Sometimes an employment contract becomes dated. This could be when an employee starts a new job and signs a contract, then stays with the employer for many years, changing positions within the company but never signing a new contract. This can present issues – the terms agreed many years ago may no longer be appropriate to govern the employment relationship as it exists now.
The courts have developed the “changed substratum doctrine” to deal with the situation where an old, written employment contract restricts an employee’s common law entitlements. This article looks at the doctrine and a recent decision of the Court of Appeal for Ontario in which an employee sought common law reasonable notice after being terminated without cause, despite his contract setting out the required notice period.
Notice entitlements upon termination without cause
An employee terminated without cause is normally entitled to reasonable notice (or payment in lieu of such notice) to search for and locate alternate employment. While a minimum period of notice based on the length of the period of employment is required by legislation, employees may be entitled to a longer period of notice under the common law. Please see our introductory article on this topic.
Employment contracts sometimes seek to remove an employee’s entitlement to common law notice, either by stating that an employee is only entitled to the minimum notice as required by legislation or is entitled to some other fixed period of notice. These types of provisions may or may not be enforceable.
The changed substratum doctrine may justify ousting the termination provisions in an employment contract
The changed substratum doctrine applies to historical written employment contracts. It limits when an employee’s common law entitlements can be restricted by such a contract, reflecting the fact that an employee’s duties and responsibilities may have expanded since the contract was agreed upon. In other words, the substratum of the contract may have been eroded, making it inappropriate to apply its terms.
As the court said in MacGregor v National Home Services:
“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… 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 changed substratum doctrine may not apply in a number of circumstances
In order for the doctrine to potentially be applied by the court, the employee’s responsibility and status need to have changed significantly since the contract was entered such that the court can find that the parties would not have intended for its provisions to continue to apply.
The changed substratum doctrine may not apply where the contract states that it continues to apply even if the employee’s position and status change. The contract may also apply if the parties ratify its continued operation when a significant change in duties occurs.
Plaintiff sought common law reasonable notice, relying on the changed substratum doctrine
In Celestini v Shoplogix Inc., the plaintiff employee’s 2005 employment contract provided that the employer would only be required to pay his base salary and health insurance for 12 months, plus a pro-rated bonus payment, in the event of termination without cause.
The plaintiff was terminated without cause in 2017. He sued his employer seeking damages for wrongful dismissal. He argued that this termination provision was no longer enforceable because his duties had materially changed.
In 2005, the plaintiff was the company’s chief technology officer, who also transferred product and corporate knowledge within the organization. In 2008, the parties entered into an incentive compensation agreement that increased his compensation. The plaintiff’s workload also increased, with new responsibilities including sales, travel, infrastructure, and financing.
The substratum of the plaintiff’s employment contract had disappeared
The motion judge agreed with the plaintiff that his duties had fundamentally changed during his employment. The new responsibilities, consistent with the increased compensation, exceeded simply incremental changes to his role that started in 2005. Even though his job title had remained the same, the judge decided that the substratum of the employment contract had disappeared.
The judge noted that the employer failed to obtain an acknowledgement that the contract remained applicable. As a result, its termination provisions were unenforceable. The judge decided upon a common law reasonable notice period of 18 months and added damages for the plaintiff’s car allowance, life insurance entitlements and bonus during the extra 6-month period.
Court of Appeal agreed that the changed substratum doctrine applied
The employer appealed, arguing that the doctrine should not apply because the plaintiff remained a senior executive and that changes to his responsibilities were only incremental. The Court of Appeal rejected these arguments.
The Court explained that applying the doctrine does not require promotion or a job title change. A fundamental expansion in the employee’s duties could happen without these things. Furthermore, the Court noted that the motion judge made an open factual finding based on the evidence, namely that the plaintiff’s duties had substantially changed.
As a result, the Court dismissed the employer’s appeal and awarded the plaintiff approximately $450,000.
Contact Haynes Law Firm in Toronto for Guidance on Employee Termination
The Haynes Law Firm helps both employers and employees deal with the termination process. An experienced employment lawyer, Paulette Haynes, will guide your organization through the situation and advise you on employee entitlements to minimize the risk of expensive litigation. Paulette is also a fierce advocate for employees, helping them to understand their rights on termination in order to level the playing field. Please contact us online or call us at 416.593.2731.