The recent Ontario Court of Appeal decision, Celestini v. Shoplogix, 2023 ONCA 131 provides a salient commentary on the doctrine of changed substratum and serves as an important reminder for both employers and employees about the enforceability of employment agreements as an employee’s role evolves. The case also imparts helpful guidance on an employee’s bonus entitlements upon termination.
The Facts
In 2005, Shoplogix Inc. (“Shoplogix”) hired Stefano Celestini (“Celestini”) as Chief Technology Officer, pursuant to a written employment agreement (the “2005 Contract”). At the time of hiring, Celestini didn’t have any direct reports and his role primarily focused on the internal transfer of product.
In 2008, a new CEO joined and Celestini’s pay and duties changed significantly. In particular, he:
- took on new sales, marketing and business development duties,
- started traveling,
- started managing other managers and employees, and
- became responsible for all of the company’s infrastructure responsibilities.
Celestini’s pay also increased from $300,000 (in 2005) to $518,850 (in 2016).
In 2017, Shoplogix terminated Celestini’s employment without cause. Upon termination, Shoplogix argued that the 2005 Contract governed the terms of Celestini’s dismissal. The 2005 Contract allowed Shoplogix to terminate Celestini by providing his base salary and group health coverage for 12 months, plus pro-rated bonus for the year leading up to termination. As such, Shoplogix paid Celestini 12 months’ salary, benefits, and a pro-rated bonus accrued up to the date of termination.
Celiestini argued that the 2005 Contract had become unenforceable by the time of his dismissal in 2017, as the substratum of the 2005 Contract had been “substantially eroded” due to material changes in his role. Therefore, Celestini argued the 2005 Contract did not govern his termination entitlements in 2017 and that he was entitled to common law damages for wrongful dismissal, significantly exceeding his entitlements under the 2005 Contract.
The Motion Judge’s Decision
The motion judge found in Celestini’s favour. Based on the evidence, he was satisfied that Celestini’s duties changed “substantially and fundamentally” over the course of his employment, despite the fact that his title stayed the same. The motion judge ruled that the reasonable notice period was 18 months. Since Shoplogix already paid 12 months of salary and benefits, Celestini was awarded 6 additional months of salary and benefits, plus car allowance and bonus entitlements across the 18-month notice period. The 18 months’ bonus award was reduced by the amount for the accrued bonus paid to Celestini upon his dismissal.
The Appeal
On appeal, Shoplogix argued that the motion judge erroneously applied the changed substratum doctrine. Specifically, it argued that there were no fundamental changes to Celestini’s role, as he retained the same title and seniority status since 2005. Moreover, it argued that any changes to Celestini’s role were “incremental” and not extraordinary enough to justify a successful application of the changed substratum doctrine.
The Ontario Court of Appeal rejected these arguments. The Court stated that a change in title is not required to fulfill the changed substratum doctrine, as long as there is a “fundamental expansion” in an employee’s duties. The Court found that there was no reversible error in the motion judge’s decision that the increase in Celestini’s duties and compensation was enough to engage the changed substratum doctrine. The Court also confirmed the motion judge’s articulation that, had the 2005 Contract contained a provision which expressly stated that its terms continued to apply notwithstanding any changes to Celestini’s responsibilities, the changed substratum doctrine may have been “averted”.
Shoplogix further argued that the motion judge made an error in awarding bonus over the notice period. The Court found that the motion judge correctly determined that the bonus plan governing Celestini’s bonus awards did not explicitly oust his common law entitlement to bonus over the reasonable notice period. The bonus plan provided that “if Shoplogix terminated Celestini’s employment for a reason other than cause, Shoplogix would pay the bonus earned up to the date of termination”.. The Court articulated that since termination without cause means a lawful termination following a reasonable notice period, the motion judge did not err in awarding damages which represented the loss of bonus over the notice period.
The Cross Appeal
In a cross-appeal, Celestini argued that the motion judge erred in deducting the accrued bonus from his reasonable notice damages. The Court agreed in part, stating that the motion judge should not have deducted the entire bonus payment Shoplogix made upon termination, as Shoplogix had an obligation to pay both the bonus until the date of termination, and the bonus throughout the notice period. The Court reasoned that Shoplogix’s performance of one obligation did not reduce its obligation to perform the other one except to the extent Shoplogix made an overpayment.
As such, the Court dismissed the appeal, allowed the cross-appeal, and increased the damages award for Celestini by $37,188.61.
Key Takeaways
If an employee’s job duties significantly and fundamentally change over the course of their employment, even if their job title remains the same, the changed substratum doctrine may render the employee’s contract unenforceable.
Employers can potentially circumvent the application of the changed substratum doctrine if their employment agreements contain a provision which explicitly states that the terms of the agreement continue to apply notwithstanding any changes to the employee’s responsibilities. Alternatively, employers can provide employees with updated employment agreements as their roles expand or their compensation structure changes.
For more information or employment law advice, contact a lawyer at Turnpenney Milne LLP.