In Celestini v Shoplogix Inc., 2023 ONCA 131, the Court of Appeal held that significant changes to an employment relationship over time may result in provisions of a contract of employment being found to be unenforceable.
The common law doctrine of “changed substratum” was explained by the Court:
The doctrine applies where there have been fundamental expansions in the employee’s duties after the employment contract was made, such that the substratum of the employment contract has disappeared or substantially eroded, or it can be implied that the contract could not have been intended to apply to the role ultimately occupied by the employee.
A contract of employment should provide terms and conditions that provide certainty to the parties. One of the most important terms of a contract of employment is a termination provision that may attempt to limit an employee’s entitlement to notice upon termination. The changed substratum doctrine provides plaintiffs with an argument that substantial expansion of compensation, responsibilities and other terms of the employment relationship may render key terms, such as termination provisions, unenforceable.
Factual Background
Shoplogix was founded in 2002 with Mr. Celestini as co-founder and Chief Executive Officer. In 2005, following investment from a venture capital firm, Mr. Celestini stepped down as CEO and took on the role of Chief Technology Officer. The May 17, 2005, contract of employment provided that Shoplogix could dismiss Mr. Celestini without cause by giving one month’s written notice and continuing to pay his base salary and group health coverage for 12 months from the date of termination. Mr. Celestini would also be entitled to be paid an amount equal to the bonus he received in the prior year, pro-rated for the period of the current year up to termination. The contract also provided that its provisions concerning notice and termination were fair and equitable and the payments it contemplated would be in full satisfaction of any claims regarding termination of employment.
Shoplogix went through substantial changes as a business over the 12 year period following the execution of Mr. Celestini’s contract of employment. There was a fundamental and substantial increase in Mr. Celestini’s responsibilities following the hiring of a new CEO and the reduction of senior management staff. Mr. Celestini took on new duties that included sales and marketing, directing managers and senior staff, travelling to pursue international sales, handling infrastructure responsibilities and soliciting investment funds. Mr. Celestini’s compensation also significantly increased through a new incentive compensation plan.
Shoplogix was acquired by another company in 2017, and Mr. Celestini was terminated without cause. Mr. Celestini brought an action for wrongful dismissal and argued that the foundation of his employment agreement had substantially changed and that he was entitled to common law notice.
The Motion Judge’s Decision
On a motion for summary judgment, the motion judge found that Mr. Celestini’s responsibilities fundamentally and substantially increased over the course of his employment and that “[a]s such, the substratum of his [2005] contract of employment disappeared and implicated the changed substratum doctrine which left the notice terms in his contract no longer enforceable”. The appropriate notice period was found to be 18 months, which comprised 6 additional months of base salary, bonus entitlement over 18 months, car allowance, and lost life insurance benefits. The total award was $421,043.05.
The motion judge was satisfied with the evidence that “Mr. Celestini’s duties changed substantially and fundamentally over the course of his employment”. Mr. Celestini received new responsibilities that 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”. Although Mr. Celestini’s CTO job title remained the same, the role Mr. Celestini was asked to, and did, fulfill “fundamentally changed” under the new leadership of Shopolgix. This change was further reinforced by the substantial changes to Mr. Celestini’s compensation.
All of this resulted in the substratum of the 2005 contract disappearing. The motion judge also noted the failure of Shoplogix to obtain any acknowledgment, while the changes were occurring, that the 2005 Contract remained applicable. He found that the 2005 Contract did not expressly provide that it would continue to apply notwithstanding any changes in Mr. Celestini’s responsibilities – in doing so, he rejected Shoplogix’s argument that a section of the contract which required Mr. Celestini to perform duties “reasonably assigned to him” could be given that effect.
The Court of Appeal
Shoplogix appealed, arguing the changed substratum doctrine was improperly applied. This argument was rejected by the Court of Appeal. On cross-appeal, Mr. Celestini argued that the deduction of a bonus payment from his damages award was improper. The Court of Appeal agreed in part.
Shoplogix’s first argument asserted that the changed substratum doctrine requires both a fundamental expansion of the employee’s duties and a promotion which necessarily implies a change in title. The Court of Appeal rejected this argument. The Court of Appeal explained:
The question of whether the “employee’s level of responsibility and corresponding status has escalated so significantly” (the phrase used in Wallace) is one of substance, not form. It may be relevant that the employee was given a new title, but it is simply one contextual factor. More important is whether there were actual increases, of a fundamental nature, in the duties and degree of responsibility of the employee. If there were, the employee was for all intents and purposes “promoted”, given their escalated status, even if the assigned title did not change. Put another way, where the duties and responsibilities are fundamentally increased the meaning of the job title is redefined as if a new job title were given.
Shoplogix’s second argument is that the changes that occured were incremental, not fundamental, given the duties described in the 2005 contract, its contemplation of additional duties, and the actual responsibilities that were assigned to Mr. Celestini up to 2017. This argument was a request to the Court of Appeal to replace the motion judge’s expressed findings about the nature of the changes and the meaning of the 2005 contract. The Court of Appeal found no error in the motion judge’s findings and rejected this ground of appeal.
Takeaways
Employers are encouraged to regularly update and revise their employment agreements when an employee has a significant change in their duties, responsibilities, or compensation. The decision also highlights that a change in an employee’s title is not required for the changed substratum doctrine to apply to an employment agreement: a significant change in an employee’s duties and responsibilities can still trigger the operation of the doctrine. The general language in the contract providing that the employee would perform “any other duties that may reasonably be assigned to him by the CEO or the board” did not insulate the contract from attack under the change in substratum doctrine.
As the Court points out, it is possible to contract out of the change of substratum doctrine in two ways. First, a contract of employment may expressly provide that its provisions, including its termination provisions, continue to apply even if the employee’s position, responsibilities, salary, or benefits change. Second, the written employment contract may also have continuing force even if there have been substantial changes in the employee’s duties if the parties ratified its continued applicability when those changes occurred.
This was written by Thomas Perry, Employment Lawyer at Monkhouse Law. Monkhouse Law is an employment law firm located in Toronto focusing on employees’ issues. Please contact us at 416-907-9249 or fill out this quick form for a free 30-minute phone consultation.