The Ontario Court of Appeal ("ONCA") recently held that an employee was entitled to significantly more wrongful dismissal damages, even though his employment contract contained termination clauses that were enforceable, because his duties had "fundamentally expanded" over time. In Celestini v. Shoplogix Inc. ["Celestini"], the ONCA dismissed the employer's appeal of an earlier court decision in which Stefano Celestini was awarded over $400,000 in damages on the basis that his employment contract had become unenforceable.
The ONCA upheld that Celestini's employment contract was deemed to be unenforceable under the "changed substratum" doctrine, because the employee's duties expanded substantially since he signed it. The changed substratum doctrine is a legal principle which acknowledges that the employment relationship can evolve over time such that it may become inappropriate to apply the provisions of an old employment contract to a job that has transformed significantly.
This decisionhas major implications for both employers and employees. Namely, dismissed employees may be entitled to common law reasonable notice even though they signed an employment agreement with termination clauses that are otherwise valid, if their duties have fundamentally expanded over time, subject to limited exceptions.
Celestini co-founded Shoplogix in 2002 and served as its CEO until 2005, when a venture capital firm acquired a stake in the company. As a result of this share acquisition, Celestini was replaced as CEO by Kevin Dwyer, and he became the company's new CTO.
Celestini signed an employment agreement for the CTO position in 2005, which provided that he would perform the duties of that office as set out in Shoplogix's by-laws, and as directed by the CEO and board of directors. Further the agreement provided that Celestini would perform "any other duties reasonably assigned to him by the CEO or the board", and that he could be dismissed without cause by being provided with 12 months' salary and benefits continuation.
Notably, Celestini's duties as CTO in 2005 as assigned by Dwyer were focused on transferring product and corporate knowledge within Shoplogix. His duties did not involve sales, travel, infrastructure responsibilities, or financing at that time.
In 2008, Dwyer was replaced as CEO by Martin Ambrose, who instituted dramatic changes at Shoplogix, including a drastic reduction in senior management staff. Consequently, Celestini's workload and responsibilities increased substantially, such that his duties were expanded to include managing key sales and marketing matters; supervising managers and senior staff who began reporting to him; travelling internationally to do sales work; overseeing infrastructure responsibilities; and soliciting investments.
Subsequently, another company acquired Shoplogix in March 2017 and Celestini was dismissed without cause the same day. As a result, Shoplogix provided Celestini with 12 months' salary and benefits continuation in accordance with his employment agreement.
Celestini then brought an action for wrongful dismissal damages against Shoplogix, arguing that he was entitled to additional severance pay, because his duties had fundamentally changed over time such that his employment agreement was no longer enforceable under the changed substratum doctrine. Both Celestini and Shoplogix requested a "summary judgment" from the court. (Summary judgment is a procedural tool that is available in cases where facts are not in dispute, in order to obtain judgment without the need for a formal trial).
The Motion Judge's Decision
The motion judge granted summary judgement in Celestini's favour, ruling that Celestini's employment agreement was unenforceable under the changed substratum doctrine because his duties had fundamentally changed over the course of his employment. In reaching this conclusion, the judge found that Celestini's new duties were "substantial and far exceeded any predictable or incremental changes to his role that reasonably would have been expected when he started as CTO". Shoplogix appealed this decision.
The Ontario Court of Appeal's Decision
The ONCA dismissed Shoplogix's appeal, holding that the motion judge did not err in finding that the changed substratum doctrine rendered Celestini's employment agreement unenforceable due to the substantial expansion of his duties.
In reaching this conclusion, the ONCA held that the changed substratum doctrine "operates as a limit on when an employee's common law entitlements will be restricted by the express terms of a historical written contract", and that this doctrine "recognizes the potential inappropriateness and unfairness of applying the contract's termination provisions to circumstances that were not contemplated at the time of contracting". Further, the ONCA held that a change to an employee's formal title is not required for the doctrine to apply, although it may be relevant as a contextual factor.
However, the ONCA also held that the doctrine would not apply where an employment agreement "expressly provides that its provisions, including its termination provisions, continue to apply even if the employee's position, responsibilities, salary or benefits change". The ONCA also held that the doctrine would not apply in circumstances where an employee confirms the agreement would continue to apply even though substantial changes to their duties occurred.
Applying the law to the facts, the ONCA found that the motion judge did not make any palpable and overriding error in holding that the changed substratum doctrine applied and that Celestini was therefore entitled to common law reasonable notice (substantially more than 12 months of pay). In the result, the ONCA dismissed Shoplogix's appeal of the motion judge's decision.
The Bottom Line
In light of Celestini, employers would be well advised to ensure that their employment agreements include language which expressly provides that the contract and termination clauses within it will continue to apply despite any changes to an employees' duties, position, or remuneration. Further, where an employer seeks to substantially expand an employee's duties and the employment agreement does not contain such language, they should have the employee ratify that the agreement and termination provisions will continue to apply despite the changes. By doing so, employers can prevent their employment agreements from being rendered unenforceable under the changed substratum doctrine.
If you have any questions regarding the enforceability of your current employment contracts or how the Celestini decision may impact your workplace, please do not hesitate to contact us for expert legal advice and guidance.