Change of Substratum: Are Employment Contracts Enforceable After Substantial Changes?

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What happens when an employee’s job has changed so much that the relationship is completely different than it was when they signed their contract of employment? For example, the individual who starts as a junior clerk at $15/hour and works her way up to a management position? Should they be held to the terms of their original contract twenty years later when the company chooses to let them go during a downsizing?

On the one hand, there should be some certainty in the law. If the parties voluntarily signed a contract that is not unlawful, agreeing to be bound by its terms and conditions, why should they not be bound by them simply due to the passage of time and change of circumstances?

On the other hand, the employee would argue that it is unfair to hold them to the terms of a contract when the relationship has changed so fundamentally since it was signed that in reality there is an entirely different contract in place.

We know that there has been no shortage of cases in recent years in which our courts have allowed employees to avoid the harsh consequences of the employment agreements they signed. Usually, this is because either:

  1. the contract as a whole is unenforceable due to the circumstances in which it was signed (typically because it was signed when they started work or sometime later), or
  2. the termination clause is unlawful since it breaches or has the potential to breach the applicable employment standards legislation.

Change of Substratum

However, there is another way to attack a contractual termination clause: legally, the principle is known as a change of substratum. As Mr. Justice Perrell explained it in MacGregor v. National Home Services:

The changed substratum doctrine is a part of employment law. The doctrine provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed.

Celestini v. Shoplogix Inc.

To be transparent, the motivation for writing this post now was a post on the topic by Professor David Doorey on his Law of Work  blog which included this background.

While successful change of substratum arguments are rare, he mentioned one recent Ontario decision in which that argument won the day: Celestini v. Shoplogix Inc.  In this case, the parties both agreed that it would be appropriate to seek summary judgment, which is a way to circumvent the litigation process and when the facts are largely agreed upon and the question(s) to be answered are based upon the application of the law to those facts.

The Court in Celistini agreed that summary judgment was appropriate. As Justice Doi summarized:

…I find that this is an appropriate case for granting summary judgment to Mr. Celestini. From the evidence, I am satisfied that he was assigned significant additional responsibilities that led the substratum of his written employment contract to disappear. Accordingly, I find that the contractual notice period for the termination of his employment should no longer be enforced. In my view, Mr. Celestini should have damages representing 18 months of compensation in lieu of notice that incorporates his base salary, incentive bonus compensation and other benefits over this period. I do not find that he failed to mitigate his damages, and accept that Shoplogix paid his retention bonus less a required holdback for expenses awaiting determination.

In this case, the employment agreement provided for twelve months of notice or pay in lieu in the event of dismissal without cause. However, since the Court found that the contract did not apply, he was awarded eighteen months of pay in accordance with the common law. Notably, this was not a case in which the contract restricted the employee to the minimum notice required by statute, which is often the case. In those circumstances, it can be even more compelling to circumvent the contract.

In summarizing the law, the Court in Celistini referenced the quote from Justice Perrell above and added the following:

The idea behind the changed substratum doctrine is that with promotions and greater attendant responsibilities, the substratum of the original employment contract has changed, and the notice provisions in the original employment contract should be nullified. In Rasanen v. Lisle-Metrix Ltd. (S.C.J.), supra, at para. 41, Justice Dambrot approved the following description of the doctrine from Ball, Canadian Employment Law:

Canadian jurists have recognized that contractual terms that are fair in the early part of the employment relationship may be unfair when the employee has developed new skills, has acquired a new position, receives greater remuneration or has additional responsibilities. When these circumstances exist, the Court may hold that the “substratum” of a written contract of employment has disappeared or eroded sufficiently so that, inter alia, terms purporting to limit the amount of notice required for termination of employment no longer have contractual force. [Emphasis added]

It is important to remember that relatively nominal or routine changes will not constitute a change of substratum. In this case, the plaintiff’s duties and responsibilities increased dramatically over many years, and his compensation increased by approximately 173%. This argument will not succeed in many cases, but it is one to be aware of.

How do employers ensure contracts are enforceable despite significant changes?

The answer is relatively simple: have the employee confirm that they continue to be bound by the terms and conditions. That can be done through a brief document which references changes to be made, such as promotions or increases in salary, and then confirms that all other terms and conditions remain in force. Or, if there is any concern about the old contract, make the promotion/increase in compensation contingent on signing a new contract. We also routinely put clauses in our corporate clients’ contracts which state that despite any changes, the remaining terms and conditions will continue to apply.

As we have said many times, employment agreements can help employers control their severance costs, but most of them are unenforceable. We can help employers draft, implement, and maintain contracts, as well as ensure that changes do not render them worthless.

We also help employees to understand the consequences of contracts they are being asked to sign, or the one they signed in the past.

Contact us to understand your rights.

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