Long-term sick leave doesn’t mean the contract disappears: what the FWC just ruled on ‘frustration’

The short version

An employer told a long-serving helicopter pilot that his employment contract had simply come to an end on its own, because he’d been off work for years with a terminal illness. No dismissal, no process, just “the contract frustrated itself.”

The Fair Work Commission didn’t agree. It found the pilot had been dismissed, and the reason came down to one thing: he still had long service leave sitting on the books.

What happened

The pilot, an aircraft captain with more than two decades of service, had been off work since late 2022 after a serious illness that was later confirmed as terminal. His income protection payments ran out, and he’d used up his annual and personal leave. To keep getting paid while he was too unwell to work, he moved onto long service leave.

Roughly three and a half years after he first stopped working, the company told him his contract had been “frustrated”, meaning it treated the employment as having ended by operation of law rather than by any decision or dismissal on its part.

The employer’s argument in the Commission was straightforward: if there’s no dismissal, the Commission has no jurisdiction to hear an unfair dismissal claim at all. Case closed, no case to answer.

The Commission looked at one number: how much long service leave the pilot had left. As at the date the employer declared the contract frustrated, he still had close to 24 weeks of accrued long service leave, and he was actively using it as paid leave. On that basis, the Commission found the contract was still operating on its terms. He was on leave he was entitled to take, and the point at which he was expected to return to work hadn’t arrived yet.

Which meant there was only one way the employment could end: someone had to bring it to an end. The Commission found that’s exactly what happened, regardless of what the employer chose to call it.

Why ‘frustration’ is a trap, not a shortcut

Frustration of contract is a genuine legal concept, but it’s a narrow one. It applies when something happens that makes the contract impossible to perform through no fault of either party, and it isn’t something either party can simply declare. It has to actually be true on the facts.

The problem for employers is that frustration looks tempting precisely because it feels like it avoids the hard parts of ending someone’s employment: no process, no consultation, no risk of an unfair dismissal claim. In practice it does the opposite. If the Commission finds the contract wasn’t actually frustrated, what you’re left with is a dismissal with no process behind it at all, which is about as exposed as an employer can be.

Paid leave entitlements are the clearest sign the contract is still alive. If someone is drawing on annual leave, personal leave or long service leave, they’re being paid under the contract, which means the contract is still operating. You can’t be on leave from a contract that no longer exists.

What this means for your business

• Long-term illness or incapacity is a genuine reason for termination, but it still has to be managed as a termination: with a proper process, medical evidence, and a chance for the employee to respond.
• Check leave balances before making any call about someone’s employment status. If they’re still accruing or drawing on leave entitlements, the contract almost certainly hasn’t ended itself.
• Don’t rely on frustration of contract as a way to sidestep process. It’s a rare, fact-specific doctrine, not a general escape hatch for long absences.
• If someone’s incapacity looks permanent, get advice on medical incapacity termination early rather than waiting years and then trying to close the file quietly.

Frequently asked questions

What is frustration of contract in Australian employment law?

Frustration of contract is a legal doctrine where an employment contract is treated as having ended automatically because an unforeseen event has made it impossible to perform, through no fault of either party. It isn’t a decision either party makes; it has to be established on the facts, and Australian tribunals apply it narrowly.

Can an employer end employment because someone is too sick to work?

Yes, but it has to be done properly. Long-term incapacity can be a valid reason for dismissal, but the employer still needs to follow a fair process, get appropriate medical evidence, and give the employee a genuine opportunity to respond before ending their employment.

Does having leave entitlements left affect whether a contract has ended?

It can be decisive. If an employee still has accrued leave they’re entitled to take and are using, that’s strong evidence the contract is still operating, because leave is paid under the contract. It’s much harder to argue a contract has frustrated itself while someone is still being paid leave under it.

Bottomline

Managing a long-term illness or incapacity case and not sure where you stand? HR Gurus helps Australian businesses cut through the BS and manage these situations properly, so you’re not left exposed further down the track. Get in touch with the team.