Introduction
In Celestini v Shoplogix Inc [Celestini], the Ontario Court of Appeal (“ONCA”) upheld the lower court’s decision not to enforce the termination provisions in the parties’ employment agreement, given that the employer substantially increased the employee’s duties, which—by operation of the “changed substratum” doctrine—caused the foundation of the agreement to disappear.
The Changed Substratum Doctrine
The changed substratum doctrine is the legal principle that, where the material terms of a written employment contract change significantly (such as a substantial expansion of the employee’s responsibilities), it can be concluded that the foundation of the contract has eroded or disappeared, or it can be implied that the contract could not have been intended to apply to the role ultimately occupied by the employee. When such a change occurs, the provisions in the employment contract limiting the employee’s termination entitlements become unenforceable, and the employee will be entitled to reasonable notice of termination under the common law.
Background
The employee co-founded the employer company in 2002 and originally served as its Chief Executive Officer (“CEO”). In 2005, a venture capital firm purchased some of the shares in the company, including from the employee. The employee stepped down as CEO and signed a written employment contract to be employed as Chief Technology Officer.
In 2008, a new CEO was appointed, causing the employee’s workload and responsibilities to increase substantially. These new responsibilities included: managing critical aspects of sales, marketing, directing an increased number of senior staff reporting to him, travelling to meet clients and solicit funding; and being responsible for all company infrastructure. The employee was also enrolled in a bonus plan for management-level employees, which significantly altered his compensation. In implementing these changes, the employer did not update the employee’s employment contract.
The employer was acquired in 2017 by another company, who subsequently dismissed the employee without cause, applying the termination provisions from the original employment contract he had signed in 2005. The employee brought a wrongful dismissal action and raised the changed substratum doctrine, claiming that the fundamental changes to his employment since 2005 rendered the contract unenforceable.
At the Superior Court of Justice, the motion judge granted summary judgement in favour of the employee, finding that the employee’s duties had changed substantially throughout the course of his employment. Notably, the motion judge held that while the employee’s job title remained the same, his actual role fundamentally changed under the new CEO’s leadership, which was consistent with the changes in his compensation. As such, the foundation of his employment had eroded and the termination provisions in his contract could no longer be relied upon.
The Ontario Court of Appeal Decision
The employer appealed this decision to the ONCA, arguing that the motion judge’s decision was erroneous for two reasons. First, the employer argued that the changed substratum doctrine requires both a significant expansion of the employee’s responsibilities, as well as a promotion, which necessarily implies a change in job title. As the employee was always a senior executive and held the same job title, the employer contended that the doctrine could not be applied. Second, the employer argued that the changes to the employee’s duties were incremental and were not changes of a sufficiently fundamental nature to warrant engaging the doctrine.
The ONCA rejected both arguments. Addressing the first argument, the Court held that, although the changed substratum doctrine does require a fundamental expansion in the employee’s duties, it does not require a change in title. In rejecting the second argument, the Court held that the motion judge had not erred in finding that the changes to the employee’s duties were substantial and far exceeded any predictable or incremental changes to his role that reasonably would have been expected when he started as CTO in 2005. For these reasons, the found that the changed substratum doctrine was applicable and, therefore, the termination provisions in the employment agreement were unenforceable.
In rendering its decision, the ONCA notably discussed how employers could avoid the application of the changed substratum doctrine. Where an employment agreement expressly provides that its provisions will continue to apply irrespective of changes to the employee’s position, responsibilities, salary or benefits, the changed substratum doctrine will not apply. Where no such provision is in place, the employment agreement may still be enforced despite substantial changes in the employee’s duties if the parties agree to the continued application of the agreement when those changes occurred.
Takeaways for Employers
Employers should be aware that when an employee’s duties are substantially increased, the original employment agreement may no longer be enforceable under the changed substratum doctrine. The Celestini decision makes clear that, in applying this doctrine, the courts will consider how an employee’s actual responsibilities have changed, and not simply whether the employee’s job title has changed.
To reduce the risk of wrongful dismissal claims based upon the changed substratum doctrine, employers should consider taking the following steps:
- Review and Revise Employment Agreements. Employers should review their employment agreements to determine whether they expressly state their terms will continue in force regardless of any changes in the employee’s position, duties, or compensation. If an agreement lacks such a term, the employer should consider having the employee sign a new employment agreement that includes the term and any other necessary changes, or have the employee acknowledge in writing that the terms of their previous employment agreement will continue to apply irrespective of the changes to their employment.
- Revisit Employment Agreements. As the law continues to evolve, employers should revisit their employment agreements periodically to ensure they remain legally compliant and are consistent with best practices. Employers should also revisit their employment agreements any time they make significant changes to an employee’s position, responsibilities, salary, or benefits.
