Termination clause unenforceable after fundamental changes to employee’s role

Employment contracts may be rendered null and void if an employee’s role and responsibilities have fundamentally changed since they signed the agreement, says Toronto civil litigator Stephany Mandin

In Celestini v. Shoplogix Inc., the Court of Appeal for Ontario upheld a motion judge’s application of the “changed substratum” doctrine to invalidate the termination clause in a 2005 contract signed by the chief technology officer of a start-up company, more than a decade before he was dismissed without cause.

Although Stefano Celestini held the same professional title at the time Shoplogix let him go in 2017, the Appeal Court concluded that the judge hearing the summary judgment motion made no error when applying the doctrine, which kicks in to render provisions restricting amounts payable to dismissed employees unenforceable when there has been a fundamental expansion in the person’s duties.  

Mandin, principal of Mandin Law, says the decision is a must-read for employers who wish to enforce termination provisions in the contracts of long-term or promoted employees without falling foul of this little-known doctrine.

“This case suggests that courts will look behind the job title to see what employees are actually doing. If there has been a substantial change to their responsibilities, then the written employment agreement may no longer be enforceable, even when the termination provisions are robust and relatively generous to the employee,” she says.

According to the decision, Celestini was one of the co-founders of tech company Shoplogix when it came into being in 2002, serving initially as the start-up’s chief executive officer. However, when a venture capital firm bought in to the company in 2005, Celestini signed an employment agreement with the company for a new role as CTO under a fresh CEO.

The 2005 contract provided for one month’s written notice for Celestini, as well as 12 months base salary and group health coverage, plus a pro-rated bonus should Shoplogix ever dismiss him without cause. The provisions were invoked by Shoplogix’s new owners in 2017 when they fired Celestini in one of the first acts of their takeover.

After Celestini sued, the judge hearing a summary judgment motion sided with him, agreeing that the changed substratum doctrine applied because of substantial and fundamental alterations to his duties over the course of his employment, far exceeding “any predictable or incremental changes to his role.” New tasks cited by the judge included Celestini’s management of sales and business development activities, exploration of business opportunities with international partners, and contributions to the firm’s investment funding solicitations.

After concluding that the termination provisions in his contract were unenforceable, the motion judge set Celestini’s notice period at 18 months under the common law, awarding him a total of $421,000 in damages.

On appeal, Shoplogix claimed that the changed substratum doctrine could not apply without a promotion or change in job title. In addition, the firm argued that the changes to Celestini’s role were too incremental for the doctrine to apply.

However, the Appeal Court rejected both arguments, noting that a new job title is a potentially relevant factor – but not a necessary one – for judges considering whether to apply the changed substratum doctrine.

“More important is whether there were actual increases, of a fundamental nature, in the duties and degree of responsibility of the employee. If there were, the employee was for all intents and purposes ‘promoted,’ given their escalated status, even if the assigned title did not change,” wrote Ontario Appeal Court Justice Benjamin Zarnett on behalf of the unanimous three-judge panel.

According to Mandin, employers who wish to rely on termination provisions should consider revisiting the employment contracts of long-term or promoted employees.

“If there have been material changes to their duties, you may want to think about asking the employee to sign a new contract,” she says.

Alternatively, a written acknowledgment with the employee, confirming that the terms and conditions set out in their earlier contract still apply could reduce the risk of the doctrine being applied upon termination, Mandin adds.

Mandin also suggests that employers may be able to mitigate against the doctrine’s application by including a term in the employment agreement confirming the intent to be bound therein, regardless of any future changes in role or responsibility. Although Celestini’s 2005 contract contemplated the assignment of additional duties during his tenure, the trial judge wrote that it did not go far enough to prevent him applying the changed substratum doctrine:

“The Employment Agreement does not feature a term which expressly states that its terms continue to apply notwithstanding any changes to Mr. Celestini’s responsibilities, which otherwise may have averted the application of the substratum doctrine in this case,” Ontario Superior Court justice Michael Doi wrote as he granted summary judgment in Celestini’s favour.

“Absent the employer expressly acknowledging in writing their intent for the termination provisions to remain in full force and operation no matter the change to an employee’s role, they run the risk of the doctrine being applied,” Mandin says.