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Date:
2023.03.16

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Employment-Related Contract Drafting

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THE EMPLOYERS' EDGE

Time for a Change in your Employment Contracts? What we can learn from the Ontario Court of Appeal’s recent decision on the “Changed Substratum” doctrine

Even when a case is generally not favourable to employers, it can serve as an important reminder to companies to review and update their employment agreements.  Recently, the Ontario Court of Appeal (“ONCA”) affirmed a lower court’s decision that was not in favour of the employer but provided insight and clarity to employers on how they can strengthen their employment agreements. The case Celestini v Shopologix Inc., 2023 ONCA 131 discusses the “changed substratum” doctrine, which is frequently overlooked but can be detrimental to the validity of termination clauses.

The Doctrine

“Substratum” is defined as “something that underlies or serves as a basis or foundation.” In the employment law context, it can be understood as the employee’s original position they entered into at the time the employment contract was ratified. The doctrine begins to apply when there has been a “change” that amounts to a fundamental expansion of the employee’s duties. The doctrine acknowledges that it would be potentially unfair and inappropriate to apply the original employment contract terms when the employment relationship has changed so much that the substratum of the contract has disappeared or substantially eroded, or it can be implied that the contract could not have been intended to apply to the new role.

The doctrine essentially acts as a limit on when an employee’s common law entitlements will be restricted by the express terms of preceding employment agreements. Put simply, if an employee’s job has changed significantly since they began employment, they may be entitled to a much longer notice period at the time of termination than provided for in the contract.

The Decision

In the above case, the motion judge found that the termination provisions of the employee’s contract had become unenforceable due to the “changed substratum” doctrine and determined that he was entitled to an 18-month notice period instead of the 12-month period provided for by the employment agreement. The new responsibilities that triggered the doctrine included managing sales and marketing; directing managers and senior staff; travelling to pursue international sales; handling all of the company’s infrastructure responsibilities; and soliciting investment funds.

The employer, Shopologix, appealed this decision to the ONCA, arguing that the motion judge erred for two reasons. First, to invoke the doctrine an employee must receive a promotion. Shopologix argued that the doctrine could not be properly applied to an employee who was always a senior executive and never changed job titles. Second, Shopologix argued that the changes the motion judge relied on were incremental, and not sufficiently dramatic or fundamental enough to render the original contract null and void.

Justice Zarnett ultimately dismissed the appeal finding that a change in an employee’s formal title is not necessary to invoke the doctrine. The substratum of the original agreement disappeared irrespective of a formal promotion because the employee received new responsibilities and an increase in renumeration that were far beyond what was provided for in the initial contract. Further, the ONCA determined that there was no overriding error in the motion judge’s findings that the employee’s duties had been substantially and fundamentally changed in his employment.

Takeaways

This case is a cautionary tale to employers of the potential outcomes that can arise as the employer-employee relationship evolves. Employers should be put on notice that if an employee undergoes a change in employment, such as receiving a promotion, gaining an increase in wages or benefits and/or receiving a considerable expansion of responsibilities, the original contract may no longer have force and effect. Fortunately, Justice Zarnett provided some clarity and acknowledged that employers can avoid the negative effects of the doctrine by taking two different steps. One option is to include a clause in the original employment agreement stating that the terms of the contract will still apply should there be any fundamental changes of employment. A second option available to employers is to respond to any new changes of employment by entering into a new employment agreement.

If you are still unsure about how to protect yourself from the “changed substratum” doctrine contact the Lawyers for Employers are CCPartners can help.

Click HERE to access CCPartners' “Lawyers for Employers” podcasts on important workplace issues and developments in labour and employment law.

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