Outgrowing Canadian Employment Contracts: Beware the Changed Substratum
It is becoming increasingly difficult for Canadian employers to enforce the termination provisions of employment contracts, even cases where the wording in the contract is clear. A recent decision from the Ontario Court of Appeal has held that an employment contract may no longer be valid even in cases where the employee did not receive a formal promotion.
The decision in Celestini v. Shoplogix Inc., 2023 ONCA 131 involved a claimed by Stefano Celestini who worked for Shoplogix for 12 years before being terminated.
When Celestini was hired in 2005, he was offered the position of Chief Technology Officer (CTO), and signed an employment contract presented by the employer at that time.
In preparing Celestini’s contract, the company took the approach which many employers follow, which was to incorporate language which would contemplate some flexibility about a change to his duties. In particular, the employment agreement provided that, in addition to his duties as CTO, Shoplogix could assign Celstini “any other duties that may reasonably be assigned to him by the CEO or the Board.”
In attempt to obtain certainly about what the obligations would be upon termination, the contract also stipulated that Celestini would be provided with 12 months of salary and benefits in the event that his employment was terminated without cause.
At the time of hiring, the CTO role and the work which Celestini was assigned focussed on internal interactions, and he did not have any direct reports. As such, he had no responsibilities relating to sales, travel, infrastructure or financing. Although Celestini retained the title of CTO, his duties changed dramatically in 2008, when the employer’s new CEO gave him increased duties and responsibilities, which included sales and marketing, technical oversight and oversight for a number of managers and direct reports.
There was also a substantial change to the compensation structure between the commencement of employment in 2005 and the termination 12 years later. In 2008, and again in 2012, Shoplogix introduced amended compensation plans and an incentive program which provided Celstini with different entitlements.
When the company terminated Celestini in 2005, it attempted to rely upon the 12 month termination provision in his 2005 contract, which had not been revised despite the changes to duties and compensation in the intervening years.
Celestini sued the company for wrongful dismissal, and he was successful in challenging the enforceability of the termination provision in his 2005 contract. The trial judge accepted his legal argument that there has been a “change of substratum”, meaning that the employment duties and compensation had changed substantially and fundamentally, to the point that the initial agreement was no longer enforceable. While Celestini’s title had never changed, the work arrangements had been altered to such an extent that the contract no longer reflected the role at the time of termination. As a result, the Ontario Superior Court of Justice found that the 12 month notice provision was unenforceable, with the Court proceeding to award damages equal to 18 months of compensation.
The Ontario Court of Appeal’s recent decision upheld the decision of the trial judge. In affirming the original verdict, the Court of Appeal has confirmed that there is no requirement for the employee’s title to be formally changed in order to “outgrow” the termination provisions of a contract. Instead, it will be deemed to be like a promotion if the employee receives substantially enhanced duties and compensation during the course of employment.
Takeaways for Employers
This decision highlights the ongoing risks of attempting to rely upon employment agreements, especially in the case of documents drafted many years before the employee is terminated. It is prudent to carefully review the actual wording in the contract, and there should ideally be express wording which states that the agreement and its termination provisions will continue to apply regardless of any change to duties or compensation. The approach followed in this particular case also highlights the importance of an ongoing review of agreement even when the employee remains employed – there are potential options available to present increased compensation opportunities as being conditional upon re-affirming the conditions agreed to with the executive at the outset of employment. Simply ignoring the issue can in many cases lead to costly and unintended implications.