Expanding employee duties can invalidate termination clauses

Termination clauses in employment agreements may be unenforceable if an employee’s role has expanded significantly over time. To prevent this outcome employers should ensure their agreements anticipate job changes, and they should confirm the continued application of agreements as changes occur.

Expanded roles raise “substratum doctrine” issue

Termination clauses are often the most important terms in an employment agreement from the employer’s perspective. They set out the compensation an employee is entitled to upon termination, limiting employer liability and minimizing litigation risk when employment ends. 

These clauses are vulnerable to a common law concept known as the “substratum doctrine.” This doctrine prevents an employer from relying on a termination clause if there have been “fundamental expansions” in an employee’s duties and compensation after the employment agreement was first entered into. 

Courts apply this doctrine based on the view that termination clauses agreed to when an employee was in a smaller role should not apply when the employee has moved on to a much larger role. The underlying nature of the job – the “substratum” – has changed. The employment agreement terms were negotiated for the smaller role, not the expanded role, and it is not reasonable to continue applying them.

The substratum doctrine presents a problem for employers who foster employee growth over the long term. If steps are not taken to prevent its application, unexpected liability may arise when employment ends and the employer discovers there are no longer enforceable contractual limits on employee termination entitlements.

The Court of Appeal recently applied the substratum doctrine

In Celestini v Shoplogix Inc., the Court of Appeal for Ontario confirmed that an employee’s termination clause was unenforceable under the substratum doctrine. 

Mr. Celestini was employed by Shoplogix as chief technology officer from 2005 until his termination in 2017. During that time Mr. Celestini’s job title never changed, but his duties expanded from his core CTO role to include sales, marketing, managing employees and obtaining investment funds.

Mr. Celestini’s 2005 employment agreement had a termination clause providing for 12 months of notice. He argued his role had “fundamentally expanded” and, under the substratum doctrine, his termination clause no longer applied. He sought damages based on an increased notice period. The Court of Appeal agreed and upheld an extended notice period of 18 months.

The Court of Appeal observed:

• Mr. Celestini’s expanded duties far exceeded any predictable or incremental change that reasonably would have been expected when he started as CTO in 2005. 
• The substratum doctrine does not require a formal change in job title. While Mr. Celestini’s title as CTO did not change, his underlying role changed fundamentally, as did his compensation.
• There was nothing in the 2005 employment agreement that spoke to the continued application of the termination clause despite employment changes, and the parties did not confirm that continued application at any time between 2005 and 2017.

The substratum doctrine is a question of substance, not form. As in this case, courts will examine changes in duties and compensation, and will not limit the inquiry to job titles.

Takeaways

Employers can take steps to prevent application of the substratum doctrine:

• In drafting employment agreements, employers should ensure termination clauses anticipate the possibility of changes to employment and expressly provide that the termination clause continues to apply despite such changes.
• When expanding the roles of existing employees, employers should confirm the continued application of existing contract terms. This is best done through written acknowledgments that accompany changes to the employee’s position. 

Employee promotions or increases in compensation are also effective consideration for changes the employer may wish to make to terms of employment. Employers may consider entering into new employment agreements as employment evolves.

The author would like to thank Shanika Gordon, articling student, for her help in preparing this legal update.