The Substratum Doctrine (Start-Ups – this one’s for you)

You are currently viewing The Substratum Doctrine (Start-Ups – this one’s for you)
  • Post category:Uncategorized
  • Reading time:5 mins read

By Samantha Seabrook

A growing organization means lots of changes, re-jigging positions, moving people around the org chart, and quickly expanding roles. Hey, that’s how you create an agile, competitive, company. 

But as roles change, grow, and expand, you need to be aware of the substratum doctrine

The substratum doctrine is basically this – a court may refuse to enforce an employment contract, particularly a termination clause that limits an employee’s notice entitlement upon termination, if the employment duties and responsibilities have changed substantially since the time the employment contract was signed.

Think of it like this. Ahmed signed an employment contract with Acme Grocery when he started stocking shelves 10 years ago. That contract said that if he was terminated without cause, Ahmed would only get his Employment Standards Act (ESA) minimum entitlements. Over the course of 10 years, Ahmed is now the Regional Vice President of Operations for Acme Grocery. He was not given a new employment contract as he moved up the ranks. If Ahmed is terminated without cause, the substratum doctrine could be argued to say that the 10-year-old employment contract should not apply because Ahmed’s job has changed to such a degree that it would not make sense to hold him to ESA minimums.

So, when the current conditions of employment have substantially departed from those initially agreed to, a court may find that it is unfair to enforce a restrictive termination clause that was intended to apply to a very different employment relationship. In such situations, the employment contract is said to be obsolete, or the “substratum” (the foundation) of the employment contract is said to have disappeared.

The case of Celestini v. Shoplogix (2021 ONSC 3539) shows us how the substratum doctrine could be applied to a tech start-up as it grows and makes changes. 

Stefano Celestini had started as the Chief Technology Officer (CTO) at Shoplogix in 2005. He signed an employment contract that limited his entitlements upon termination without cause to 12 months base salary and benefits, plus a pro-rata bonus. When he was terminated in 2017, Mr. Celestini argued that the contract no longer applied because his role had substantially changed. In 2008, Shoplogix’s new CEO did a mass restructuring of the company, letting go a large portion of the sales staff. While Mr. Celestini remained CTO in title, he was assigned significant new duties and responsibilities, including sales and a lot of international travel. 

The court applied the substratum doctrine and found that the 2005 contract did not apply: 

[56]           Based on the foregoing, I am satisfied that Mr. Celestini’s duties changed substantially and fundamentally over the course of his employment. Among other things, he received the following new tasks: a) managing important sales and business development activities; b) handling technical, solutions management and quality assurance matters; c) directing managers and staff who were reassigned to report directly to him (i.e., after he had worked for several years without any direct reports); d) pursuing business opportunities with international partners that introduced global travel requirements; e) handling a range of company infrastructure and other administrative matters; and f) contributing significant work to solicit investment funding. In my view, these responsibilities 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. In addition, Shoplogix made substantial changes to his compensation. In light of these significant changes, I find that the substratum of his original contract of employment disappeared and that its notice terms should no longer be enforced as they could not have been intended to apply to his role at termination. Applying the changed substratum doctrine, I find that the terms in the Employment Agreement that purport to limit the notice obligations for termination should no longer have contractual force…

Keep the substratum doctrine in mind as you promote people, reorganize your company, or consolidate job duties. Each time an employee’s role changes, think about whether you need to update their employment contract. By the way, Mr. Celestini was awarded an additional 6 months (for a total of 18 months) pay in lieu of notice by the court, so looking at your contracts can really pay off. 

Contact your SWL lawyer to talk about employment contracts, reorganization strategy, or the substratum doctrine. 

Share this Post!