Employers need to pay heed to court of appeal decision

Employment/Labour /
Ellen Low
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By Tony Poland, LegalMatters Staff • A recent court of appeal ruling should give employers the impetus to review the employment contracts of long-standing staff, says Toronto employment lawyer Ellen Low.

In Celestini v. Shoplogix Inc., the Ontario Court of Appeal (ONCA) found that an employee was not bound by the terms of the termination clause in his employment agreement after his duties were substantially expanded while his job title remained the same.

The court found his employer had altered the substratum, or underlying substance, of the worker’s employment contract without updating their employment contract.

“This decision is a timely reminder for employers to be reviewing and updating their employment agreements on a regular basis,” says Low, principal of Ellen Low & Co. “It is not simply a question of whether a termination provision has good language or should be allowed to be relied upon. It is whether the changes in the employment position are so substantial that the entire original contract is effectively rendered null and void.

‘May be time to put a new contract in place’

“As an employer, if you have a contract that was drafted years ago and the responsibilities of the employee have significantly changed, it may be time to put a new contract in place.”

Court was told Stefano Celestini was a co-founder of Shoplogix and originally served as its chief executive officer (CEO).

When a venture capital firm purchased shares in Shoplogix from the founders in 2005, Celestini stepped down as CEO and was given the position of chief technology officer.

He then signed an employment contract that stated he could be dismissed without cause with one month’s written notice. Under the agreement, he would be paid his base salary for 12 months following termination and would be entitled to the bonus he received in the prior year.

In 2008 a new CEO was appointed and there was a significant reduction in senior managers. Celestini’s role in the company was expanded along with his responsibilities.

Shoplogix was acquired by another company in 2017 and Celestini was dismissed without cause. The terms of his 2005 contract were applied in his termination.

Relied on the changed substratum doctrine

Celestini countered by suing for wrongful dismissal, relying on the changed substratum doctrine.

The motion judge who heard the case ruled, “Mr. Celestini’s duties changed substantially and fundamentally over the course of his employment.” Although his job title remained the same, he was asked to take on more responsibilities, the judge found, and he was entitled to 18-month’s notice, as opposed to the 12 months stipulated in his contract.

Low, who was not involved in the case but comments generally, explains that in the changed substratum doctrine, “significant and material changes” in an employee’s role can render notice provisions in an employment agreement unenforceable. 

“It is a little unusual to see a change in substratum argument at the court of appeal,” she tells LegalMattersCanada.ca. “That could be because people tend to forget about changing substratum and whether it is a good strategy to challenge a termination provision in an otherwise valid employment contract. 

“There are always new and different ways to try and attack either the enforceability of a contract at large or the termination provision contained within that employment agreement,” Low adds. “Change in substratum is not new. It is a relatively old doctrine. It just doesn’t come up that often.”

Effective way to challenge a contract

She says it is an effective way to challenge a contract for an entry-level worker whose role and responsibilities significantly change over an extended period of employment.

“The doctrine can be applied where the underlying substance of the employment contract has disappeared or has been considered eroded,” says Low. “The question becomes was the contract intended to apply to the existing position at the time of the employee’s termination?

“This strategy would only be effective in cases involving a long-standing employee,” she adds. “The duration of employment, as well as an expansive change in responsibilities, must be factors. We are not talking about minor revisions in an employee’s role. There is commentary from the court of appeal about how significant the changes should be.”

As a lawyer, Low says what she found interesting is that the case “goes back to contractual first principles.”

‘Should be looking at the overall contractual enforceability’

“Sometimes in employment law, we get excited about changes to the legislation or new cases that find a way to attack a termination provision,” she says. “In my opinion, we should be looking at the overall contractual enforceability as a whole when contesting a termination provision. 

“The question should be is whether the contract writ at large is still enforceable at law,” Low explains.  “The change in substratum fits under the category of trying to attack or obviate the actual entire contract rather than trying to challenge a termination provision contained within an agreement.”

She says the ONCA decision should be a warning to employers about the risk of significantly increasing an employee’s duties without reworking their employment agreement.

“It is certainly another reason to review your employment contracts,” Low says. “Especially where people are taking on significantly larger job duties and responsibilities. Employers have to consider whether that promotion and that raise ought to come with a new or revised employment agreement.”