In my Employment Law courses, we always discuss a variety of scenarios in which courts decline to enforce clear language found in employment contracts. One such scenario involves the “changed substratum doctrine”.
In my text The Law of Work (Chapter 8, p. 124) I discuss this doctrine by using the example of a McDonald’s employee who is hired as teenager as a burger flipper/cook at minimum wage according to a standard form contract that includes a clause permitting the employer to terminate the employee by providing only the minimum amount of notice found in employment standards legislation. The employee ends up advancing up through the ranks over the years and when his employment is eventually terminated 25 years later, he is the Regional Manager for Eastern Canada responsible for hundreds of stores. However, the only contract ever signed was the original burger flipper contract. So the employer tries to terminate the employee by relying on the notice of termination clause in that old contract, providing the minimum notice required, say 8 weeks.
In that case, the employee might argue, probably successfully, that the changed substratum doctrine applies. The nature of the job has changed so fundamentally that in fact the old contract expired and was replaced by a implied contract more suitable to the new position, and that this new contract requires “reasonable notice” of termination.
There aren’t a huge amount of cases applying the changed substratum doctrine in Canada, but there is a useful new case decided in Ontario in 2021 that does so. It is called Celestini v. Shoplogix. Here is a quick summary.
Key Background Facts
The employee (Celestini) began work for the employer as its Chief Technology Officer (TCO) in 2005. He signed an employment contract that stated that the employer could terminate the contract without cause by providing Celestini with 12 months’ base salary and benefits coverage plus a bonus calculated based on a formula in the contract that we needn’t concern ourselves with in this post. In March 2017, Celestini was terminated without cause and paid out his entitlements as per the original 2005 employment contract. However, Celestine sued the employer for wrongful dismissal, alleging that the “changed substratum” doctrine applied since the conditions of his job has changed so fundamentally by 2017 that the original 2005 contract language relating to notice of termination should be ruled void and “reasonable notice” substituted.
In 2008, a new CEO was hired who began a mass restructuring of the company. In 2009, the new CEO terminated a group of Vice-Presidents and a large chunk of the sales staff in order to make the company leaner. Although he maintained the same job title (TC), the restructuring led to Celestini being assigned significant new duties and responsibilities that had previously been performed by other employees and that did not exist when he was first hired as TCO in 2005. Celestini was also assigned a portfolio that required considerable international travel.
The court summarized the “changed substratum doctrine” as follows:
Under the changed substratum doctrine, significant changes in employment may cause the notice provisions in a contract ofemployment to become unenforceable at the time of termination. Where the substratum of the employment contract at the time of hiring has disappeared or eroded sufficiently, it may be implied under the doctrine that the contract could not have been intended to apply to the position that the employee ultimately occupied at termination” (para. 31)
Justice Perell helpfully summarized the changed substratum doctrine in MacGregor v. National Home Services, 2012 ONSC2042 at paras 11 and 12:
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 notenforceable if over the course of employment, the important terms of the agreement concerning the employee’sresponsibilities and status has significantly changed
Applying this test to the facts, the Court concluded that the conditions of Celestini’s job has changed fundamentally over the years and that therefore the termination clause in the 2005 contract should no longer be enforced:
[56] Based on the foregoing, I am satisfied that Mr. Celestini’s duties changed substantially and fundamentally over the course of hisemployment. Among other things, he received the following new tasks: a) managing important sales and business developmentactivities; b) handling technical, solutions management and quality assurance matters; c) directing managers and staff who werereassigned to report directly to him (i.e., after he had worked for several years without any direct reports); d) pursuing business opportunities with international partners that introduced global travel requirements; e) handling a range of company infrastructure and other administrative matters; and f) contributing significant work to solicit investment funding. In my view, these responsibilities were substantial and far exceeded any predictable or incremental changes to his role that reasonably would have been expected when he started as CTO in 2005. In addition, Shoplogix made substantial changes to his compensation. In light of these significant changes, I find that the substratum of his original contract of employment disappeared and that its notice terms should no longer be enforced as they could not have been intended to apply to his role at termination. Applying the changed substratum doctrine, I find that the terms in the Employment Agreement that purport to limit the notice obligations for termination should no longer have contractual force.
Outcome
Applying the Bardal factors that we explore in Chapter 10 of The Law of Work , the Court ruled that “reasonable notice” in this case was 18 months. Therefore, the employer was ordered to pay Celestini an additional 6 months’ wages above the 12 months it had already paid, plus an additional bonus payment and damages to account for a lost car allowance and lost insurance benefits.