- Don’t take a chance with outdated employment contracts - July 18, 2023
By Tony Poland, LegalMatters Staff • Failing to review and update employment agreements to meet changing circumstances can be an expensive mistake as one employer recently discovered, says Ontario employment lawyer Alex Minkin.
Minkin, an associate with Rudner Law, cites Celestini v. Shoplogix Inc., an Ontario Court of Appeal (ONCA) decision that found the “changed substratum” of an employment agreement nullified terms of its termination clause.
“Substratum refers to the underlying layer of substance,” he tells LegalMattersCanada.ca. “In science, it is the layer of rock underneath the soil. In the employment law context, it means the foundation or the circumstances that exist at the time that the employment contract is entered into.
“When an employee’s role and responsibilities change, the foundation or the basis of that contract may no longer apply, rendering the termination clause unenforceable,” Minkin adds. “They must be fundamental changes, but that doesn’t always have to involve a completely different role.”
Served as chief executive officer
The appellant court was told Stefano Celestini cofounded Shoplogix in 2002 and originally served as its chief executive officer (CEO).
Some of the company’s shares were sold to a venture capital firm in 2005 and Celestini was given the position of chief technology officer.
He accepted a new employment agreement that stated that he could be dismissed without cause with one month’s written notice. Under the terms of the contract, he would continue to receive his base salary and group health coverage for 12 months upon termination. Celestini would also be entitled to the bonus he received the previous year.
Three years later, 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 employee’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.
At the same time, a new CEO was appointed who instituted “dramatic changes” that caused a considerable increase in Celestini’s workload and responsibilities, court heard.
When another company acquired all of Shoplogix’s shares in 2017, Celestine was dismissed without cause under the terms of the 2005 employment contract, according to the judgment.
He then sued for wrongful dismissal relying on the changed substratum doctrine.
Duties changed substantially
Celestine won a summary judgment with the motion judge ruling his duties “changed substantially and fundamentally over the course of his employment.”
He received 18-montths’ notice instead of the 12 months stipulated in his contract, along with damages for his lost bonus during the 18-month notice period, for a total award of $421,043.
“The court of appeal’s ruling to uphold the motion judge’s decision is important because it clarifies the application of the changed substratum doctrine,” says Minkin, who was not involved in the case but comments generally. “I don’t see this as being a major expansion of the doctrine, but it certainly clarifies how it is applied.”
He says it is not unusual to see the changed substratum doctrine used in wrongful dismissal claims.
“In employment law cases, it is the job of the plaintiff’s counsel to find ways to attack the enforceability of an employment contract,” Minkin explains. “That is often done by examining the wording of the agreement and finding ways that it can be interpreted as violating the Employment Standards Act.
“In this case, there apparently wasn’t anything in the wording of the contract that the plaintiff’s counsel could attack on an enforceability basis,” he adds. “However, they could approach it based on the idea that the employee’s roles and responsibilities were fundamentally different at the time of termination than what they were when the contract was signed.”
Two takeaways that could be helpful
Minkin says there are two takeaways from the OCNA judgment that “could helpful to employers who are concerned about changed substratum doctrine.”
“A contract may explicitly state that its provisions, including the termination provisions, continue to apply even if the employee’s position, responsibilities, salary or benefits change. Then the changed substratum doctrine will not apply,” he says. “That was something that was accepted by the court of appeal in its decision.”
Secondly, when changes are made in the employment relationship, both sides can agree that the original employment contract continues to be in force, Minkin says. Third, the parties can agree on a new employment contract but the employer must provide “fresh consideration” in return.
“Of course, the promise of continued employment is not sufficient consideration,” he warns. “There needs to be something of value that the employee receives in exchange for entering into the new employment contract. For instance, a raise, a new bonus plan or some other new compensation.”
And the employee must signal their agreement, says Minkin.
‘The employer provided additional compensation’
“In this case, changes were made to the employment role,” he says. “The employer provided additional compensation but it didn’t have the employee sign a document that said that the original employment contract continues to apply in spite of these changes.”
Minkin says the judgment is another example of the importance of seeking legal advice.
“It is quite possible that your original employment agreement is no longer going to be enforceable,” he says. “There might be changes to the working relationship that you don’t consider to be fundamental. However, the court might view those changes as enough to rule that the foundation of the employment contract has changed and should no longer apply.
“We certainly encourage our clients to regularly review their contracts to see if there is anything worth updating,” Minkin adds. “If an employee is receiving a promotion or some other new benefits, that is usually a good time to re-evaluate the employment agreement.”
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