The Court of Appeal for Ontario recently released a decision that affirmed the key legal principles and considerations courts will rely on when determining the enforceability of a historically written contract that no longer reflects the nature of an individual’s employment. The doctrine of “changed substratum” is applied to set aside an employment agreement in circumstances where the employee’s job duties, responsibilities, or status, have fundamentally changed since the agreement was entered into. In Celestini v. Shoplogix Inc., 2023 ONCA 131, the Court of Appeal for Ontario upheld the decision of the Superior Court of Justice to apply this principle to set aside the agreement of an employee who was hired as an executive.

Background

The employer, Shoplogix Inc., had hired the employee, Stefano Celestini, who was the founder and chief executive officer (CEO) of the predecessor company, as its chief technology officer (CTO). The terms of Celestini’s employment were subject to a written employment agreement that was validly entered into in 2005. The agreement stated that Celestini was to carry out the duties of the CTO, as outlined in the company’s bylaws, while also performing “any other duties that [might] reasonably be assigned to him by the CEO or the board.” The contract also stated that he would be reporting to the CEO.

In 2008, Celestini entered into an incentive compensation agreement (ICA), which substantially changed his compensation structure. Additionally, Shoplogix brought in a new CEO, who altered Celestini’s role and duties significantly. The parties did not execute a new employment agreement or ratify the existing contract despite these changes.

Shoplogix dismissed Celestini without cause on March 2, 2017.  He was provided with one year’s salary pursuant to his 2005 employment agreement. He subsequently brought a claim for wrongful dismissal against Shoplogix. Celestini argued that his termination entitlements could not be limited to his contract, as the substratum of his original contract was no longer present, such that it was not the intention of the parties to have the termination provisions in the 2005 contract apply to his current employment.

The Motion Judge’s Decision

The motion judge decided in favor of Celestini. On the evidence before him, the judge found that the employment relationship had “fundamentally changed” since Celestini’s hire date. Celestini’s additional duties included managing sales and marketing, overseeing managers who were assigned to him as direct reports, and pursuing opportunities with international business partners.

The judge noted that these changes were supported and reinforced by Celestini’s change in pay and 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.

As a result, the motion judge awarded Celestini $421,043.05 in damages.

The Court of Appeal’s Decision

At issue before the Court of Appeal, among other things, was the motion judge’s application of the changed substratum doctrine. Shoplogix took the position that the motion judge had misconstrued and potentially expanded the doctrine by applying it to a high-ranking employee who had not received a promotion. Further, Shoplogix argued that the changes to Celestini’s employment had been incremental and expected, and not fundamental in nature.

While agreeing that the changed substratum doctrine applies only when an employee’s duties are expanded, and cannot be relied on by an employee who experiences a decrease in responsibilities or alleges that he or she has been demoted the Court of Appeal noted that the doctrine does not require a change in job title. Instead, an employee’s job title is one contextual factor, but the overall analysis will emphasize the substance of the employment relationship as opposed to its form.

With respect to Shoplogix’s argument regarding the motion judge’s findings, the court noted that the argument was untenable. The motion judge’s findings were made in view of an unchallenged evidentiary record. Accordingly, the motion judge’s findings were owed deference, and the Court of Appeal did not have any reason to revisit the conclusions. Without being able to point to evidence the motion judge did not consider, the argument could not succeed.

The Court of Appeal dismissed Shoplogix’s arguments with respect to the enforceability of the Celestini’s contract, upholding the motion judge’s decision.

Key Takeaways

Employers may want to be mindful of historical employment agreements that no longer reflect an employee’s duties, responsibilities, status, or compensation. When an employee is offered a new position or the terms of his or her employment are being significantly altered, the employer may want to include those changes in a new or amended agreement. Employers may also want to have employees in this situation ratify their understanding and agreement with the terms and application of their prior agreements. In addition, employers may want to review all employment contracts at least once a year.