Can substantial increases to one’s job responsibilities void what would otherwise be a binding termination provision in an employment contract?
In Celestini v. Shoplogix Inc., 2023 ONCA 131, the Court of Appeal for Ontario upheld the use of the “changed substratum” doctrine to void an otherwise legal, and some might even argue generous, contractual termination provision.
Facts
Shoplogix was founded in 2002. Mr. Celestini was one of its co-founders, and he originally served as its CEO.
In 2005, a venture capital firm purchased some of the shares in Shoplogix from the founders, including from Mr. Celestini. Mr. Celestini stepped down as CEO and was replaced by Kevin Dwyer. Mr. Celestini was given the position of Chief Technology Officer.
Shoplogix and Mr. Celestini signed a written employment contract dated May 17, 2005.
The 2005 Contract provided that Mr. Celestini would be employed as CTO and would carry out the duties of that office set out in any Shoplogix by-laws and as specified by the CEO, subject to the overall direction of the board and “consistent with such office”. He was also to perform “any other duties that may reasonably be assigned to him by the CEO or the board”. Mr. Celestini was to report to the CEO.
The 2005 Contract 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 2005 Contract 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.
Friedman Canada Inc. acquired all of Shoplogix’s shares on March 2, 2017. Mr. Celestini was dismissed without cause by Shoplogix on the same day.
Applying the terms of the 2005 Contract, Shoplogix continued Mr. Celestini’s base salary and group health coverage for 12 months beyond the termination date (that is, to March 2, 2018). Shoplogix also paid a further sum representing a pro-rated bonus for the portion of 2017 up to his termination. Since Mr. Celestini had earned a bonus of $293,850.00 in 2016, the pro-rated bonus that Shoplogix paid him for the period January 1, 2017 to March 2, 2017 was $50,554.44.
Position and Argument
Mr. Celestini took the position that, by 2017, the termination provisions relied on by Shoplogix had become unenforceable, because the substratum of the 2005 contract had disappeared, or been substantially eroded, due to material changes in his employment duties since 2005. Therefore, he claimed he was entitled to common law damages for wrongful dismissal, due to the breach by Shoplogix of the implied term to provide reasonable notice of termination. Based on his age, seniority, length of service and other factors, he maintained that the reasonable notice he should have received was substantially greater than 12 months, and the resulting damages for lost salary, benefits and bonus he would have earned in the notice period would significantly exceed the amounts payable on termination under the 2005 contract.
Decision of the Superior Court
On competing motions for summary judgment, Justice Michael T. Doi of the Superior Court of Justice 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”. Mr. Celestini was therefore entitled to damages at common law for the failure of Shoplogix to provide reasonable notice of termination. The motion judge found the appropriate notice period was 18 months. He awarded damages comprised of six additional months of base salary (in addition to the 12 Shoplogix had already paid), bonus entitlements Mr. Celestini would have received over the 18 month notice period less an amount for accrued bonus paid to him on termination, car allowance entitlements, and lost life insurance benefits. The total awarded was $421,043.
Justice Doi’s reasons for decision are reported at 2021 ONSC 3539.
Decision of the Court of Appeal
In upholding Justice Doi’s decision, the Court of Appeal for Ontario explained the common law “changed substratum” doctrine as follows:
[30] The common law implies a term into an employment relationship of indefinite duration that the employee will receive reasonable notice before being discharged without cause. Reasonable notice is generally determined by reference to factors such as the character of the employment, the length of service, the age of the employee, the availability of similar employment, and the experience, training and qualifications of the employee: Machtinger v HOJ Industries Ltd., [1992] 1 S.C.R. 986, at pp. 998-99. It follows that what will constitute reasonable notice for a specific employee may change over time, as the employee gains greater seniority and responsibility.
[31] The law also recognizes that, as long as the minimum requirements of the Employment Standards Act, 2000 are not infringed, parties to an employment arrangement may prescribe, by express contract, the entitlements of the employee on termination, and if they do so, these will apply instead of the implied term of reasonable notice: Machtinger, at pp. 999-1000.
[32] The changed substratum doctrine operates as a limit on when an employee’s common law entitlements will be restricted by the express terms of a historical written contract. Given that an employer-employee relationship may evolve in a fundamental way after the written contract was made, the doctrine recognizes the potential inappropriateness and unfairness of applying the contract’s termination provisions to circumstances that were not contemplated at the time of contracting.
[33] In Wallace v. Toronto-Dominion Bank (1983), 41 O.R. (2d) 161 (C.A.), at pp. 180-81, leave to appeal refused, [1983] S.C.C.A. No. 98, Robins J.A. described the doctrine and its rationale as follows:
[T]here are readily imaginable cases where an employee's level of responsibility and corresponding status has escalated so significantly during his period of employment that it can be concluded that the substratum of an employment contract entered into at the time of his original hiring has disappeared or it can be implied that that contract could not have been intended to apply to the position in the company ultimately occupied by him.
[34] More recently, Perell J. summarized the effect of the authorities in MacGregor v. National Home Services, 2012 ONSC 2042, at paras. 11-12:
The changed substratum doctrine is a part of employment law. The doctrine provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed.
The idea behind the changed substratum doctrine is that with promotions and greater attendant responsibilities, the substratum of the original employment contract has changed, and the notice provisions in the original employment contract should be nullified. [Citations omitted.]
[35] The written employment contract may oust the application of the changed substratum doctrine, if it expressly provides that its provisions, including its termination provisions, continue to apply even if the employee’s position, responsibilities, salary or benefits change: Miller v. Convergys CMG Canada Limited Partnership, 2013 BCSC 1589, at paras. 35-36, aff’d 2014 BCCA 311, leave to appeal refused, [2014] S.C.C.A. No. 424. 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: Schmidt v. AMEC Earth & Environment et al., 2004 BCSC 1012, at paras. 32-33.
In this case, the Court of Appeal showed deference to Justice Doi’s finding that the increased compensation provided by an Incentive Compensation Agreement was consistent with substantial and fundamental changes to Mr. Celestini’s role that began in 2008, when a new CEO, Martin Ambrose, replaced Mr. Dwyer. Mr. Ambrose instituted dramatic changes to revitalize Shoplogix. One change was the drastic reduction in the number of senior management personnel, which caused Mr. Celestini’s workload and responsibilities to increase substantially. These 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 short, the court agreed that Celestini’s role in 2017 was so far removed from what it had been in 2005 that the deal Mr. Celestini made in 2005 was no longer appropriate.
Commentary
The “changed substratum” or “altered substratum” doctrine is not one frequently seen in employment law. To that end, a refresher on what the doctrine is and how it is applied is important. The Court of Appeal’s analysis of the doctrine is therefore welcomed.
Without reviewing the whole of the evidence, I do have some difficulty however accepting the outcome in this case. Mr. Celestini was a senior executive, who had accepted a compensation package well in excess of the statutory minimums required by the ESA. While I understand the fight to void termination clauses that attempt to limit employees to no more than statutory minimums, those clearly were not the facts in this case.
That said, given that the total award to Mr. Celestini in this case was somewhere in the order of $450,000, I get it.
Takeaways for Employers
There are two key takeaways for employers, and they come from paragraph 35 of the Court of Appeal’s decision: (1) A written employment contract may oust the application of the changed substratum doctrine, if it expressly provides that its provisions, including its termination provisions, continue to apply even if the employee’s position, responsibilities, salary or benefits change; (2) A 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.
Said another way, better drafting of the termination provision could have prevented this problem.
According to the court’s decision in this case, had the termination provision said that it would continue to apply regardless of any changes in Mr. Celestini’s employment responsibilities, then the clause would have been fine and he would have no case.
Another way this outcome apparently could have been avoided would have been for the employer to include, as part of any documentation explaining the changes to Mr. Celestini’s employment responsibilities, a line whereby the parties confirmed their agreement to accept and abide by the already established termination provisions.
If you’re an employer, and you are contemplating making changes to your employee’s responsibilities, even those of senior executives who are expected to perform “such other duties as reasonably assigned,” it may be prudent to speak with an experienced employment lawyer first to purchase some paper that could save you money down the road.
Takeaways for Employees
The takeaway for employees is that just because you signed an employment contract at one point in time doesn’t necessarily mean that such contract is still binding on you. Employment law isn’t pure contract law. Different rules apply. To that end, it might be worth your investment to speak with an experienced employment lawyer before accepting the first severance package offered to you by your employer.
Contact Me
I can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321 x233.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. For 2.5 years he was in-house legal counsel providing employment law advice to one of Canada’s largest corporations. He is also a part-time professor at Algonquin College teaching Employment Law for Paralegals. He has previously taught both Trial Advocacy for Paralegals and Small Claims Court Practice.
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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.
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