The “changed substratum doctrine” presents one way an employee can defeat the terms of their employment contract. In a recent Ontario decision, the doctrine was usefully summarized and applied.
Mr. Celestini co-founded the defendant employer, Shoplogix, in 2002. In 2005, Celestini sold many of his shares in Shoplogix and stepped down from CEO to CTO. As part of this transition, he signed an employment agreement on May 17, 2005. This agreement included a termination clause that allowed for 12 months’ salary continuation with benefits and pro-rated bonus.
In 2017, 15 years after Celestini founded Shoplogix and 12 years after taking on the role of CTO, Celestini was terminated without cause.
The sole issue in this case was whether or not the substratum of Celestini’s contract of employment with Shoplogix changed substantially after the employment agreement of May 17, 2005 such that the contractual notice terms in the employment agreement (i.e. 12 months’ salary and benefits continuation) were unenforceable. If so, Celestini would be entitled to common law reasonable notice, which potentially would be higher than the notice provided in his contract.
Celestini took the position that the substratum of his contract had changed substantially. Shoplogix took the position that it had not, and that any change was minor and incremental.
The Ontario Superior Court has previously explained that contractual notice periods will not be enforceable if, over the course of an employee’s employment, the important terms of the agreement concerning that employee’s responsibilities and status have significantly changed. This recognizes that contractual terms which are fair at the beginning of the employment relationship may later be unfair when the employee:
- Develops new skills;
- Acquires a new position (although there is no requirement that they assume a new job title);
- Receives greater remuneration; or
- Acquires additional responsibilities.
According to the changed substratum doctrine, significant changes in employment can cause notice provisions in an employment contract to become unenforceable at the time of termination. Where the substratum of the employment contract at the time of hiring has disappeared or eroded sufficiently, it may be implied under the doctrine that the contract could not have been intended to apply to the position held by the employee at the time of their dismissal because the position is not the same as the position the original employment contract related to.
Did the Substratum Change? Is the Contract Enforceable?
When Celestini entered into the contract in 2005 he was CTO. He received his instructions from the CEO, Mr. Dwyer. At the time, Celestini was not responsible for operational programs or other activities related to Shoplogix’s sales or research and development activities. Rather, his role was to explain the business to others at Shoplogix, including its new sales team. He was responsible for internally transferring knowledge to others on the team so they could best understand the Shoplogix product and how to best market it. Significantly, Celestini had no direct managerial or operational responsibilities.
Mr. Dwyer left Shoplogix in 2007. Before a new CEO was hired, Celestini was tasked with managing the transition to a new CEO. His role shifted considerably. He was depended upon for managerial and operational duties that extended well beyond the CTO role he initially performed.
When the new CEO was introduced in 2008, a new manager approach was implemented that departed substantially from the approach of the CEO’s predecessor. Celestini saw his compensation change dramatically: from $300,000 in 2005 to $518,850 in 2016. Celestini was also tasked with significant new duties and responsibilities that fundamentally changed his employment from what it was in 2005 when he started as CTO. He became responsible for all the company’s infrastructure responsibilities, and travel became a significant part of his job despite being non-existent in 2005.
Based on all the above, the trial judge found that the substratum had changed – after the new CEO was introduced, dramatic changes were instituted to revitalize the company. The CEO reduced the senior management team and restructured its remaining roles, resulting in Celestini’s role as CTO fundamentally changing.
The substratum of Celestini’s employment contract had disappeared. Therefore, the changed substratum doctrine was implicated with the effect that the contract’s notice provisions were unenforceable. As a result, common law would apply. The trial judge awarded Celestini with 18 months’ notice (i.e. 6 months more than allowable under his employment contract of 2005).