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By Tony Poland, LegalMatters Staff • The terms of the employment contract signed years ago may no longer be valid if an employee’s duties have changed substantially, says Toronto employment lawyer Jeffrey M. Andrew.
Andrew, a partner with Cavalluzzo LLP, points to Celestini v. Shoplogix Inc., an Ontario Court of Appeal (ONCA) judgment that examined the “changed substratum,” or underlying substance, of an employment agreement.
“It is a fairly interesting doctrine that the average person is unlikely to even think about,” he tells LegalMattersCanada.ca. “It is a common-sense way courts strive to be reasonable in contractual interpretation. It is not that complicated but is very sensible.”
Court heard Stefano Celestini co-founded Shoplogix in 2002 and held the title chief executive officer (CEO).
Founders sold shares to venture capital firm
In 2005, the founders sold some of its shares in the company to a venture capital firm and Celestini was given the position of chief technology officer (CTO) after stepping down as CEO.
He signed an employment contract stating he could be dismissed without cause with one month’s written notice. If he was terminated under terms of the agreement, he would continue to receive his base salary and group health coverage for 12 months. He would also be entitled to the bonus he received in the previous year.
In 2008, Celestini and Shoplogix entered into a bonus plan for management-level employees. The motion judge who heard the case found that the plan “significantly changed” the man’s compensation from the bonus arrangements stipulated in his 2005 contract. The judge also found Shoplogix did not mention or ratify the 2005 contract when the bonus plan was agreed to.
A new CEO was also appointed during that time and instituted “dramatic changes” that caused a considerable increase in Celestini’s workload and responsibilities, court was told.
In 2017 another company acquired all of Shoplogix’s shares and Celestine was terminated without cause under the terms of the 2005 employment contract. Celestini responded by filing a wrongful dismissal claim relying on the changed substratum doctrine.
Duties ‘changed substantially and fundamentally’
The motion judge granted summary judgment in his favour finding the employee’s duties “changed substantially and fundamentally over the course of his employment.” The court found Celestine took on increased 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.”
The judge ruled Celestine was entitled to notice of 18 months – as opposed to the 12 months stipulated in his contract – along with damages for lost bonus for a total award of $421,043.05. The court of appeal upheld that judgment.
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Andrew, who was not involved in the case but comments generally, says the substratum doctrine is not commonly used.
“It is usually something that comes up when you have longer service employees who have changed jobs, such that what they were doing when they are terminated is significantly different than what they did when they signed an employment agreement,” he says “For example, if you were a low-level employee when you started out and now you are a boss with substantially more responsibilities and there is no drafted agreement for the job you currently hold, the doctrine of substratum can apply. It could come into play with lateral moves to vastly different jobs.”
Company’s focus can change
He says a company can get bigger or change focus and an employee’s area of responsibility could be affected in a way that doesn’t reflect what they were doing when they started out.
“Conceivably, a court could find that company policies, salary levels and other considerations had changed significantly,” Andrew says. “If the context of the job and the work that the person does is markedly different, that is when the court would be prepared to apply the doctrine.”
Of course, just because someone’s job has been conspicuously altered does not necessarily mean the doctrine of substratum would apply, he says.
“Employment law is fundamentally contractual and there is an overlay of statutory regulation,” Andrew says. “The Celestine judgment points to a case where it was acknowledged in the initial employment agreement that someone’s job may change in the future and the terms of the agreement would still apply. In a case like that, a court could find the employer contemplated at the front end that even changes in the nature of the duties and responsibilities would not alter certain terms of the employment contract.
“This ruling is another reason to pay attention to the terms of employment agreements,” he adds.
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