Updating an Employment Contract and Changed Substratum

Employee Promotions, Changed Substratum and Constructive Dismissal

In any workplace context, employers generally have a need to maintain flexibility in order adapt to changing circumstances, economic conditions and workforce. Shortly after the Canadian economy began to rebound from the COVID-19 pandemic resulting in a tightened labour market, many employees suddenly became less hesitant to quit their jobs and jump ship to new employment opportunities. In an effort to retain some of their best talents, employers began to offer perks to employees, including bonus pay, remote work and promotions.

In Ontario, many employers are keenly aware of the importance of having an employee sign a new employment contract in exchange for obtaining a promotion. However, a recent Ontario Court of Appeal decision helps explain why employers should regularly update employment contracts, especially when making significant changes to an employee’s terms and conditions of employment.

In Celestini v Shopologix Inc., 2023 ONCA 131, the Court found that in circumstances where an employee has experienced significant changes to their role status and responsibilities, such that the “foundations of the original employment contract” have completely changed, it is appropriate for employers to rely on the original employment contract. In wrongful dismissal cases, this can result in a termination clause being found invalid, entitling them to a large financial severance package.

Put another way, according to the changed substratum doctrine, provisions in a written employment contract that restrict or limit the amounts payable to a dismissed employee may be unenforceable. This legal rule applies where there have been fundamental expansions in the employee’s duties after the employment contract was made, such that the substratum of the employment contract has disappeared or substantially eroded, or it can be implied that the contract could not have been intended to apply to the role ultimately occupied by the employee.

What Happened in Celestini v. Shopologix Inc.

In 2005, the employee was appointed Shoplogix Inc.’s Chief Technological Officer, and signed a written employment contract. The employment contract contained a termination clause that limited his entitlements upon termination of employment.

In 2008, the employee and Shoplogix entered into a new compensation agreement, which significantly altered his bonus entitlements. However, they did not change the original 2005 employment contract at this time.

Overt time, Shopologix expanded the employee’s workload and responsibilities as a result of a change in leadership and his new compensation arrangement.

In 2017, Shoplogix terminated the employee’s employment without cause. Shoplogix argued that his severance pay rights were governed by the employment contract he signed in 2005. However, the employee argued that the termination clause in the 2005 employment contract were legally unenforceable because of the substantial changes to his position, and he was therefore entitled to reasonable notice at common law (a financial severance package). As a result, he claimed he was entitled to common law damages for wrongful dismissal based on the fact that Shoplogix violated the implied term to provide reasonable notice of termination.

What did the Court Find?

The Ontario Court of Appeal found that the increase in the employee’s responsibilities over time were so significant that they effectively shifted the entire “substratum” of the employment contract, thereby rendering the termination clause unenforceable. In the Court’s view, had the employment contract contained a clause expressly stating that the employment contract’s termination clause would continue to apply even if the employee’s position, responsibilities, salary or benefits change. Alternatively, the written employment contract could also have continuing force even if there were substantial changes in the employee’s duties if the parties ratified its continued applicability when those changes occurred. Lastly, the court found that the changed substratum can apply even if there is no change in an employee’s job title or rank (e.g., entry-level to executive-level).

Put simply, there must be a fundamental expansion in the employee’s duties in order to engage the changed substratum doctrine, although this does not require a change in the employee’s formal job title. While a change in job title may be a relevant factor, it is more important to determine whether there were actually fundamental increases in the duties and degree of responsibility of the employee.

Employment Lawyer in Toronto

If you are an employee who believes you have been constructively dismissed, please speak with our experienced employment lawyer in Toronto regarding your options, including negotiating your severance package to obtain the severance compensation you deserve, as well as wrongful dismissal claim.

Contact us by phone 647-822-5492 or fill out the contact form to the side. Our employment lawyer in Toronto would be happy to assist in your employment law matter as quickly as possible.

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