June 26, 2023
The Ontario Court of appeal continues to favour employees when it comes to the interpretation of termination clauses in employment contracts.
THE ISSUE
The latest issue is the question of what happens when an employment contract is signed at the commencement of employment, but the termination occurs years later when the employee has very different job responsibilities.
This is known as the “changed substratum” doctrine. “Substratum” is the word used to describe something which supports something else; for instance, the foundation of a building is the substratum for the building itself. The analogy is that in the employment contract, the nature of the duties performed are the substratum which support the terms of the contract. If the substratum is fundamentally different, then the terms of the contract may no longer be fair.
Canadian law has recognized this principle since at least 1983 and operates on the principle that although the express terms of a historical written contract may limit common law entitlements, it is inappropriate and unfair to apply the contract’s termination provisions to circumstances that were not contemplated at the time of hiring or contracting.
THE CASE
Celestini v. Shoplogix Inc. applies the doctrine, adopting a description from a 2012 Superior Court decision which stated that:
The changed substratum doctrine is a part of employment law. The doctrine provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed.
The idea behind the changed substratum doctrine is that with promotions and greater attendant responsibilities, the substratum of the original employment contract has changed, and the notice provisions in the original employment contract should be nullified. [Citations omitted.]
An employment contract may exclude the application of the changed substratum doctrine, if it expressly and clearly provides that the termination provisions continue to apply after the change in the employee’s position, responsibilities, salaries, or benefits or if the termination provisions are ratified after the changes in the duties occur.
It does not matter whether or not the job title has changed, it is the actual duties and responsibilities together with the salary that the court will look at.
In the Shoplogix case, it was also argued that because the employee had begun and remained at an executive level throughout his employment, there had not been the necessary fundamental change. That ignored the fact that his actual duties had greatly expanded over time. Shoplogix clarifies the law in this area. Earlier Superior Court decisions had taken different approaches to the issue.
The necessary fundamental changes may also occur gradually over time, and need not be the subject of a specific event that alters the duties.
As a result, the employee’s compensation upon termination is not limited to the contractual amount but is calculated in accordance with the common law principles of reasonable notice which may be substantially greater. In the Shoplogix case, the contract provided for 12 months notice but the court felt that reasonable notice ought to be 18 months. For a senior executive, this made a substantial difference in the amount owing.
TAKEAWAYS
- Courts view employees as vulnerable and lacking in bargaining power at the time they are hired. This can apply to the benefit of senior executive employees as well as to more junior positions;
- Employers should not rely upon onerous provisions agreed to at the at the beginning of employment where, as time passes, duties evolve;
- If the employer intends to continue to restrict the notice available upon termination without cause, ratification of that agreement is necessary whenever fundamental change has occurred. This is true whether the change is gradual or occurs all at once;
- Employers should take care to watch for situations of gradual change in an employee’s duties or responsibilities, and update contract terms accordingly;
- Employees should seek legal advice before agreeing to any settlement at the time of the termination without cause;
- This is another example where legal advice may point out rights that the employee does not know that they have.
WHAT WEILERS LLP CAN DO YOU
The employment law group at Weilers LLP provides a comprehensive service from drafting employment contracts, through advising on dismissals and severance packages, to mediating, arbitrating, or litigating employment disputes. If you want advice tailored to Northwestern Ontario from lawyers based in Thunder Bay, Weilers LLP may be the right lawyers for you.