What does a promotion really change?

Over time, contracts entered into at the start of employment may not be worth the paper they are written on – whether due to changes in the law or fundamental expansions of an employee’s duties and responsibilities that trigger established legal doctrines. Photo credit: Pexels/Kampus Production

 

In response to the question posed by the title of this article: a lot. 

The Ontario Court of Appeal (OCA) recently in Celestini v Shoplogix Inc. held that where a promotion fundamentally and substantially expands an employee’s duties and responsibilities, employers may no longer be able to rely on their employees’ written contract – even if the employee’s title remains unchanged. This is due to the Changed Substratum Doctrine.

What is the Changed Substratum Doctrine? 

This legal doctrine applies to situations where there have been fundamental expansions to an employee’s duties and responsibilities after the initial contract was made resulting in the disappearance or substantial erosion of the initial contract.  

This doctrine is in place to recognize the unfairness of applying contractual provisions, including termination provisions, to circumstances that were not contemplated at the time of contracting. This includes where the employee:

• Develops new skills;
• Acquires a new position (with or without a new title);
• Receives greater remuneration; or
• Acquires additional duties and responsibilities.

Case in Point: Celestini

In Celestini, Mr. Celestini was hired in 2005 as the Chief Technology Officer (CTO) of Shoplogix. His 2005 employment contract limited his entitlements upon dismissal without cause to 12 months of base salary and benefits plus a pro-rated bonus calculated to the date of termination.    

In 2008, Mr. Celestini and Shoplogix entered into a new bonus plan for management employees that significantly increased Mr. Celestini’s overall compensation (i.e., by 173%). No mention was made of Mr. Celestini’s 2005 employment contract or his bonus entitlements at the time of these changes.  

Likely not as a coincidence, with the increased compensation came an increased workload and responsibilities. Mr. Celestini became responsible for management of sales and marketing, directing managers and senior staff, travelling to pursue international sales, handling all of the company’s infrastructure responsibilities, and soliciting investment funds on top of his previous CTO duties and responsibilities.  

In 2017 Mr. Celestin’s employment was terminated without cause. When terminating Mr. Celestini, Shoplogix relied on the 2005 employment contract and provided him the agreed upon severance (i.e., at the time of hiring).  

Mr. Celestini disagreed that such severance was still appropriate arguing that his 2005 employment contract was no longer valid because of the Changed Substratum Doctrine. He sued for wrongful dismissal.  

The lower court engaged by way of summary judgement agreed with Mr. Celestini.  So did the OCA. The OCA found that starting in 2008, Mr. Celestini received new responsibilities that were “substantial and far exceeded any predictable or incremental changes to his role that reasonably would have been expected when he started as CTO in 2005”.  

Underscoring these changes were significant increases to Mr. Celestini’s compensation, including the bonus plan. Such changes resulted in the substratum of the 2005 employment contract disappearing regardless of whether or not his title was changed. The latter being a being an express finding of the OCA.  

In the result, Shoplogix was ordered to pay 18 months of damages in lieu of reasonable notice, based on Mr. Celestini’s base salary, bonus, car allowance, and lost benefits, totaling $458,232 (plus costs and interest).

Fatal to Shoplogix’s case:

• Was the fact that it had failed to obtain any ratification of the 2005 contract when the substantial changes to Mr. Celestini’s responsibilities were made (I would have had him sign an updated contract given the fresh consideration of the bonus plan); and  
• The 2005 employment contract did not contain an “anti-obsolescence” clause (i.e., once that includes language that regardless of any changes to the employee’s position, compensation, duties, or responsibilities, fundamental or otherwise, the contract still applies), which may have avoided this lawsuit. The “reasonably assigned other duties” clause in the 2005 contract was insufficient as the parties could not have anticipated the significant increases that occurred.

Takeaways for employers

This case is as an important reminder that employment contracts entered into at the start of employment may not be worth the paper they are written on over time – whether due to changes in the law (i.e., Waksdale and ESA or other statutory changes) or fundamental expansions of an employee’s duties and responsibilities that trigger established legal doctrines such as the Changed Substratum Doctrine.

As a general rule employers can protect themselves by: 

• Including an “anti-obsolescence” clause in all offer letters and employment contracts.  
• By ratifying the terms and conditions of any existing contracts at the time of promotion or new compensation plans if they want to make it clear that they still apply or better yet have employees sign off on new employment contracts with updated terms and conditions.