Changes to a Job Can Void an Employment Contract

Ontario employees are frequently hired on the condition they sign written contracts containing termination provisions which significantly limit their severance entitlements.

As business needs change, it is common for employers to increase or change an employee’s responsibilities. Minor changes may not affect the legal enforceability of a contract, but what happens if the changes have significantly altered the foundation of the employment contract? Is the contract still enforceable? Can changes be made without voiding the contract – including its termination provisions?

These are all important questions. They are why the recent decision in Celestini v Shoplogix Inc., 2023 ONCA 131, has caused employers to scramble to re-evaluate their employment contracts (as they should!).

In Celestini, the Ontario Court of Appeal upheld a motion judge’s award of over $400,000 to a terminated employee who successfully relied on the “changed substratum” doctrine (the “doctrine”).

The primary issue before the Court was whether the doctrine could be properly engaged where there had been no change in title to a senior executive’s role since the time of hire.

THE SHORT VERSION

In short, the Court of Appeal agreed with Mr. Celestini, whose employment was terminated in March 2017, that his employment contract, from 2005, had become unenforceable because the substratum of the contract “had disappeared, or been substantially eroded, due to material changes in his employment duties”.

Mr. Celestini’s job title was not an important consideration as much as the expansion of his duties and responsibilities.  A “substantial and fundamental” increase in his responsibilities, and significant changes to his compensation structure since 2005 triggered the doctrine. A change in title was not required. As a result, the contract was no longer enforceable, including its termination provision limiting Mr. Celestini to 12 months’ base salary and benefits, along with a pro-rated payment of his annual bonus accrued up to termination. Instead, under the common law, he was awarded base salary and bonus entitlements over the 18 months, car allowance and lost life insurance benefits.

Interestingly, the Court noted that the employer could have avoided this result had the parties ratified the employment contract when the substantial changes to duties occurred, or had the contract included proper language ousting the application of the changed substratum doctrine by expressly providing “that its provisions, including its termination provisions, continue to apply even if the employee’s position, responsibilities, salary or benefits change”.

If you are interested in knowing more about Celestini, please read “The Fine Print” sections below. Or feel free to scan the sections highlighted in yellow for the essentials – and join me at the end of this blog for “What You Must Know”.

THE FINE PRINT

Author’s note:  All quotations in this section are from the Court of Appeal decision unless otherwise noted. All highlights are the mine.

So, what is the “changed substratum” doctrine and how does it work?

Justice Perell in MacGregor v. National Home Services, 2012 ONSC 2042, as cited in Celestini, helpfully provides the answer to this question:

… 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….

As noted below, an ambiguous termination provision or one that is non-compliant with the Employment Standards Act, 2000 (“ESA”) are not the only reasons why a that provision may be legally unenforceable. Similarly, a contract signed without fresh consideration is not the only reason why the entire contract – and not just its termination clauses – can be voided. The “changed substratum” doctrine can have the same effect. However, as noted above, there are ways employers can maintain the enforceability of their employment contracts even after fundamental changes to employment have been made.

Particulars

Mr. Celestini was a co-founder and Chief Executive Officer (“CEO”) of Shoplogix until 2005, when some of the corporation’s shares were purchased by a venture capital firm. Subsequently, he stepped down as CEO and agreed to sign an employment agreement (the “2005 Contract”) as Shoplogix’s Chief Technology Officer (“CTO”).

As CTO, Mr. Celestini would report to the new CEO, Dwyer, and his duties were focused on “transferring product and corporate knowledge within Shoplogix”, among “other duties that may reasonably be assigned to him”.  Per the 2005 Contract, if his employment were to be terminated, Shoplogix would pay his base salary, continue his group health insurance for 12 months, and make a pro-rated payment for his annual bonus accrued up to termination.

In March 2008, a new CEO, Ambrose, replaced Dwyer and instituted “dramatic changes” to Shoplogix. One of those changes was the “drastic reduction in the number of senior management personnel”. Consequently, Mr. Celestini’s workload and responsibilities significantly increased.  His CTO role expanded to include “sales, international travel, infrastructure responsibilities and financing”.

In or around the same time, Mr. Celestini signed an Incentive Compensation Agreement (the “ICA”) introduced by Shoplogix as an annual bonus plan for management-level employees. The terms required him to be “actively employed” to remain eligible for a bonus under the ICA.

On March 2, 2017, Friedman Canada Inc. acquired all of Shoplogix’s shares and dismissed Mr. Celestini, without cause, the same day.

Relying on the “changed substratum” doctrine, Mr. Celestini brought a wrongful dismissal claim for damages for the failure to provide common law reasonable notice of termination. He alleged that the fundamental changes in his employment duties since his hire rendered the terms of the 2005 Contract unenforceable.

Shoplogix defended on the basis that Mr. Celestini’s only rights upon termination were those in the 2005 Contract.

Both parties sought summary judgment.

The Verdict: Motion Judge v. Court of Appeal

The Motion Judge (2021 ONSC 3539)

[20]      The motion judge granted summary judgment in favour of Mr. Celestini. He articulated the law concerning the changed substratum doctrine. He was satisfied on 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 leadership of Mr. Ambrose as CEO, compared to what the role had been under the previous CEO, Mr. Dwyer. Reinforcing this were the substantial changes to Mr. Celestini’s compensation as a result of the ICA. All of this resulted in the substratum of the 2005 Contract disappearing.

[21]      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.

[22]      The motion judge concluded that the termination provisions of the 2005 Contract had become unenforceable by the time of Mr. Celestini’s dismissal, and as a result, he was entitled to damages at common law, which the motion judge found should be based on an 18-month notice period.

Shoplogix appealed.

The Court of Appeal

The Court of Appeal agreed with the motion judge. Firstly, it rejected the employer’s argument that the doctrine could not be properly applied to an employee who was always a senior executive and who held the same job title (since, according to Shoplogix, “the doctrine requires both a fundamental expansion of the employee’s duties and a promotion which necessarily implies a change in title). According to the Court, this argument “is inconsistent with the changed substratum doctrine, properly understood”:

[42]…The question of whether the “employee’s level of responsibility and corresponding status has escalated so significantly”…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.

The Court also rejected the employer’s argument that the doctrine can only apply to an employee who began in a non-executive role as “there is nothing to support such a limitation in the doctrine itself or the principle that underlies it.”

Turning to the second argument of Shoplogix, that the changes the motion judge relied on were incremental and not sufficiently dramatic or fundamental, the Court found that “[t]his argument is also flawed, as it is contradicted by the motion judge’s findings that were available to him in the record and are entitled to deference. Shoplogix has not identified any palpable and overriding error in those findings” (since “the question of whether the changed substratum doctrine applies in ay particular situation is one of mixed fact and law”).

Further:

[45] The motion judge’s findings support his conclusion to apply the changed substratum doctrine. At paras. 56-57, he found:

Based on the foregoing, I am satisfied that Mr. Celestini’s duties changed substantially and fundamentally over the course of his employment. Among other things, he received the following new tasks: a) managing important sales and business development activities; b) handling technical, solutions management and quality assurance matters; c) directing managers and staff who were reassigned to report directly to him (i.e., after he had worked for several years without any direct reports); d) pursuing business opportunities with international partners that introduced global travel requirements; e) handling a range of company infrastructure and other administrative matters; and f) contributing significant work to solicit investment funding. In my view, these responsibilities 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. In addition, Shoplogix made substantial changes to his compensation. In light of these significant changes, I find that the substratum of his original contract of employment disappeared and that its notice terms should no longer be enforced as they could not have been intended to apply to his role at termination. Applying the changed substratum doctrine, I find that the terms in the Employment Agreement that purport to limit the notice obligations for termination should no longer have contractual force. Although his job title remained unchanged, I am satisfied that the substantial changes to his position support the application of the substratum doctrine in this case.

[46] I see no error in these findings and accordingly reject this ground of appeal.

The Bonus

While the employment contract was deemed unenforceable, there was still the issue of whether the ICA ousted Mr. Celestini’s bonus entitlement over the reasonable notice period.

Shoplogix’s position was that “…even if it could not rely on the 2005 Contract, the motion judge erred in failing to find that the ICA ousted Mr. Celestini’s bonus entitlement over the reasonable notice period. It submits that the ICA addressed bonus payment on termination of employment and limited it to the amount unpaid up to the date of termination.”

However, the Court of Appeal again agreed with Justice Doi that the terms of the ICA did not unambiguously oust Mr. Celestini’s right to damages:

[50] In my view, the motion judge’s determination that the terms of the ICA did not clearly oust Mr. Celestini’s common law entitlement to damages for the loss of his ICA bonus was free of error.

[51] The motion judge properly considered this issue by applying the decision of the Supreme Court in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, 449 D.L.R. (4th) 583. In Matthews, at paras. 52-55, the Supreme Court adopted this court’s approach to interpreting bonus entitlement as set out in Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 34 C.C.E.L. (4th) 26, and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 402 D.L.R. (4th) 325. The analysis is two-part: (1) would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?; and (2) if so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The Court of Appeal affirmed that Mr. Celestini was entitled to be paid his bonus under the ICA up to the termination date of March 2, 2017, as well as his lost bonus for the reasonable notice period of 18 months following his termination date.

WHAT YOU MUST KNOW

Key Takeaways

1. A Court may find a contractual termination clause to be unenforceable under the doctrine of changed substratum where the employee’s duties have fundamentally changed after the contract was made. A change in title is not necessary for the doctrine to be triggered, nor does the employee need to be promoted from a non-executive to an executive role.
2. Employers need to be mindful of incremental and significant changes in an employee’s duties, responsibilities and compensation. Minor changes may not be sufficient to trigger the “changed substratum doctrine”; however, such changes can compound and eventually render employment contracts unenforceable.
3. Celestini is bittersweet for employers because, on one hand, it may be a financial burden to regularly review and update their contracts. On the other hand, if they were to do so, especially for existing long-service employees whose contracts might be outdated, it could relieve them of an unexpected—and in some cases, devastating—financial burden down the road that would far exceed legal and related costs of contract updates.

4. In any event, due to rapid changes in the law pertaining to employment contracts (especially with respect to termination language that is void under the ESA), employers should expect to review and replace their contracts every one to two years in any event even if the changed substratum doctrine has no application.
5. Contracts may oust the “changed substratum” doctrine (assuming it applies) if they expressly stipulate that its terms, including the termination provision, continue to apply notwithstanding changes to the employee’s responsibilities, position, salary or benefits change. However, as noted in no. 2 above, this will not guard employers against other changes to the contract that may be necessary, and which do not pertain to the doctrine. So, regular updates are essential.
6. If promoting an employee or making any changes to their terms of employment with a lawyer’s help, employers should ratify the employment contract so that it can remain in force. Better still, they should introduce a new contract that which considers all recent legal changes, and which contains the wording in no. 3 above. However, in either case, fresh consideration needs to be provided to an employee to ensure legal enforceability. A promotion alone may not constitute fresh consideration. So, employers should seek legal advice from an employment lawyer in this regard.
7. Of course, if an employee is asked to sign a new contract, offer of employment or a document ratifying a contract—regardless of whether they are a new hire or an existing employee—they should seek the advice of an employment lawyer before signing. Employers need to anticipate that employees will seek such advice.

If you are an employer or employee, I can help you with contract-related or other workplace issues. I have more than 25 years’ experience as an employment lawyer with satisfied, repeat clients.

If you are a lawyer or paralegal looking to appoint a mediator or arbitrator for your employment law dispute, I am a Chartered Mediator with over 15 years of experience conducting employment mediations. As well, I am a Qualified Arbitrator who conducts both arbitrations and med-arbs of wrongful dismissal matters.

This blog is for educational purposes only and is not intended as legal or other professional advice.

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