The Ontario Court of Appeal has ruled that employers can’t rely on termination clauses when employees’ duties have escalated significantly after they signed their original employment contracts, including situations where the employee didn’t receive a promotion.
In its ruling, the court relied on the changed substratum doctrine, which states termination clauses in a written employment contract that specify a notice period may be unenforceable if the employee’s responsibilities have expanded significantly since the signing of the agreement.
“The employer argued that the doctrine did not apply to a high-level executive whose job title was unchanged,” says lawyer David Conn, who represented the plaintiff Stefano Celestini. “But the court held that the doctrine didn’t require the employee to start off at a lower level.”
The changed substratum doctrine has been around since 1983, but has rarely appeared in the jurisprudence.
“I haven’t seen it cited in a long time,” said George Avraam, a partner at Baker & McKenzie LLP, who wasn’t involved in the case. “What’s unique about this case is that it involved an executive-level employee whose job changed without a formal promotion. That’s not something you run across very often.”
Celestini co-founded Shoplogix Inc., a manufacturing consultancy, in 2002. He was its chief executive officer until a venture capital company purchased some of its shares, at which point he became chief technology officer and reported to a new CEO. In May 2005, the parties signed a contract that contained bonus and termination provisions. The termination clause provided for 12 months’ notice.
Three years later, Shoplogix and Celestini entered into a new bonus plan arrangement that didn’t mention the original agreement. Celestini continued to work for the company until 2017. Shoplogix then dismissed him without cause and sought to rely on the 12 months’ notice period in the original agreement.
Celestini sued, invoking the changed substratum doctrine. He demonstrated that he had taken on new responsibilities, none of which formed part of his duties when he signed the original employment contract 12 years earlier. These duties included sales, marketing, employee management, international travel, financing and handling the company’s infrastructure responsibilities. Although Celestini’s title never changed during that period, his compensation increased substantially.
The court reasoned that the significant changes in Celestini’s role meant the termination clause couldn’t have been intended to apply upon his dismissal. The court awarded 18 months’ notice, noting the result might have been different had the employment contract expressly stated that it continued to apply despite any changes to responsibilities.
On appeal, the company argued Celestini hadn’t been promoted, but the court ruled that was a matter of form, not substance. “More important is whether there were actual increases of a fundamental nature in the duties and degree of responsibility of the employee. If there were, the employee was, for all intents and purposes, promoted.”
Avraam says he isn’t surprised by the result. “Courts have of late not been particularly sympathetic to termination provisions, so much so that there’s almost a cottage industry of decisions nullifying termination clauses under the Employment Standards Act. My bet is that we’re going to see more of these changed substratum cases going forward.”