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Employment - 'Changed Substratum'

. Celestini v. Shoplogix Inc.

In Celestini v. Shoplogix Inc. (Ont CA, 2023) the Court of Appeal considered the 'changed substratum' wrongful dismissal issue, where changes in duties can effectively result in changes in pay-in-lieu duties of the employer, even under a written contract. In this case the employer had terminated the employee and attempted to rely on a 12-year old contract:

[1] The common law “changed substratum” doctrine is central to this appeal. Under it, provisions in a written employment contract that restrict or limit the amounts payable to a dismissed employee may be unenforceable. The doctrine applies where there have been fundamental expansions in the employee’s duties after the employment contract was made, such that the substratum of the employment contract has disappeared or substantially eroded, or it can be implied that the contract could not have been intended to apply to the role ultimately occupied by the employee.

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[32] 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. Given that an employer-employee relationship may evolve in a fundamental way after the written contract was made, the 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.

[33] In Wallace v. Toronto-Dominion Bank (1983), 1983 CanLII 1907 (ON CA), 41 O.R. (2d) 161 (C.A.), at pp. 180-81, leave to appeal refused, [1983] S.C.C.A. No. 98, Robins J.A. described the doctrine and its rationale as follows:

[T]here are readily imaginable cases where an employee's level of responsibility and corresponding status has escalated so significantly during his period of employment that it can be concluded that the substratum of an employment contract entered into at the time of his original hiring has disappeared or it can be implied that that contract could not have been intended to apply to the position in the company ultimately occupied by him.

[34] More recently, Perell J. summarized the effect of the authorities in MacGregor v. National Home Services, 2012 ONSC 2042, at paras. 11-12:

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 not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed.

The idea behind the changed substratum doctrine is 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. [Citations omitted.]

[35] The written employment contract may oust the application of the changed substratum doctrine, if it expressly provides that its provisions, including its termination provisions, continue to apply even if the employee’s position, responsibilities, salary or benefits change: Miller v. Convergys CMG Canada Limited Partnership, 2013 BCSC 1589, 10 C.C.E.L. (4th) 187, at paras. 35-36, aff’d 2014 BCCA 311, 16 C.C.E.L. (4th) 49, leave to appeal refused, [2014] S.C.C.A. No. 424. The written employment contract may also have continuing force even if there have been substantial changes in the employee’s duties if the parties ratified its continued applicability when those changes occurred: Schmidt v. AMEC Earth & Environment et al., 2004 BCSC 1012, at paras. 32-33.

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[37] Shoplogix’s first submission hints at extricable legal error, as it asserts that the motion judge failed to properly recognize a required element of the changed substratum doctrine. According to Shoplogix, the doctrine does not apply to an employee who was always an executive or a member of senior management. In any event Shoplogix submits that the doctrine requires both a fundamental expansion of the employee’s duties and a promotion which necessarily implies a change in title.

[38] I do not accept this argument.

[39] To the extent that Shoplogix suggests that the doctrine can only apply to an employee who began in a non-executive role, there is nothing to support such a limitation either in the doctrine itself or the principle that underlies it.

[40] As for the argument that a promotion with a change in title is necessary, Shoplogix attempts to draw this proposition from a statement in Rasanen v. Lisle-Metrix Ltd. (2002), 2002 CanLII 49611 (ON SC), 17 C.C.E.L. (3d) 134 (Ont. S.C.), aff’d (2004), 2004 CanLII 16321 (ON CA), 187 O.A.C. 65 (C.A.). At para. 40 of his decision, Dambrot J. stated: “It is interesting to note that in virtually every case where a Canadian court has concluded that the substratum of the employment contract had disappeared, this resulted from a significant promotion of the employee, and not a demotion” (emphasis added).

[41] What Dambrot J. was doubting, in the quoted sentence, was the argument of the plaintiff employee that he could rely on the changed substratum doctrine because of reductions rather than expansions of his role − he argued that his bonus, salary and the number of people reporting to him had been reduced, and his title had been changed from Marketing and Sales Manager to “senior industrial sales”: Rasanen, at paras. 6-10. Dambrot J. observed that “where the employee has been demoted or deprived of other entitlements, surely his argument [to escape the effect of termination provisions in a contract] must be based on [those changes resulting in] a breach, and not on the changed substratum doctrine”: at para. 42. He did not ultimately find it necessary to limit his decision to that point, as he found that the doctrine had no application given that no changes of a fundamental nature had occurred in the employment relationship: at para. 52.

[42] I agree with Dambrot J. that there must be a fundamental expansion, not a reduction, in the employee’s duties in order to engage the changed substratum doctrine. But this does not mean that in addition to that fundamental expansion of duties, a change in the employee’s formal title must also have occurred. The question of whether the “employee's level of responsibility and corresponding status has escalated so significantly” (the phrase used in Wallace) is one of substance, not form. It may be relevant that the employee was given a new title, but it is simply one contextual factor. More important is whether there were actual increases, of a fundamental nature, in the duties and degree of responsibility of the employee. If there were, the employee was for all intents and purposes “promoted”, given their escalated status, even if the assigned title did not change. Put another way, where the duties and responsibilities are fundamentally increased the meaning of the job title is redefined as if a new job title were given.

(e) There Is No Reversible Error in the Finding That There Was a Fundamental Increase of Responsibilities Sufficient to Engage the Doctrine

[43] Shoplogix’s second argument is that the changes that did occur were incremental, not fundamental, given the duties described in the 2005 Contract, its contemplation of additional duties, and the actual responsibilities that were assigned to Mr. Celestini up to 2017. This argument is also flawed, as it is contradicted by the motion judge’s findings that were available to him on the record and are entitled to deference. Shoplogix has not identified any palpable and overriding error in those findings.

[44] In essence, Shoplogix asks us to replace the motion judge’s express findings about the nature of the changes and the meaning of the 2005 Contract, which he made after an assiduous review of the record, with others based on a different reading of the record. It is not the role of this court to retry the case.

[45] The motion judge’s findings support his conclusion to apply the changed substratum doctrine. At paras. 56-57, he found:

Based on the foregoing, I am satisfied that Mr. Celestini’s duties changed substantially and fundamentally over the course of his employment. Among other things, he received the following new tasks: a) managing important sales and business development activities; b) handling technical, solutions management and quality assurance matters; c) directing managers and staff who were reassigned 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. Although his job title remained unchanged, I am satisfied that the substantial changes to his position support the application of the substratum doctrine in this case.

The Employment Agreement does not feature a term which expressly states that its terms continue to apply notwithstanding any changes to Mr. Celestini’s responsibilities, which otherwise may have averted the application of the substratum doctrine in this case. [Emphasis in original; citations omitted.]

[46] I see no error in these findings and accordingly reject this ground of appeal.