The changed substratum doctrine prevents an employee’s entitlement to common law reasonable notice from being restricted by the express terms of a historical written contract when the duties and responsibilities of an employee increased substantially and fundamentally over the course of employment.
In Celestini v. Shoplogix Inc., the Court of Appeal for Ontario found that the changed substratum doctrine applied to the dismissal of Mr. Celestini, the CTO of Shoplogix. This finding had implications for Mr. Celestini’s entitlements to reasonable notice and loss of bonus damages. This decision provides more insight into when the changed substratum doctrine applies, as well as steps employers can take to avoid the doctrine in the future.
Background
In 2005, Mr. Celestini became CTO of Shoplgix Inc. At that time, he signed a written employment contract entitling him to one month’s written notice and continuance of base salary and group health coverage for 12 months from the date of termination without cause
In 2008, a new CEO took over and made a drastic reduction in senior management personnel, resulting in a substantial increase in Mr. Celestini’s workload and responsibilities. At the same time, Mr. Celestini and Shoplogix entered into an Incentive Compensation Agreement (“ICA”) – a bonus plan for management-level employees.
In 2017, Friedman Inc. purchased Shoplogix, and Mr. Celestini was dismissed, without cause, on the same day. Per the employment contract signed in 2005, he was given one month’s written notice, and continuance of his base salary and group health coverage for 12 months from the date of termination.
Mr.Celestini brought an action for wrongful dismissal, arguing that fundamental and significant changes had occurred in his employment duties since 2005, therefore engaging the changed substratum doctrine and making the terms of the 2005 employment contract unenforceable.
Justice Doi of the Superior Court was asked to rule on a motion for summary judgement. There were two key issues:
- Was the doctrine of changed substratum engaged?; and
- How should Mr. Celestini’s bonus be calculated?
Was the Changed Substratum Doctrine Engaged?
The motion judge found that the changed substratum doctrine had been engaged because Mr. Celestini’s increase in responsibilities in 2008 was substantial and far exceeded any predictable or incremental changes to his role that reasonably would have been expected when he started his role as CTO in 2005. In addition to his existing responsibilities, Mr. Celestini was given responsibility for travelling to pursue sales, managing all of the company’s infrastructure responsibilities, and securing financing.
During this same period of time, the ICA caused significant changes to Mr. Celestini’s compensation. In the ICA there was no mention or ratification of the employment contract from 2005. The motion judge found the ICA further confirmed that the “substratum” (i.e., foundation) of the original contract of employment disappeared. Thus, the notice terms from the 2005 employment contract were no longer enforceable, and reasonable notice under the common law applied.
Shoplgix appealed that the motion judge improperly applied the changed substratum doctrine. The Court of Appeal disagreed, finding that the motion judge’s conclusions were entitled to deference given that no extricable legal error had been made.
The Court of Appeal further clarified the changed substratum doctrine in response to Shoplogix’s submissions:
- The doctrine also applies to employees that began in an executive role;
- There must be a fundamental expansion, not reduction, in the employee’s duties to engage the doctrine;
- The fundamental increase in the employee’s duties and degree of responsibility are based on substance, not form (i.e., a change in the employee’s formal title is not necessary); and,
- Where the duties and responsibilities are fundamentally increased, the meaning of the job title is redefined as if a new job title were given.
Mr. Celestini’s Bonus under the Incentive Compensation Agreement
The ICA provided that if Mr. Celestini were dismissed without cause, then Shoplogix would pay his bonus pro rata, = up to the date of termination. The motion judge found that the bonus entitlements under the ICA did not remove Mr. Celestini’s entitlement to damages under the common law for the loss of his ICA bonus during the reasonable notice period (which he is entitled to due to the determination that the changed substratum doctrine applies).
The Court of Appeal agreed with the motion judge’s determination because the ICA did not expressly remove Mr. Celestini’s right to damages upon the circumstances that actually arose (i.e., dismissal without cause without reasonable notice).
Takeaways for Employers
An employer can avoid the changed substratum doctrine from being engaged by ensuring the written employment contract expressly states that its provisions, including termination provisions, continue to apply even if the employee’s position, responsibility, salary and/or benefits change. The employment contract can also have continuing force even if the employee’s duties have substantially changed if the parties ratify its continued applicability when those changes occur.
As well, an employer can avoid owing a bonus entitlement upon termination based on both common law and internal bonus structures by including an express clause in the bonus agreement that common law entitlements do not apply.
