Until death do us part: Attempts to reduce retiree benefits fail—for now

September 01, 2013 - by: Northern Exposure 0 COMMENTS

By Ralph Nero, Ross Gascho, and Keri Bennett

As in the United States, some Canadian employers have attempted to eliminate or reduce post-retirement benefits in order to address escalating costs. In two recent cases, Canadian employers were found to be not entitled to reduce post-retirement health and life insurance benefits. Courts in both Ontario and British Columbia have recently ruled that, under the respective plans before them, the employer’s “reservation of rights” (ROR) to make such changes was not sufficiently clear and unambiguous.

Nonetheless, in appropriate circumstances an employer can reduce benefits to current retirees. These cases provide further guidance about when such reductions are legally permissible.

O’Neill v. General Motors of Canada

Facts: In a response to the 2007-2008 economic crisis, GM Canada sought to reduce the benefits of already-retired salaried employees and retired executives. The targeted benefits included semiprivate hospital coverage, the addition of new dependents, out-of-province health coverage, prescription drug copayments, and life insurance benefits.

Retired salaried and executive employees started a class action. They claimed that GM Canada was not entitled to reduce benefits. It should be noted that GM Canada sought to reduce benefits only in respect of those who had retired in or after 1995. This was an apparent concession that the ROR language prior to this time was insufficient.

Decision: The court reviewed approximately 260 communications to employees and retirees issued over many years. There were repeated assurances in these documents, such as, “Your health care coverage … will be provided at GM’s expense for your lifetime” and “Your basic life insurance will be continued for your lifetime.”

Based on this and the context in which these statements were made, the court determined that retired salaried employees had a reasonable expectation that their health care and life insurance post-retirement benefits would continue for their lifetime. The court went on to find that these benefits were provided as deferred compensation for services rendered and were not gratuitous benefits.

While many of the benefits documents provided during the relevant period contained ROR language, the court concluded that it was insufficiently clear and unambiguous to allow a change to retiree benefits after the employee retired. The court contrasted the ROR language with amendments to the ROR that were made after the class action began. In the latter, GM Canada had explicitly reserved the right to amend retiree benefits, including after the employee retired.

In reaching its decision in favor of the retired salaried employees, the court held that the communications were not sufficiently or consistently clear and unambiguous. Because the provisions were capable of more than one reasonable interpretation, they were to be interpreted against the employer. The court noted that, in the employment context, courts will interpret contracts so as to protect employees in the absence of clear language mandating otherwise.

Finally, the court determined that the duty of good faith required an interpretation that employee benefits could not be reduced after retirement, given GM Canada’s reassurances about retirement security.

However, GM Canada was entitled to make post-retirement benefit changes for retired executives. Unlike salaried employees, the court held that executive retirees “knew from the outset,” based on the contract language, that their retirement benefits were not guaranteed and could be reduced or eliminated after retirement.

Lacey v. Weyerhaeuser Company Limited

In the General Motors decision, the court referred to a recent British Columbia Court of Appeal decision, Lacey v. Weyerhaeuser. There, the employer similarly provided certain promises that employees would receive benefits for life upon retirement.

The British Columbia Court of Appeal was persuaded that the promises were made unilaterally and the benefits were provided in order to retain employees. As such, these benefits constituted deferred compensation. The employees were entitled to receive what was promised.

Takeaway for employers

Both decisions confirm that employers may be entitled to amend retiree benefits before an employee’s retirement. In addition, employers may amend retiree benefits after retirement so long as the relevant ROR language is drafted appropriately. To the extent that there are deficiencies in existing ROR language, an employer may be limited with respect to adverse benefit changes for current retirees. However, employers may still be able to reduce post-retirement benefits for future retirees.

We have extensive experience in drafting valid and enforceable amendments to benefit and pension plans and evaluation of ROR plan language. Should you have any questions, do not hesitate to contact a member of our Labour, Employment, Pension and Benefits Group.

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