If you’re an employer or HR representative well-acquainted with the realm of employment law blogs, you’ve undoubtedly encountered a myriad of cautionary tales about the perils of contracting errors. The blogs about this topic are countless – and for good reason! The significance of getting contracts right cannot be overstated, as a single mistake could potentially lead to substantial liabilities for your organization. An omitted phrase or a misused word within a termination clause could be the deciding factor between an 8-week statutory notice obligation and a hefty 24-month damages award.
However, let’s assume that you’ve taken every precaution. You’ve carefully reviewed your contracts, consulted legal experts, and you’re confident that your termination clauses are impeccably drafted. Is there still a risk that a court would refuse to enforce that termination clause? The answer, perhaps unsurprisingly, is yes. Even with meticulous drafting, there’s a legal principle that could potentially invalidate your termination clause – the Substratum Doctrine.
The substratum doctrine can be applied when a court finds that an employment relationship has changed so substantially since the contract was executed that the terms of the agreement should no longer be allowed to apply. This can happen when an employee’s responsibilities increase over time. Take, for example, an employee who was originally hired as a junior sales associate. That employee executes an employment contract at the time of hiring that includes an enforceable termination provision. If, over time, they prove valuable to the company then they might be promoted into a sales manager position in which their primary responsibility is managing other salespeople. If they have not been provided with a new employment contract, then it is possible that the basis of the original contract has changed so substantially (from making sales to managing employees) that a court could refuse to enforce the termination clause of the original contract. This can result in a significant unexpected liability if the employer eventually needs to terminate the employee.
Factors that have tended to support the application of the substratum doctrine include:
- Major changes to the employee’s regular duties
- A change in position title
- Substantial increases in compensation and/or changes in the type of compensation provided
- Changes in reporting structure
- A long-term of service
Employers should ensure that their contracts expressly provide that termination provisions will survive substantial changes to their position, responsibilities, and pay, as this can prevent the application of the substratum doctrine.1 Employers should also regularly assess and update contracts when substantial changes occur within an employee’s role. While it’s natural for businesses to evolve and adapt, these changes can inadvertently introduce legal vulnerabilities. As roles transform, so should the contractual agreements that underpin them. A short consultation with your employment lawyer to assess the relevant facts and prepare a fresh contract (if required) could result in massive savings in the long run.
If you need help in preparing or updating your Canadian employment contracts, get in touch with our incredible team today!
