Major Changes to Job Invalidates Original Contract

Celestini v. Shoplogix Inc.

The longer an individual is employed at a particular company, the higher the likelihood that their job will change over time. Often times when several years pass, the initial contract an employee signed when starting their employment will no longer accurately reflect their job.

So, what happens when an employer attempts to rely upon the terms of the original employment contract to limit its severance obligations when terminating an employee?

This was an issue addressed in the recent case of Celestini v. Shoplogix Inc.

Overview

In 2002, Mr. Celestini co-founded Shoplogix as a technology start-up company.

A few years later, he stepped down from his CEO role to that of a CTO. At the time he became CTO, he signed an employment contract which attempted to limit his entitlements upon termination to a 12-month notice period. Twelve years after signing the contract, Mr. Celestini’s employment with Shoplogix was terminated without cause after Shoplogix was acquired by another company.

In dispute in this case was the question of whether, over the course of the 12 years the employment contract was in effect, the duties Mr. Celestini’s position as CTO changed substantially so as to undermine the validity of the contract. This meant that substratum, or the foundation, on which the contract was based had changed substantially, rendering it unenforceable. This is what Mr. Celestini asserted, while Shoplogix argued the changes to his position were only minor.

Changed Substratum Doctrine

Under the changed substratum doctrine, significant changes in employment may cause the termination provisions in a previous contract of employment to become unenforceable at the time of termination.

Where the substratum, or essence, of the employment contract at the time of hiring has eroded sufficiently, it may be implied under the doctrine that the contract could not have been intended to apply to the position that the employee subsequently occupied at the date of termination.

Contractual terms that are fair in the early part of the employment relationship may be unfair, for example, when the employee receives a pay-raise, has taken on a new role, developed new skills, or has extra responsibilities. If significant enough changes occur, the clauses restricting severance in the original agreement would be nullified.

The Court’s Decision

The court ultimately held that since signing the contract Mr. Celestini had been assigned significant additional responsibilities such that the severance restrictions in the original agreement were nullified. Mr. Celestini’s position had changed so significantly that the notice terms in his contract were no longer enforceable. The court held that Mr. Celestini should receive damages representing 18 months of compensation, including his base salary, bonus compensation and his benefits.

Takeaways for Employees

Get a lawyer to check your contract!

If an employee is let go and they don’t believe their severance package is fair, they should contact an employment lawyer to find out if any restrictive clauses in their employment contract are still valid. You can reach out to the trusted team at Samfiru Tumarkin, LLP, to help resolve your severance package issues.

Takeaways for Employers

Review contract after changes

When the terms of a worker’s employment change so significantly, whether it be related to their compensation, duties, position, or responsibilities, employers need to consider whether or not the last contract they signed is still enforceable. To mitigate the risk of a contract not being applicable, employers could have the contract explicitly state that its terms would continue notwithstanding any subsequent changes to the terms of employment.

Get employees to sign new contracts

Employers could also have their employees sign subsequent agreements confirming that the terms of their original contract apply, provided the employer provides the employee with some additional consideration in exchange.