Court of Appeal Applies “Changed Substratum” Doctrine to Invalidate Termination Clause in Employment Contract

Written on behalf of Peter McSherry

Many workers see their work duties and responsibilities change in response to their employer’s needs. While many of these changes are relatively minor and incremental, they may not need to be written into your employment contract. However, what happens if your work duties expand so significantly that the essence of your employment contract has disappeared?  

In the employment context, the common law “changed substratum” doctrine states that where there has been a material expansion to a worker’s duties and responsibilities beyond what was in their initial employment contract, such that the foundation of the agreement has disappeared or substantially eroded, the contract may no longer be valid. 

In a recent decision, the Ontario Court of Appeal considered this doctrine when determining whether to invalidate the termination provision in a written employment contract.

Employee signs employment contract that limits amount payable on dismissal

In Celestini v. Shoplogix Inc., the respondent employee was hired by the appellant, Shoplogix, as its Chief Technology Officer (“CTO”) in 2005. His employment contract provided that in his role as CTO, he would carry out the duties of that office as set out in the company’s by-laws and as specified by the CEO. 

As CTO, the employee’s duties initially involved transferring product and corporate knowledge within Shoplogix. However, the employment contract also stated that the employee agreed to perform any other duties that the CEO or the board may reasonably assign to him. 

The employment contract also included a termination provision whereby Shoplogix could dismiss the employee without cause by giving him one month’s written notice and continuing to pay his base salary and group health coverage for 12 months from the date of termination. The employee was also entitled to receive an additional sum representing a pro-rated bonus to the termination date.

Employee sees work duties and responsibilities significantly expand

In 2008, the parties entered into an Incentive Compensation Agreement (“ICA”). The ICA was a new bonus plan for management-level employees that significantly changed the employee’s compensation scheme from the original contract. Shoplogix did not mention or ratify the original contract when the ICA was agreed to.

Coinciding with the ICA, the employee saw substantial changes made to his role with the company. In particular, he took on the following new responsibilities:

• 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 his employer’s infrastructure responsibilities; and
• soliciting investment funds.

Employee dismissed without cause under terms in original employment contract

In 2017, the employer dismissed the employee from his employment without cause. Pursuant to the original employment contract, as part of his severance package, he was paid his base salary and group health coverage for 12 months after the termination date, plus a sum representing a pro-rated bonus to the date of termination. 

The employee eventually brought a claim for wrongful dismissal. The employee cited the changed substratum doctrine in his claim and argued that the changes to his employment duties after 2005 made the original employment contract unenforceable.

The motion judge granted summary judgment in the employee’s favour, and Shoplogix appealed the decision. 

Court of Appeal holds motion judge’s findings

On appeal, Shoplogix argued that the motion judge erred in his application of the changed substratum doctrine. Specifically, the employer alleged that the doctrine requires a fundamental change to an employee’s duties arising from a promotion. Therefore, because the employee’s job title did not change, the doctrine could not be applied. Further, the employer claimed that the motion judge’s changes were incremental and not dramatic enough to justify striking down the original employment contract. 

The Court disagreed with the employer’s arguments and affirmed the motion judge’s decision. 

A change in title is not required to invoke the changed substratum doctrine

The Court dismissed the employer’s first argument, finding that nothing supported the assertion that the doctrine only applies to an employee who started in a non-executive role. 

Further, the case law does not establish that the employee must have been promoted in order to rely on the doctrine. This is instead a question of substance and not form. The change in an employee’s title may be a relevant factor to consider in the analysis, but the more important question is whether there were actual, fundamental increases in the duties and degree of responsibility of the employee. If there were, the Court held, it is as if the employee had been “promoted” even if their job title remained the same.

Court finds employee experienced fundamental increase in responsibilities

The Court also disagreed with the employer’s second argument, noting that if the Court accepted this point, the Court would be required to override the motion judge’s findings of fact. 

Instead, the Court of Appeal agreed with the motion judge’s findings that in 2008, the employee was assigned new tasks and responsibilities that far exceeded anything he would have expected when he started in his role as CTO in 2005. In addition, the increase in his compensation under the ICA resulted in the substratum of the original employment contract disappearing. 

Employer failed to ratify existing contract in new agreement

A fact which was detrimental to the employer’s case was that it did not include a provision in the ICA ratifying the original employment contract or explicitly stating that it continued to apply despite any change to the employee’s responsibilities.  The motion judge acknowledged that the changed substratum doctrine may not have applied if this had occurred.

The Court held that, while the original contract did include a general provision saying that the employee agreed to perform other duties “reasonably assigned to him,” this did not fully anticipate the substantial changes that occurred.

The Court dismissed the employer’s appeal.

Contact Guelph employment lawyer Peter A McSherry for guidance on your employment contract or wrongful dismissal

If you are concerned about the terms of your employment contract, or you think you have been unfairly terminated, contact the trusted employment law team at Peter A. McSherry Employment Lawyer. With more than 15 years of practical experience, our team helps clients manage and resolve issues involving employment contracts and wrongful dismissal. To arrange a confidential consultation, contact us online or by phone at 519-821-5465.