Changed Substratum Doctrine and Changing an Employee's Job

Most employers need time and flexibility to transition their workforce. Among other things, this includes asking an employee to take on a new role with different job title or responsibilities (promotion), or at other times, imposing relatively minor changes to an employee’s job that may not amount to a constructive dismissal claim.

While the law does permit some leeway for employers to govern their workplaces in reasonable ways, there is a risk that an employer has to deal with an employment dispute any time an employee’s job is impacted. A key issue (although not as often deal with by Ontario employment lawyers) is known as the “changed substratum doctrine,” which is a common law rule that can be used to argue that an employment contract is no longer valid if the employee’s duties have changed significantly. This doctrine can be used to challenge key terms of the contract, such as termination provisions, and can make them unenforceable.

For instance, in a case called Celestini v. Shoplogix Inc., the court affirmed the possibility that certain clauses in an employment contract, particularly those that limit the financial entitlements of a dismissed employee (called a “termination clause“), may become legally unenforceable where there has been a substantial change in the employee’s role. In these circumstances, the court held that the original employment contract terms no longer applicable. If the employee’s duties evolve to the point that the original contract no longer reflects the nature of the employment, the employment contract may be deemed inapplicable or void.

In this case, the Court of Appeal upheld the lower court’s decision, rejecting the employer’s appeal and affirming that the employee, a former employee, was entitled to a higher severance payment than stipulated in the contract due to significant changes in his role over time.

Facts

The employee, who was a co-founder and former Chief Executive Officer (CEO) of Shoplogix Inc., signed an employment contract in 2005 when he transitioned from his CEO position to become the company’s Chief Technology Officer (CTO). At the time, a venture capital firm had purchased shares in the company, and as part of this transaction, the employee sold some of his shares. The written contract stipulated that, if terminated without cause, the employee would be entitled to one month’s notice, his salary and group health benefits for 12 months, and a prorated portion of his annual bonus. This provision was intended to cover all claims related to the termination.

However, in 2017, Shoplogix terminated the employee’s employment in the midst of an acquisition. The company asserted that the termination terms outlined in the 2005 contract were applicable and that they had complied with them. The employee disagreed, arguing that due to significant changes in his responsibilities since 2005, the contract’s termination clause had become unenforceable under the “changed substratum” doctrine. He believed that his duties had expanded so fundamentally that the contract no longer reflected the nature of his role, and he was therefore entitled to a more generous severance package based on common law principles.

Lower Court’s Ruling

The case proceeded to a motion for summary judgment, where the lower court sided with the employee. The court concluded that the employee’s duties had expanded dramatically since 2005, to the point where the original contract no longer accurately reflected the scope of his role. The judge invoked the “changed substratum” doctrine, ruling that the contract’s termination provisions were no longer enforceable because the employment relationship had evolved substantially.

employee the time the employee first signed the contract in 2005, the CTO role was primarily focused on overseeing the transfer of product and corporate knowledge. However, over the following years, particularly after a new CEO took over in 2008, the employee’s duties grew significantly. He became involved in critical areas of the business such as sales, marketing, managing senior staff, overseeing the company’s infrastructure, pursuing international sales opportunities, and soliciting investments. The judge found these changes to be so substantial that they rendered the original contract, especially its termination provisions, obsolete.

As a result, the judge ruled that the employee was entitled to damages based on a common law notice period of 18 months, rather than the 12 months stipulated in the contract. The judge awarded damages for six additional months of salary, bonus entitlements, car allowances, and life insurance benefits, resulting in a total award of over $420,000 in addition to what Shoplogix had already paid under the contract.

Appeal Court’s Decision

Shoplogix appealed the motion judge’s decision on several grounds. The company argued that the judge had incorrectly applied the “changed substratum” doctrine and that the changes in the employee’s role were not sufficient to invalidate the termination clause. Shoplogix contended that the termination provision in the contract should still apply because the employee had always held a senior position and the changes in his duties were incremental, not sufficiently significant to justify departing from the contract terms. Additionally, Shoplogix challenged the lower court’s award of damages for lost bonus entitlements, claiming they were miscalculated.

The Court of Appeal rejected Shoplogix’s arguments. The court affirmed that the “changed substratum” doctrine does not require a change in title and that it can apply to employees who maintain their seniority but experience significant changes in their responsibilities. The court also agreed with the lower court’s finding that the employee’s duties had grown substantially over the years, noting that such findings of mixed fact and law are entitled to deference on appeal. As a result, the employee was entitled to their full severance package, including damages for the bonus he would have earned during the notice period.

Conclusion

This decision reinforces the importance of understanding the potential impact of the “changed substratum” doctrine in employment law. While it may not frequently arise, the doctrine provides a critical safeguard for employees whose roles have evolved substantially over time. Employers must be aware that employment contracts – particularly those containing termination clauses – may be subject to revision or unenforceability if the nature of the employee’s duties changes fundamentally. This case serves as a reminder for employers to regularly review and update employment contracts to ensure they reflect the evolving responsibilities of their employees, particularly in situations involving senior executives whose roles may change over the course of their employment.

Book a Consultation with an Employment Lawyer in Toronto

At Bune Law, we understand and are familiar the complexities of workplace law and are committed to helping both employers and employees navigate these challenges, including understanding just cause vs. wilful misconduct. Whether you are an employer or employee dealing with employment contracts, workplace disputes like a wrongful dismissal or constructive dismissal, or simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

Book a confidential consultation with our Toronto employment law firm to protect your legal rights to understand your options and protect your rights.

Why Choose Bune Law When You Need an Ontario Employment Lawyer?

Experience in all areas of workplace law, including wrongful dismissal claims, constructive dismissal claims, severance package reviews, severance package negotiations, discrimination and human rights disputes, and employment contract reviews, including navigating the important issue between just cause vs. wilful misconduct in Ontario employment law.
Proven track record of successfully resolving workplace disputes through negotiation, mediation, and employment litigation.
Compassionate and personalized approach to each case, ensuring tailored solutions that meet your specific needs.

If you need a Toronto employment lawyer who is committed to delivering strong results and proactive solutions, please contact Bune Law online or by phone today at 647-822-5492.