Our firm is often retained by employees and employers to provide advice on dismissal entitlements. One of the first places we look in this regard is to the parties’ written employment contract (if one exists). Employers have an incentive to implement written contracts as a means of limiting future dismissal costs. For similar reasons, contracts often come under heavy scrutiny by employees (and their lawyers) whenever a job termination takes place.
We have written previously about the need for termination clauses in employment contracts to always adhere to minimum statutory requirements. Any statutory non-compliance can render a contract useless when it comes to specifying dismissal entitlements.
Recently, the Court of Appeal for Ontario has commented on a much lesser-known method of invalidating contractual termination clauses: the “changed substratum doctrine”.
What is the Changed Substratum Doctrine?
The courts recognize employment relationships evolve over time. A worker who was been with their employer for many years may find an employment contract agreed at the start of their tenure no longer reflects the reality of their present-day job. In short, the underlying circumstances of the parties’ relationship (i.e. its substratum) has changed.
The Court of Appeal describes the doctrine this way:
The changed substratum doctrine operates as a limit on when an employee’s common law entitlements will be restricted by the express terms of a historical written contract. Given that an employer-employee relationship may evolve in a fundamental way after the written contract was made, the doctrine recognizes the potential inappropriateness and unfairness of applying the contract’s termination provisions to circumstances that were not contemplated at the time of contracting.
Changed Substratum at Work
The impact of the changed substratum doctrine can be dramatic. Consider these two real-world examples of how the doctrine affected dismissal entitlements:
Schmidt v. AMEC Earth & Environment et al., 2004 BCSC 1012 – The employee signed a written contact in 1987 which provided for 150 days of notice should he be dismissed. While initially employed as a senior engineer, the worker was later promoted several times and held a variety of different roles (including Vice-President). By the time he was let go in 2003, the Court ruled that his original 1987 contract no longer reflected the reality of the parties’ relationship. Instead of 150 days, the Court concluded that the worker was owed 21 months of notice (a more than a four-fold increase in his dismissal entitlement).
Irrcher v. MI Developments Inc., 2003 CanLII 27685 (ON CA) – A construction engineer signed a contract in 1990 that provided for 6 months of notice with respect to any future job termination. 10 years later, the Court concluded that the worker’s job had so fundamentally changed that the parties’ original contract was invalid. As succinctly put by the Court:
The [worker’s] responsibilities were dramatically greater. His remuneration was much greater. His method of remuneration had changed. Even his title was different. It was simply not the same job.
The worker ultimately received 18 months’ notice of dismissal, a three-fold increase over what his original 1990 contract had envisioned.
Lessons Learned
In its latest decision on the changed substratum doctrine, Celestini v. Shoplogix Inc., 2023 ONCA 131, the Court of Appeal provides guidance for employers who want to avoid having their contracts rendered obsolete.
First, explicit contractual language can be used to specify that any termination clause will continue to apply in future (notwithstanding later changes to a worker’s duties, job title or compensation). Second, and as an alternative, employers can require that workers ratify the continued application of an earlier contract (and its termination clause) whenever there is a major change in the working relationship. Promotions, job transfers and pay increases all represent prime opportunities for such contractual ratification.
For employees, the lesson is this: do not assume that any written contract you have signed will be enforceable upon your dismissal. This is particularly the case where there have been substantive changes over the tenure of your employment. As seen in the two examples detailed above, contractual enforceability can play a pivotal role in determining what you are owed.
Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in Ottawa and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.