Incremental changes

Changes made to the employment contract over time did not justify an increase in the notice period

In February 1985 Lisle-Metrix Ltd. placed an advertisement in the Globe and Mail seeking candidates for a sales and marketing manager position. Henry Rasanen replied to that ad and was eventually hired for that position in April 1985. The terms of Mr. Rasanen’s employment were laid out in a letter of employment signed in March 1985. One of the terms in the letter was that Mr. Rasanen would receive one month per year notice of termination to a maximum of six months.

Mr. Rasanen’s remuneration was comprised of a base salary to be reviewed annually, a bonus on company sales, a car allowance, annual vacation and “all normal employee benefits.”

Mr. Rasanen’s function was to supervise outside and inside sales personnel and handle marketing. He reported to the company president and was considered a key member of the company’s management team.

At the end of his first year of employment, Mr. Rasanen was informed that his bonus would be changed to a discretionary bonus. Although he did not like the change, he reluctantly agreed to it. His base salary had started at $45,000 per year and reached a high of $63,500 by 1992. However his salary was reduced by 10 per cent in 1992 as a result of the company’s financial difficulties. Prior to 1992 Lisle-Metrix made an annual contribution of $3,000 to Mr. Rasanen’s RRSP. In 1992 Lisle-Metrix stopped making these contributions.

On Jan. 31, 1994, Mr. Rasanen’s employment was terminated. He was given six months’ notice as per his offer of employment. He asked to work during his notice period which Lisle-Metrix permitted him to do.

On Jan. 27, 2000, four days before the expiration of the limitation period, Mr. Rasanen brought an action for wrongful dismissal against his former employer. At no time prior to that did he indicate to the company that he intended to commence litigation.

Mr. Rasanen argued that during the course of his employment, his salary was reduced, his bonus system was changed, the company stopped making contributions to his RRSPs and his responsibilities were reduced in that fewer sales persons were reporting to him.

In his view because of these actions the written termination provisions limiting reasonable notice no longer prevailed. As a result of the above-noted changes to his employment contract the “substratum of the contract” disappeared or, alternatively, the employer had unilaterally broken almost all of the fundamental terms of his contract of employment.

The Court acknowledged that there were cases in which, despite the presence of a clearly specified alternative to reasonable notice, the contractual notice period did not prevail because the changes to the employment contract over time resulted in the disappearance of the whole of the substratum of the contract.

Of interest is that in virtually every case where the substratum doctrine was applied, the employee received a significant promotion, not demotion. This is logical as one would expect that an enhancement of position, salary and benefits would be accompanied by an enhancement of the entitlement to notice.

The Court then addressed each of the changes to his employment contract that occurred. The 10 per cent salary cut applied to all senior employees and was the result of financial difficulties being suffered by the company. In fact Mr. Rasanen, as a member of the senior management, was involved in the discussion of a pay cut and agreed to that decision. Even after the decrease in 1992 his salary was still 25 per cent higher than it was at the time of his initial hire.

The Court found that there were fewer sales persons reporting to Mr. Rasanen at the time of his dismissal not because he was given less responsibility but because the number of sales persons had decreased due to financial difficulties. However at all times he remained a member of senior management, attended management meetings and shared in the decision-making.

As for the RRSP contributions it was not a term of the employment contract that Mr. Rasanen would be entitled to them. He was only entitled to receive the “benefits normally allowed to all employees by the company.” The company decided to stop RRSP contributions to all employees. If he had desired he would have been able to enter into the company pension plan which he declined.

The Court held that these incremental changes in the terms of his employment were unexceptional and unsurprising. They were not so fundamental as to remove the substratum of the contract. For the same reasons the Court did not accept the argument that the changes were so fundamental to the contract so that the company had repudiated the contract.

For these reasons the claim was dismissed.

For more information:

Rasanen v. Lisle-Metrix Ltd., Ontario Superior Court of Justice, Docket No. 00-CV-184163, Jan. 25/02.

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