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What you need to know about the “change of substratum” doctrine and employment contracts.

Stuart Rudner here with another Rudner Law employment law update.

Today we’re going to be talking about why an otherwise valid employment contract may not be valid if the employee’s duties and responsibilities have substantially changed, even if their job title remains the same. What we’re talking about here is the “change of substratum” doctrine which basically means that the factual underpinnings of a contract have changed so significantly, since it was signed, it would not make sense for the contract itself to remain in force.

Now, the Court of Appeal of Ontario recently had the occasion to consider this doctrine in the case of Celestini and Shoplogix Inc., so let me give you a little background on the case. Mr. Celestini started working at Shoplogix as their CTO, their Chief Technology Officer, in 2005. He signed an employment contract that, among other things, limited his entitlements upon dismissal without cause, fairly standard. He works there until 2017. Over that 12 year period, his duties and responsibilities, the organization structure, and his compensation package all change substantially, but his title doesn’t change. Fast forward to 2017, he’s let go without cause, and the company tries to rely upon that contract that he signed back when he started in 2005, to limit his severance entitlements. Mr. Celestini on the other hand, argued that the change of substratum doctrine should apply and that because the factual nature of the relationship had changed so dramatically, he should not be held to that same contract he signed way back when he started. So first of all, as regular viewers or readers will know, this can have a huge impact on someone’s severance entitlements, and that’s why employers like to use contracts.

Imagine in some cases the difference between 8 weeks and 24 months of severance, it can be massive. That’s why we see so much litigation on this issue and people trying to get around contracts that they may have signed.

So in this case, the court agreed with Mr. Celestini and applied that change of substratum doctrine.

The court, as a result, ordered Shoplogix to pay 18 months of damages in lieu of reasonable notice, which included salary, his bonus, his car allowance, his lost benefits – as an aside, this just kind of confirms a couple of things that we always say. First of all, severance is not one month per year. He was only there for 12 years, he got 18 months. But courts will consider things such as the nature of the position, in this case, senior management, the person’s age, and everything else. The other important point to take out of this, is it’s not just base salary, when we look at how many months someone gets, you also have to look at what a month is worth, and in this case he got bonus, car allowance, and a whole bunch of other things beyond base salaries.

So, some tips for employers. Even if your contract is drafted and implemented properly, which is no easy feat in these days, you need to make sure there are ways that the change of substratum doctrine will not apply. Best way to do that? Put an anti-obsolescence clause in the contract, which basically says that no matter what changes occur, the contract, other than those terms that have changed, will remain in force. So even if the person’s title changes, duties, responsibilities, compensations, everything else will stay in place. Next thing you want to do is whenever there are significant changes, document them and confirm that other than those changes, everything else that is set out in the terms and conditions of the employment contract remain in place – that’s a very important thing to do. That way the person can’t say that they assumed that because their job changed, the contract was no longer in place. You keep confirming it, over and over and over again.

Now the next thing is that for employees, if you’re asked to sign a contract when you start, have it reviewed by an employment lawyer, because again, think of that difference – 8 weeks vs. 24 months. And if you do sign a contract that may not be so great, but then things change over time, and you get a higher level position, more responsibility, more compensation, consider whether you should push back and ask the company to change the contract at that point, because you may have more bargaining power as you become more authoritative in the company.

Now interestingly, the classic example of change of substratum, and I use this all the time, is the person who joins the mail room and slowly works their way up to become the CEO, and how it would be ridiculous to say the contract they signed when they were working in the mail room should apply to them as CEO, but this Celestini case confirms that is doesn’t have to be that dramatic of a change. Mr. Celestini’s position or title did not change at all, but there were enough other changes to render his contract invalid.

So employers you need to make sure you take steps to protect your contracts even as the relationship changes, and employees you need to make sure you take steps to protect yourself, and either avoid signing a bad contract or if you have no choice, see if you can get that changed over time.

So, as we always say, these videos are for informational purposes only and if you need advice for your specific situation you should reach out to an employment lawyer. We would be happy to talk to you. As we always say, if you think you might need an employment lawyer, you probably do. So feel free to contact us. That’s all for today, thanks for tuning in. See you next time.

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Stuart and others on the team at Rudner Law are frequent contributors to the following sites: 

First Reference Employment Law Resources
Canadian HR Reporter Blog
Rudner Employment Lawyer in the Lawyer's Daily
Legal Matters Employment Law Canada

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