Valid employment agreements can become invalid over time.
One of the reasons an existing and otherwise valid employment agreement can become invalid over time is due to “changed substratum”.
The “changed substratum” doctrine provides that where the foundation of a written employment agreement has materially changed over time (i.e. substantial change in job duties, responsibilities, or status), the agreement essentially becomes obsolete and its terms should no longer apply.
Most recently, the doctrine of “changed substratum” was explored in in Celestini v. Shoplogix Inc., 2023 ONCA 131 where it was successfully used to set aside an executive’s employment agreement in circumstances where the employee’s job duties, responsibilities, and status, fundamentally changed since the agreement was entered into.
Background and Decision
Mr. Celestini founded Shoplogix Inc. in 2002. Shoplogix was sold in 2005 and Mr. Celestini was hired as its chief technology officer (CTO), signing an employment agreement with Shoplogix reflecting his role. The agreement stated that Mr. Celestini was to carry out the duties of the CTO, while also performing “any other duties that [may] reasonably be assigned to him by the CEO or the board.”
In 2008, Mr. Celestini’s compensation structure changed and he signed an incentive compensation agreement (ICA) which evidenced the changes. Shoplogix also hired a new CEO who altered Celestini’s role and duties significantly. At no time did the parties sign a new employment agreement or ratify the existing one, despite the changes in the working relationship.
Shoplogix terminated Celestini’s employment without cause on March 2, 2017. He was provided with one year of salary pursuant to his 2005 employment agreement. Celestini claimed wrongful dismissal, arguing that his termination entitlements were no longer limited to the 2005 employment agreement because the substratum of his original contract changed so much that it was no longer applicable to his current employment circumstances.
The motion judge decided in favor of Celestini, finding that the employment relationship had “fundamentally changed” since Celestini’s hire date, and awarded him $421,043.05 in damages.
The judge noted that the significant changes (including managing sales and marketing, overseeing managers, and pursuing opportunities with international business partners) were supported and reinforced by Celestini’s change in pay. Furthermore, the judge found that Shoplogix’s failure to acknowledge that the terms of the old agreement would apply, notwithstanding the changes, was detrimental to its reliance on the agreement.
Shoplogix appealed the motion judge’s decision, and the Ontario Court of Appeal, among other things, noted that the doctrine of “changed substratum” does not require a change in job title. The overall analysis of the doctrine emphasizes the substance of the employment relationship as opposed to its form (i.e. what were the duties, responsibilities and status of the employee).
Notably, the Court of Appeal stated that had there been a term in Mr. Celestini’s 2005 employment agreement which stipulated that its terms would continue to apply despite a change in “substratum”, such a term may have “averted the application” of the changed substratum doctrine.
Key Takeaways for Employers
The best thing employers can do to ensure their employee liability remains low is to review their existing employment agreements on a regular basis.
The Celestini decision provides significant takeaways for employers, including:
- Written employment agreements should always include language confirming that the agreement will continue to apply throughout the employment relationship, notwithstanding any changes to the employee’s variable terms and conditions of employment. Such a term is often called an “obsolescence” clause.
- Where an employee has a written employment agreement that does not contain an obsolescence clause, if the terms of that employee’s employment have substantially changed since they signed the written agreement, that agreement may no longer be enforceable.
- If there have been significant and material changes to the terms of an employee’s employment since they last signed an employment agreement, and there is no obsolescence clause in the agreement, then the employee should be required to:
- Sign a written acknowledgement confirming that the employee remains bound by the terms of the previous written employment agreement; or
- Sign a new written employment agreement (with valid consideration being given by the employer in exchange for the signature).
About the Author
Ljubica Durlovska is an Employment Lawyer at HRC Law Professional Corporation. With a passion for employment and labour law, she has spent many years helping employers with a wide range of workplace issues, including employment contracts, discipline, investigations, policy development, accommodation, termination, and employment-related human rights and health & safety matters. Ljubica also has experience in corporate/commercial law and leasing.