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Dusting Off the Original Employment Agreement – What Happens When an Employee’s Role Changes?

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Dusting Off the Original Employment Agreement – What Happens When an Employee’s Role Changes?

By:

Posted August 9, 2021

Claims of constructive dismissal are typically triggered by adverse changes to an employee’s position such as the loss of managerial responsibilities, significant wage cuts and demotions.  However, it is also the case that positive, mutually rewarding and welcome changes to an employee’s roles and responsibilities can have an impact on the underlying employment agreement.

The Changed Substratum Doctrine

In essence, the changed substratum doctrine stands for the principle that where significant changes have been made to an employee’s position, role and or responsibilities, the foundation on which the employment contract was built, may have eroded to the point that the notice provisions in the employment contract may have become unenforceable.   The changed substratum doctrine was at the heart of the recent decision in Celestini v. Shoplogix Inc., 2021 ONSC 3539 (CanLII).

Mr. Celestini co-founded Shoplogix in 2002.  In 2005 he signed an employment agreement with the company which remained the only written employment agreement signed between the parties until his termination in 2017.  At the time of his termination, he contended that the substratum of his contract had disappeared or sufficiently eroded to render the contractual notice period unenforceable.

Shoplogix for its part argued that Mr. Celestini was bound by the 12 month notice period in his employment contract as his role at Shoplogix did not significantly change during his employment.

In arriving at its decision, the court considered the following facts:

In 2005 when he started as the CTO, Mr. Celestini was not responsible for any operational programs or anything directly related to sales or research and development.  He had no staff, nor any managerial responsibilities.  By 2007, Mr. Celestini was expected to handle important managerial and operational duties that extended well beyond the limited role he initially performed as CTO. Following the layoff of many other senior members of the leadership team Mr. Celestini’s role was further expanded.  The organization came to rely on him to handle important managerial and operational duties that extended well beyond the limited CTO role that he initially performed.

In the end the court found Mr. Celestini was assigned significant additional responsibilities that led the substratum of his written employment agreement to disappear.  It followed that the 12 month contractual notice period in his employment agreement was considered unenforceable and instead Mr. Celestini was awarded 18 months of notice.

Commentary

  • The court in this case paid attention to the impact of the layoffs of other employees (who were not replaced) on Mr. Celestini’s roles and responsibilities. While layoffs do reduce headcount, they do not always correlate with a decrease in work. This case seems to suggest that where those employees who are left behind are expected to shoulder a significant additional burden, this increase in workload may be a factor in a substratum argument.
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  • Celestini’s job title remained the same between 2005 and his termination. The absence of a change in title will not be determinative of whether or not the employee’s roles and responsibilities have changed significantly enough to find that the substratum has been eroded.
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  • This case also highlights the importance of job descriptions. While Shoplogix tried to argue that the change in Mr. Celestini’s role was not significant, the absence of a job description, as well as the failure to produce witnesses to contradict Mr. Celestini’s testimony as to his evolving roles and responsibilities over the years left the employer without any meaningful evidence to support its position.
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  • For employers this case supports the often repeated advice of the importance of regularly reviewing your employment agreements to ensure that they are current. In the case at hand, Shoplogix significantly amended its compensation plan in 2008.  At the time the company did not mention or ratify its existing Employment Agreement with Mr. Celestini.  The court wrote  “As the ICA substantially changed his compensation, I am satisfied that  Shoplogix ought to have ratified the Termination Clause in the Employment Agreement had it wished to continue relying on its terms.”
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  • Employers may also want to consider using language in their contracts to address changes in circumstances although one cannot assume that radical changes in an employee’s role will be condoned on the strength of catch all language. Notably, Shoplogix did try to argue that its contract with Mr. Celestini did allow it to impose changes to his role as CTO. In particular they relied on the term of the contract that required Mr. Celestini to devote his full working time and attention

“to the performance of the duties to be performed by him hereunder and to the performance of any other duties that may reasonably from time to time be assigned to him by the Chief Executive Officer of [Shoplogix] and/or the board of directors of [Shoplogix].”

The Court disagreed and concluded that the language was NOT sufficiently clear to allow Shoplogix to make substantial or fundamental changes to the CTO role.

  • Employees who have been terminated may want to consider whether there have been significant changes in their roles and responsibilities and discuss those changes with their legal counsel.

This blog post was written by Colleen Hoey, a Partner in the Employment team.  She can be reached at 613-369-0366 or at Colleen.Hoey@mannlawyers.com.

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