By Lai-King Hum | Hum Law Firm
Employment contracts are a critical component of the relationship between employers and employees. They outline the expectations and obligations of both parties, including the employees’ job duties and compensation.
However, as businesses evolve, so do the roles and responsibilities of the employees. The change in an employee’s job duties may render the original employment contract void.
As a result, even if the original contract limited the employee’s entitlements on termination, either to the minimum requirements under Ontario’s Employment Standards Act, 2000, or some other limitation such as two weeks’ notice or pay in lieu for every year worked, that original contract may no longer be effective.
If the employee’s role and responsibilities have changed significantly, the employer may be shocked and caught off-guard at the substantial increase to the employee’s entitlements on termination.
For example, in Celestini v. Shoplogix Inc., 2023 ONCA 131, the Ontario Court of Appeal upheld the motion judge’s ruling that the employee Mr. Celestini is entitled to common law reasonable notice and pro-rated bonus because his contract was unenforceable under the changed substratum doctrine.
Mr. Celestini had started working for Shoplogix Inc. (“Shoplogix”) as its inaugural Chief Executive Officer in 2002. In 2005, he shifted his role to Chief Technology Officer (“CTO”), and entered into an employment agreement that limited his termination entitlements to a 12-month notice period. His initial duties as the CTO were to transfer product and corporate knowledge within Shoplogix. Due to a change in Shoplogix’s structure and business operations, the CTO was then assigned a number of different responsibilities, managing many activities that were previously managed by former senior managers. In 2017, he was terminated without cause.
Notwithstanding that his CTO contract limited him to 12 months’ notice or pay in lieu, Mr. Celestini was granted 18 months’ common law reasonable notice. The motion judge held that his job duties had been significantly changed, and his employment contract was no longer enforceable under the doctrine of “changed substratum.” In other words, although Celestini’s job title remained the same, the motion judge concluded that his role had been substantially altered due to the addition of significant new duties and responsibilities.
Shoplogix argued that the changed substratum doctrine did not apply because of a term in the employment contract, which required the CTO to perform duties that were reasonably assigned to him. The motion judge rejected this argument because the term did not expressly provide that the employment contract would apply despite any changes to the CTO’s role.
As a result, the employment contract was declared void, and the CTO was entitled to common-law reasonable notice, not the 12 months that was in the CTO agreement. Mr. Celestini was paid very well for his work. Hence, in addition to the 12 months’ salary and the pro-rated bonus in 2017 already paid by Shoplogix per the CTO agreement, the motion judge granted $421,043.05, equal to six further months’ salary and bonus, plus pre-judgment and post-judgment interest to Celestini.
The Court of Appeal upheld the motion judge’s findings, except that it allowed Mr. Celestini’s cross-appeal and increased the award by $37,188.61.
Employees’ roles may change as operations evolve. To avoid costly terminations, it is important for employers to amend employment contracts in a timely manner when new duties are assigned to their employees.
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