontario employers because the same basic framework applies here.
Background
The plaintiff was hired in 2014 as an insurance producer by Johnston Meier Insurance Agencies Ltd. (JMI), reporting to a branch manager. During her employment, a contact at one of JMI’s largest clients began stalking and harassing her. The plaintiff reported the stalking to the branch manager, who put basic office safeguards in place. As the stalking intensified, however, he failed to follow through on any meaningful plan to protect her, and an eventual exchange about the situation was, in the Court’s words, “victim-shaming.”
The branch manager then unilaterally reduced the plaintiff’s monthly draw, citing commission-target concerns, and responded dismissively to her request for vacation time, telling her to “drop her attitude.” JMI’s human resources department referred her to WorkSafeBC. The plaintiff went on sick leave on October 4, 2021 and was subsequently diagnosed with PTSD and major depressive disorder, for which she received WorkSafeBC disability benefits.
On August 24, 2022, WorkSafeBC determined that the plaintiff’s permanent psychological injuries were attributable in part to both the stalker and the branch manager’s management failures, and permanently restricted her from returning to work at JMI. After reviewing that determination, JMI terminated the plaintiff on September 16, 2022 on the basis of frustration of contract, and she sued for wrongful dismissal.
Decision of the BCSC
Frustration
Justice Bennett grounded the employer’s duty in s. 23 of the Workers Compensation Act, which obligates a supervisor at all times to ensure a worker’s health and safety and to remedy known hazards. As the plaintiff’s supervisor and the only person other than the police who could reasonably have assisted her, the branch manager had the authority and responsibility to address the stalker’s conduct but did nothing beyond seeking permission to consult his wife, which he never acted upon.
Combined with the unannounced pay reduction, the dismissive response to the plaintiff’s accommodation requests, and HR’s compounding failures, the Court concluded that JMI’s own cumulative conduct, rather than the stalker’s misconduct alone, directly contributed to the plaintiff’s injuries and inability to return to work, a finding fatal to its frustration defence.
Drawing on Aldergrove Duty Free Shop Ltd v MacCallum, the Court confirmed that frustration requires:
- a qualifying supervening event not contemplated by the parties
- that is not the fault of either party
- that renders performance of the contract radically different from what was undertaken
While the plaintiff conceded the first element, the defence failed on the second, because JMI’s own conduct materially contributed to her incapacity.
Deductibility of WorkSafeBC Benefits
JMI sought to deduct the plaintiff’s WorkSafeBC benefits, contending that failing to do so would allow her to double-dip. Applying IBM Canada Limited v. Waterman, the Court explained that disability benefits give rise to a “compensating advantage problem” and are deductible only where the benefit would not have been received but for the breach, or where it is intended as indemnity for the loss the breach caused.
Justice Bennett held that WorkSafeBC benefits can serve dual purposes, requiring a fact-specific analysis. Benefits paid before August 29, 2022, which were directed primarily at wage-loss replacement, would have been deductible. However, once the plaintiff’s condition was deemed permanent, the benefits paid from August 29, 2022 onward were not deductible, because they were received on account of injury and loss of function rather than lost wages.
Key Takeaways
WSIB Benefits Are Not a Blanket Set-Off Against Wrongful Dismissal Damages
Although this case arose in British Columbia, its lesson on benefit deductibility is directly relevant to Ontario employers. In Ontario, Loss of Earnings (LOE) benefits and Non-Economic Loss (NEL) awards under the Workplace Safety and Insurance Act, 1997 serve distinct purposes: LOE benefits replace lost earnings, while NEL awards compensate permanent impairment or loss of function. Because any set-off analysis turns on the purpose of the particular benefit, employers defending wrongful dismissal claims should identify the nature of the WSIB benefit at issue. Ontario courts have generally accepted the set-off of LOE benefits during the notice period, following Jensen v. Schaeffler.
An Employer Who Contributes to an Employee’s Incapacity Cannot Invoke Frustration of Contract
Where an employer’s own conduct contributes to an employee’s incapacity, the frustration defence is unavailable. To protect an employee facing threats to their personal safety, employers can:
- treat known threats to an employee’s health and safety, including third-party misconduct such as stalking, as triggering a proactive duty under workers’ compensation legislation
- follow proper processes before altering an employee’s compensation and respond seriously to accommodation requests
- ensure HR investigates and supports employee complaints rather than discouraging them
Cumulative management failures, even absent malicious intent, can foreclose the frustration defence entirely.
If you require further information or would like advice on disability management or other workplace safety issues, please contact your Hicks Morley lawyer.
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