Ontario decision provides takeaways for HR about 'fundamental' changes to responsibilities
“A fairly common HR circumstance — namely, giving employees new duties… could have really dramatic consequences for an employment relationship and for the enforceability of termination provisions in existing employment contracts.”
So says Micah Fysh, an associate at Filion Wakely Thorup Angeletti in Toronto, in response to a recent decision involving an executive whose role changed so fundamentally that it made his original contract unenforceable – and led to a judgment of $420,000.
“Employers promote employees all the time to higher and better-paying jobs. And when they do that, without updating the employment contracts, there's always been a risk that the employee’s old contract, or at least the termination clause in it, might not apply, depending on the nature and the extent of the changes to the employment relationship.”
The case reinforces just how important it is to have good HR practices around promotion and assigning new duties, he says.
“And it flags that risk of not updating employment contracts where circumstances would require or would indicate would be appropriate.”
Unfortunately, this decision is going to give employee-side counsel extra ammunition when it comes to the enforceability of employment agreements, says Paul Boshyk, a partner at McMillan in Toronto.
“Legal decision-makers will look for ways to see it that employees receive their reasonable notice under the common law. And for an employer to be able to limit the employee's entitlements, their contract really needs to be airtight and bulletproof.”
Background: From CEO to CTO
Stefano Celestini was a cofounder of Shoplogix, originally serving as CEO starting in 2002, and then becoming chief technology officer (CTO) in 2005.
He signed a written employment contract in stating he would carry out duties subject to the overall direction of the board and “consistent with such office,” along with “any other duties that may reasonably be assigned to him by the CEO or the board.”
The contract provided that Celestini could be dismissed without cause with one month’s written notice and his base salary and group health coverage for 12 months from the date of termination. The CTO 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.
In 2008, Celestini and the company entered into an Incentive Compensation Agreement (ICA), a bonus plan for management-level employees, which significantly changed his bonus, according to the motion judge, Michael Doi of the Superior Court of Justice, in his May 31, 2021 decision.
Also in 2008, a new CEO at the company meant Celestini’s workload and responsibilities increased substantially, including: 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 March 2017, Shoplogix was acquired by another company and Celestini was dismissed without cause. Applying the terms of the 2005 contract, Shoplogix continued his base salary and group health coverage for 12 months and paid a further sum representing a pro-rated bonus for the portion of 2017 up to his termination.
But Celestini brought an action for wrongful dismissal. Relying on the “changed substratum” doctrine, he alleged that fundamental changes had occurred in his employment duties, making the terms of the 2005 contract unenforceable. He claimed damages for the failure to receive reasonable notice of termination.
The Ontario Superior Court of Justice agreed — as did Justice Benjamin Zarnett in his Feb. 28, 2023 decision for the Court of Appeal for Ontario. Celestini was awarded a summary judgment of $421,043 plus pre-judgment and post-judgment interest.
What is ‘changed substratum’?
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,” said Zarnett in his decision.
“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.”
According to Shoplogix, the doctrine did not apply because Celestini was always an executive or member of senior management, there was no fundamental expansion of the employee’s duties and his title did not change.
Zarnett did not accept this argument: “To the extent that suggests that the doctrine can only apply to an employee who began in a non-executive role, there is nothing to support such a limitation either in the doctrine itself or the principle that underlies it.”
Citing case law, the justice said there must be a fundamental expansion, not a reduction, in the employee’s duties in order to engage the changed substratum doctrine.
“But this does not mean that in addition to that fundamental expansion of duties, a change in the employee’s formal title must also have occurred… It may be relevant that the employee was given a new title, but it is simply one contextual factor,” he said.
“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.”
In 2019, a termination provision limiting a Saskatchewan worker’s notice entitlement that was signed when the worker first joined the employer was declared unenforceable after 11 years and multiple promotions.
Duties and responsibilities
This goes all the way to the basic principle that when two parties make a contract, the parties should understand what they're agreeing to, says Fysh.
“And when parties are put into a situation that they couldn't have contemplated when they made the contract, under this doctrine, the theory is that they couldn't have agreed to have the contract apply in that situation,” he says.
“When we think of promotion, we primarily do think of title changes and everything that goes with that. And what the Ontario Court of Appeal said, in this case, is a title is just a name, and what actually matters is the duties and responsibilities.”
The substratum doctrine is not used very often by employee-side counsel, and rarely where the title or the position hasn't changed, says Boshyk.
“This case really focuses on just the expansion of the duties and the responsibilities of the employee, and to a lesser extent the increase in their compensation… and I think that that is pretty significant.”
With so much case law that is already favourable to employees in terms of the enforceability of termination provisions and employment contracts, employee-side counsel really haven't had to rely on the doctrine too much, he says.
“But because of this decision, and how employee-favourable it really is… I think we will see it relied on much more frequently going forward.”
The big takeaway for HR? Change the contract
To avoid this whole mess, if the employer had contained an anti-obsolescence provision in the original agreement that said, essentially, “This contract will govern the relationship regardless of any changes,” the court's decision seems to suggest that the substratum doctrine wouldn't have even been available for the employee to argue in the first place, says Boshyk.
An anti-obsolescence clause is a way of explicitly putting in writing that the employer and the employee intend for this contract to continue to apply, “notwithstanding certain changes… in duties, titles, compensation responsibilities, changes in location,” says Fysh.
In addition, to avoid the risks, either at the outset of the employment relationship or when there are these promotions or unofficial promotions or compensation increases, HR should clarify the terms of employment by confirming the application of contractual termination clauses, he says.
“Employers often like to take this opportunity to also review and revise older employment contracts to ensure that they're still valid, because employment law does change fairly quickly.”
When an employee is promoted, or receives increases in compensation, with material changes to duties and responsibilities, it can only benefit the employer to restate the existing terms of the employment agreement, says Boshyk.
“It's as simple as one sentence in that letter that says, ‘All the other terms and conditions of your employment agreement remain in full force and effect.’ And with those magic words, employers can breathe life back into employment agreements that might otherwise be caught by the substratum doctrine.”
But it’s important to remember that employers must provide fresh consideration for a new employment agreement, such as a true promotion or a material increase in pay, he says.
“You can't just put a new employment agreement in front of the employee and say, ‘Sign here’ — that's not going to be enforceable.”
As the Canadian Supreme Court has ruled, on many occasions, the most onerous terms of employment are not valid anymore, says another Vancouver lawyer.
Also important? ‘Keep an eye’ on employees
But the reality is duties and responsibilities often expand or change organically over the course of time, says Boshyk, so it can be difficult to restate an employment agreement if you haven't changed a title, increased pay or expanded benefits.
“Going forward, employers also have to be careful to keep one eye on what their key employees are doing. And if they do notice a significant change or expansion in the scope of what their people are doing, they need to determine what’s the best way to preserve the employer’s rights under the existing employment agreement,” he says.
“I don't think there is a one-size-fits-all solution.”
Employers promote people all the time, says Fysh, “and the bottom line here is just having really good HR practices about how you handle promotions and how you handle contracts, and that generally can really help mitigate risk.”
