Mitigate the Risk: What Employers Should Consider When Terminating an Employee

eCaseNote 2023 No. 03

 The Ontario Court of Appeal (the “ONCA”) in Celestini v. Shoplogix Inc., 2023 ONCA 131 (“Celestini”) held that an employee whose responsibilities had fundamentally changed during his employment was not bound by a restrictive termination notice period set out in his original employment contract and was therefore entitled to over $420,000.00 in damages for common law reasonable notice.

Background

In Celestini, Celestini was hired by Shoplogix Inc. (“Shoplogix”) as their Chief Technical Officer (“CTO”). The employment contract he signed (the “2005 Contract”) outlined Celestini’s responsibilities, inclusive of “any other duties that may reasonably be assigned to him by the CEO or the board.” The 2005 Contract further outlined that Shoplogix could dismiss Celestini without cause by giving him one month’s written notice and continuing to pay his base salary and group health coverage for 12 months from the date of termination.

In 2008, Shoplogix hired a new CEO. Under his direction, Celestini was asked to take on additional duties. During this period, Celestini and Shoplogix entered into an Incentive Compensation Agreement (“ICA”) which outlined a new compensation structure. The 2005 Contract was not mentioned by Shoplogix, nor ratified, when the ICA was agreed upon.

In 2017, all of Shoplogix’s shares were sold. On the same day, Celestini was dismissed without cause by Shoplogix, who relied on the termination terms of the 2005 Contract.

Celestini brought an action for wrongful dismissal and, relying on the “changed substratum doctrine”, argued that significant changes had occurred in his employment duties since the 2005 Contract had been entered, making its terms unenforceable. The changed substratum doctrine provides that if an employee’s duties, status, or compensation significantly change during their employment, the notice period for dismissal specified in their original employment contract may no longer be enforceable (as the substratum of the contract will have disappeared).

Shoplogix’s position was that Celestini’s termination rights were limited to the terms in the 2005 Contract. Both parties sought summary judgement.

 The Decision

The motion judge, relying on the changed substratum doctrine, granted summary judgement in favour of Celestini, as his duties had “changed substantially and fundamentally.” Despite his job title remaining the same, the role that he fulfilled significantly changed in 2008 under the new CEO, and the substratum of the 2005 Contract had disappeared.

The motion judge rejected Shoplogix’s argument that the portion of the 2005 Contract which required Mr. Celestini to perform duties “reasonably assigned to him” could be given effect and noted the failure of Shoplogix to obtain any acknowledgement, while changes were occurring, that the 2005 Contract remained relevant.

Mr. Celestini was awarded 18 months in common law reasonable notice, totalling damages over $420,000.00. Shoplogix appealed this decision to the ONCA.

 Shoplogix made two related arguments, both of which were rejected by the ONCA. First, Shoplogix argued that because the changed substratum doctrine requires there to have been a fundamental change to an employee’s duties arising from a promotion or change in title, it could not be properly applied to Celestini who held the same title since employment. This argument was rejected by the original judge for being ‘inconsistent with the doctrine’.

Secondly, Shoplogix argued that the “fundamental changes” the motion judge had relied on were incremental, and not “sufficiently dramatic” to justify abrogating the 2005 Contract. The ONCA held that the original judge’s findings supported his decision to apply the changed substratum doctrine, and that he was entitled to deference.

Shoplogix’s appeal was dismissed by the ONCA. Like the motion judge, the ONCA stated that the use of the changed substratum doctrine may have been avoided had a clause been inserted in the 2005 Contract indicating that its terms applied notwithstanding any changes to employment duties.

Conclusion

 It is prudent that employers ensure every employee’s employment contract contains sufficient language to mitigate the risk of the successful application of the changed substratum doctrine by a Court. Additionally, any change to an employee’s employment duties, compensation, or a promotion, should alert an employer to review an employee’s contract, and consider entering a new agreement that accounts for any such changes.

The comments contained in this eCaseNote provide general information only and should not be construed as legal advice or opinion. For more information or specific advice on matters of interest, please call our offices.