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Changed substratum: The risk of ‘outgrowing’ an employment contract

Employers are often aware that they need to approach hiring and terminations with caution. However, they may not be aware that promoting an employee or even making repeated small changes to an employee’s job duties, may have a legal impact on the employee’s entitlements or increase an employer’s potential liability upon termination due to something called the changed substratum doctrine.

The changed substratum doctrine applies in situations where an employee’s role or job duties have significantly changed or expanded from when the employee entered into their employment contract.

As an example, the doctrine may apply when an employee entered into an employment agreement to be a cashier, then worked their way up to become a manager over the course of their employment, but never signed a new employment contract that reflected their new position and duties.

The doctrine provides that where there has been such a substantial change to the foundation (or the “substratum”) of the original employment agreement, such agreement will have “eroded” or become obsolete and it can be implied that the terms of such employment contract could not have been intended to apply to the employee’s current employment arrangement, which has changed significantly from its original form.

In the previous example, based on the doctrine of changed substratum, a court would likely find that the employment agreement entered into for a cashier position is no longer applicable now that the employee is a manager.

Problems for employers

If an employee’s role has expanded or changed (e.g., the employee was promoted), the changed substratum doctrine may apply and, accordingly, result in the employee’s employment contract being unenforceable even though that contract would have otherwise been enforceable if not for the changed circumstances of the employee’s role or job duties.

This can be particularly troublesome for employers with respect to termination provisions.

Even if the original termination provision was enforceable, the changed substratum doctrine would mean that the employer would not be able to rely on it. As such, in the event of a termination, the employee would be entitled to common law reasonable notice instead. Given that the changed substratum doctrine only applies when there has been a significant change to the employment relationship, it is likely that the employee in question will now have several years of service and be in a higher-level position than when they started. Both of these are factors that will lengthen the employee’s reasonable notice entitlement and increase the employer’s liability.

Case law example: Celestini v Shoplogix Inc., 2023 ONCA 131

In this case, an employee stepped down as CEO in 2005, became the chief technological officer (CTO) of Shoplogix, and signed a written employment contract to that effect. By 2017, even though his title had not changed, the employee’s job duties had significantly and fundamentally changed and increased over the course of his employment. No other employment contracts had been signed. Accordingly, and pursuant to the doctrine of substratum, the Court found that the 2005 employment contract was no longer enforceable, including the termination provisions. As such, the employee was entitled to common law reasonable notice upon termination.

The Court noted that the 2005 employment contract did not have any terms that expressly stated its provisions continued to apply notwithstanding any changes to the employee’s responsibilities. The Court further noted that such language had the potential to avert the application of the changed substratum doctrine.

At what point is there a ‘changed substratum?’

If there is a single large change to an employee’s role or duties (without a corresponding update to the employment contract), that change has the potential to trigger the changed substratum doctrine.

However, even if the changes to an employee’s job duties occur slowly and incrementally, such changes may still trigger the changed substratum doctrine. While one or two minor changes may not be enough to do so, the more changes there are, the more likely the doctrine will apply. A court may look only at what was encompassed by the original agreement in comparison to the employee’s most recent job responsibilities.

What can employers do?

Employers should keep record of, and regularly review, all incremental changes to their employees’ duties, responsibilities, compensation, etc. This will likely include reviews of employment contracts. It may be necessary to update and enter into new employment contracts with employees to ensure that such contracts continue to be enforceable. When updating employment contracts, it may be necessary for employers to offer something extra (such as a one-time payment) to the employee to ensure that the new employment contract has the necessary consideration to be enforceable.

It is also important for employment contracts to contain language addressing the continued application of certain terms, such as the termination provision, even if the employee’s job title, duties, compensation, etc., change in any way in the future.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.