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Employment contracts are a common source of disputes between employers and employees. Securing employment can be difficult, so it is natural for workers to be excited about new opportunities and eagerly agree to terms without giving them adequate consideration. However, reading and understanding an employment contract is crucial for both parties to ensure that they are aware of their responsibilities and rights throughout the employment relationship, as well as the procedures under the termination process.

However, as time goes on, the nature of an employee’s work may change, and the employment contract may not be updated to adequately reflect updated terms relating to a new role or responsibility. This issue was raised in a recent decision before the Court of Appeal for Ontario, in which the Court was asked to determine whether an employee’s termination was valid or whether the nature of the employee’s work had changed enough to render the employment contract void.

Company co-founder steps down to chief technology officer

In Celestini v. Shoplogix Inc., the employee co-founded the employer’s business in 2002 and originally served as the Chief Executive Officer. In 2005, the employer was purchased by a venture capital firm, and the employee stepped down from his role and took on the position of Chief Technology Officer. He signed a written employment contract reflecting this in May 2005 (the “2005 contract”).

The 2005 contract stated that the employee could be terminated without cause with one month’s written notice, though he would continue to receive his base salary and group health coverage for 12 months following the termination date. The 2005 contract also stipulated that the employee would be entitled to payment equal to the bonus he received the previous year on a pro-rated basis.

Employment agreement remains unchanged after employee signs new compensation agreement

In 2008, the employee and employer entered into an Incentive Compensation Agreement (“ICA”), a bonus plan for management-level employees. The 2005 contract was not ratified when this new agreement was put into place. 2008 also brought a new Chief Executive Officer into the company and required the employee to take on additional responsibilities, including sales management, marketing management, and soliciting investment funds.

In 2017, the employer’s ownership changed hands once again, and the employee was dismissed on March 2, 2017, without cause. The employer terminated the employee in accordance with the terms of the 2005 contract and provided the employee with 12 months’ salary, one year of group health benefits coverage, and a prorated bonus.

However, the employee commenced an action against the employer for wrongful dismissal. He relied on the changed substratum doctrine and claimed that there had been fundamental changes to his employment duties after signing the 2005 contract, rendering it unenforceable. The employee sought damages for the employer’s failure to provide reasonable notice of termination, while the employer defended the action claiming that the employee’s only rights upon termination were those in the 2005 contract.

Motion judge rules in favour of employee

The motion judge found that the employee’s duties had, in fact, changed substantially throughout his employment and that the responsibilities he had at the time of his termination were “substantial and far exceeded any predictable or incremental changes to his role.” The motion judge also found that the ICA substantially changed the employee’s compensation plan from the 2005 contract. Under the changed substratum doctrine, an employer cannot limit an employee’s entitlement to notice to the terms of a contract if the employee’s duties and responsibilities have substantially or fundamentally changed.

After finding that the 2005 contract was no longer enforceable, the motion judge granted summary judgment in favour of the employee. The motion judge imposed a notice period of 18 months, which was in line with common law. In total, the employee was awarded damages of just over $420,000.

Employer appeals motion judge’s decision

The employer appealed the decision to the Court of Appeal for Ontario, arguing that the motion judge erred in their application of the changed substratum doctrine. The employer argued that the doctrine requires there to have been fundamental changes to an employee’s duties through promotion. In this case, the employer took the position that the doctrine did not apply because the employee did not ever change job titles.

The employer also argued that the changes referenced by the motion judge occurred in increments rather than all at once, meaning that there was never a substantial enough change for the doctrine to be applicable.

Court of Appeal finds in favour of employee

The Court of Appeal did not accept the employer’s arguments and held that a promotion was not required for the doctrine to be applicable. The Court also found that the motion judge exercised their deference in determining that there had been substantial changes and that the Court was not in a position to review or change that finding.

The Court awarded the employee higher damages than he was originally awarded, increasing the amount by $37,188.61. Further, the Court agreed with the employee’s cross-appeal that the motion judge improperly deducted $50,554 from his damages because of the bonus paid by the employer. However, the bonus was paid out for a period before the employee was terminated and therefore did not apply to the notice period.

The Employment Lawyers at Bader Law Provide Advice on Wrongful Dismissal Claims

At Bader Law, our knowledgeable employment lawyers understand the impacts a termination can have on an employee. If you believe you have been wrongfully dismissed or have been offered an unfair severance package, we will assess your circumstances and advise you on your rights and options in order to develop a strategic plan to move forward. To speak with a member of our employment law team, contact us online or call us at (289) 652-9092.