Special thanks to Oscar Ramirez (articling student in our Toronto office) for co-authoring this blog.
In Celestini v. Shoplogix Inc., 2023 ONCA 131, the Ontario Court of Appeal recently upheld a motion judge’s award of over $400,000 to an employee on the basis of the changed substratum doctrine.
What is the changed substratum doctrine?
The changed substratum doctrine recognizes that the employment relationship evolves over time such that sometimes it may be inappropriate to apply the provisions of an out-dated employment contract to a job that has changed significantly. The doctrine applies in situations where the employee’s duties have fundamentally expanded to a point where the underlying employment contract has substantially eroded, or it can be implied that the employment contract could not have been intended to apply to the employee’s latest role.
In 2005, Mr. Celestini became Shoplogix Inc.’s Chief Technological Officer through a finance arrangement with a venture fund. As part of the deal, he would step down as Shoplogix’s CEO and serve as its CTO under a written employment contract, which he signed in 2005. The employment contract limited Mr. Celestini’s entitlements upon termination of employment.
In 2008, Mr. Celestini and Shoplogix entered into an Incentive Compensation Agreement (“ICA“) which significantly altered Mr. Celestini’s bonus entitlements. Shoplogix did not amend the 2005 employment contract at this time.
There was an expansion of Mr. Celestini’s workload and responsibilities that coincided with the execution of the ICA and a change in leadership. His new responsibilities included: “managing important aspects of sales and marketing; directing managers and senior staff who were reassigned to report to him; travelling to pursue international sales; handling all of the company’s infrastructure responsibilities; and soliciting investment funds.”
In 2017, Shoplogix terminated Mr. Celestini without cause. Shoplogix took the position that Mr. Celestini’s rights were governed by the employment contract he signed in 2005. But Mr. Celestini argued that the termination provisions in the 2005 contract were unenforceable because of the substantial changes to his position, and he was therefore entitled to reasonable notice at common law. He claimed he was entitled to common law damages for wrongful dismissal on the basis that Shoplogix breached the implied term to provide reasonable notice of termination.
The motion judge rules in favor of the employee
The motion judge found that Mr. Celestini’s duties had changed fundamentally over the course of his employment in a manner that far exceeded incremental or predictable changes that could have been reasonably expected when he started as CTO in 2005. Despite Mr. Celestini’s title remaining the same, his work fundamentally changed under the leadership of the new CEO and after the execution of the ICA. As a result, Mr. Celestini was awarded over $421,043.05 plus pre-judgment and post-judgment interest at the summary judgment motion.
Shoplogix appealed the motion judge’s decision on the basis that the changed substratum doctrine was improperly applied. Shoplogix argued that the doctrine requires fundamental changes to an employee’s duties arising from a promotion and that the motion judge relied on incremental changes that did not justify the abrogation of the 2005 employment contract.
The Court of Appeal agrees
The Court of Appeal found that the motion judge did not err in applying the changed substratum doctrine and that there was no reversible error in the finding that there was a fundamental increase of responsibilities sufficient to apply the changed substratum doctrine. The Court dismissed the appeal and commented that the employment contract could have prevented the application of the doctrine had it contained a provision stating that the employment contract’s provisions would continue to apply despite any changes to the employee’s position, responsibilities, salary or benefits. The Court of Appeal also stated that the employment contract could have continued to be enforceable if the parties ratified its continued applicability.
- Be cognizant of incremental (but significant) changes in employees’ duties, responsibilities and compensation. While one or two minor changes would not be sufficient to trigger the changed substratum doctrine, such changes can compound and eventually render important provisions in employment contracts unenforceable.
- It’s vital to review and update employment contracts, particularly for long-service employees. Many employers review and update their employment contract templates, but few have the contracts of existing employees reviewed to assess whether there are any gaps or whether they are enforceable at all anymore. This can lead to significant exposure down the road, because long-tenured employees tend to be the ones who pose a significant liability to employers if and when their employment is terminated.
- When reviewing and updating employment contracts, ensure that they include a provision stipulating that the termination provision, and any other key provision, continue to apply even if there are changes to the employee’s duties, responsibilities, reporting structure, compensation, etc.
- A good time to review and update contracts is when an employee is promoted, receives an increase in compensation, or even at the time of a one-time bonus payout. Please see our blog here for more information on updating employment agreements before end of year bonuses.
If you have any questions, please do not hesitate to ask one of our employment lawyers.