The highest court in Ontario has recently confirmed that where an employer substantially changes the duties of an employee (even with their consent) outside of the written employment agreement, the original termination clause may still not be enforceable.
In Celestini v. Shoplogix Inc., 2023 ONCA 131 (“Celestini”), the Ontario Court of Appeal confirmed that the common law doctrine of changed substratum applies in respect of a written employment contract that restricts or limits the amounts payable to a dismissed employee when there has been a substantial change in the employee’s role or duties.
In Celestini, the Plaintiff, Mr. Celestini, co-founded Shoplogix in 2002 and served as the company’s inaugural chief executive officer (“CEO”). On May 17, 2005, he stepped down as CEO to become its chief technology officer (“CTO”). He continued as CTO until March 2, 2017, when the company terminated his employment without cause after the company was acquired. Mr. Celestini signed an employment agreement with the company in 2005, where if he was terminated without cause, Mr. Celestini would receive his base salary and have his group health insurance continued for 12 months from the termination date. The company would also make a pro-rated payment for his annual bonus accrued up to termination.
Upon his termination, Mr. Celestini assumed that the termination provision from the 2005 contract was unenforceable as there had been material changes in employment duties without a change in his title. Therefore, he claimed he was entitled to common law damages for wrongful dismissal due to the breach by Shoplogix of the implied term to provide reasonable notice of termination.
The Motion Court (lower court) held that Mr. Celestini’s responsibilities fundamentally and substantially increased throughout his employment and that “[a]s such, the substratum of his  contract of employment disappeared and implicated the changed substratum doctrine which left the notice terms in his contract no longer enforceable” and that “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.” These changes included managing essential aspects of the company’s sales and marketing operations, business development, customer support and engineering program areas, creating a website for generating sales leads, and significant international travel for sales and development meetings.
Mr. Celestini was therefore entitled to damages at common law for the failure of Shoplogix to provide reasonable notice of termination. The lower level judge found the appropriate notice period was 18 months (for a 12-year executive employee).
The Court of Appeal agreed with the lower court decision, and agreed that the termination provision in the 2005 contract unenforceable. The Court of Appeal cited the Superior Court of Justice’s decision in MacGregor v. National Home Services, 2012 ONSC 2042 where Justice Perrel stated 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”. The Court of Appeal also found that even without a change in the employee’s title, changed substratum still applied.
Implications for Employers
This decision further underscores the importance of written contracts being confirmed at every step of the way, for every employee – even CEOs and CTOs.
Even if there is no change in an employee’s title, if the employee’s duties and responsibilities substantially change, an employer should consider whether or not the employee’s most recent contract is still enforceable. In that case, they should provide a contract with a new benefit to act as fresh consideration and have the employee confirm that they continue to be bound by the agreement, notwithstanding any subsequent changes to the terms and conditions of employment.
This article is provided for general information purposes and should not be considered a legal opinion. Clients are advised to obtain legal advice on their specific situations.