Legal Update: Contract Clause Doesn't Cut It – Employer Can't Reduce Post-Retirement Employee Benefits

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Legal Update: Contract Clause Doesn’t Cut It - Employer Can’t Reduce Post-Retirement Employee Benefits

: September 16, 2013

On July 17, 2013, the Ontario Superior Court of Justice confirmed that in certain circumstances, employers can change post-retirement (non-pension) benefits – as long as the contract language allows it:

Context Counts. The starting premise favours employees: courts will take into account the employees’ objective, reasonable expectations of the effect of contract language giving the employer the right to reduce the benefits, and whether the employer held the benefits out to employees as a form of deferred compensation.

Crystal Clear Contract. The contract wording on which the employer relies to reduce post-retirement benefits must be clear and unambiguous. Courts protect employees and assume an employer won’t undermine employees’ contractual rights. If the wording isn’t crystal clear, a court will give the benefit of the doubt to the employees.

In O’Neill v. General Motors of Canada, the Court decided the contract language on which General Motors of Canada Limited relied to reduce employees’ post-retirement benefits didn’t cut it – and delivered an important message to employers who seek to change them.

BACKGROUND

In 2009, GM reduced the basic life insurance benefits available to retired salaried and executive employees – by as much as $100,000 – as part of cost reduction efforts. GM said it was entitled to do so based on the “reservation-of-rights” (ROR) clause included in many of its retirement benefits publications.

The salaried employees’ ROR clause said GM, “reserves the right to amend, suspend or terminate any of its programs (including benefits) and policies by action of its Board of Directors or other committee expressly authorized by the Board to take such action.” The executive employees’ ROR clause contained a subtle – yet key – difference: the executives knew from the outset that their benefits were “not guaranteed” and “may be reduced or eliminated with the prior approval of the Board of Directors.”

The affected salaried and executive employees launched a class action against GM, alleging the ROR clauses did not permit GM to reduce their post-retirement benefits.

CONTRACT CLAUSE DOESN’T CUT IT

Context Counts. The Court took an objective approach, making two key contextual decisions grounding its interpretation of the ROR clauses:

Reasonable Expectations. GM sent its employees numerous communications assuring them that their post retirement benefits were secure – for example, “[y]our health care coverage … will be provided at GM’s expense for your lifetime”. The Court decided GM’s employees could reasonably rely on these assurances.
Deferred Compensation. GM also represented to its employees that the benefits are an important part of their overall compensation package. The Court confirmed that post-retirement benefits are a form of deferred compensation.

Crystal Clear Contract. The Court confirmed that employers can change post-retirement benefits – even for retirees – as long as the contract wording (here, the ROR clauses) permits it. The Court found the salaried employees’ ROR clause did not:

Nature of Contract. Courts have long viewed employees as vulnerable vis-a-vis their employer. Unlike ordinary commercial contracts, courts interpret employment contracts so as to protect employees. Thus, clear contract language was required to permit GM to reduce the benefits.
Duty to act in good faith. The assumption that an employer acts in good faith when exercising unilateral powers, and will not undermine employees’ contractual rights, favoured the employees’ position that GM could not reduce the benefits after the employee retired.
Subsequent Conduct. Later iterations of the ROR clause included in benefit-oriented publications clearly stated that GM could reduce benefits “at any time, including after employees’ retirements.” When compared to this wording of the ROR clause, the original wording was not clear enough to support GM’s reduction of the benefits.
Language not clear and unambiguous. In most of the benefit documents, the ROR clause spoke of “salaried employees”; it did not clearly state it applied to “retirees” nor specifically avert to the possibility of reductions after retirement. The Court concluded the wording of the ROR clause was neither clear nor unambiguous
Strict Interpretation. Courts interpret contract terms that limit benefits (like the ROR clauses) restrictively against employers, particularly when the question is whether the employer can make post-retirement changes. The Court thus read the ambiguous ROR clause as not applicable to retired employees.

The Court applied the same analysis to the executive employees’ ROR clause – but reached a different conclusion: the language was clearer – sufficiently clear to entitle GM to reduce the executive employees’ benefits.

Click here to read the Ontario Court of Justice’s decision in O’Neill v. General Motors of Canada.

CLARITY AND CONTEXT ARE KEY

This decision sends an important message to employers offering employees non-pension, post-retirement benefits – if they want to reserve the right to later change those benefits:

Be Crystal Clear. The contract wording permitting the employer to reduce the benefits must be clear and unambiguous. It is not enough to merely tell employees that benefits may change in the future at the employer’s discretion. Instead, the wording must clearly identify the affected employees – like salaried employees, retired employees, and so on – and the conditions under which the employer can make such change. Remember: courts will protect employees, and will interpret any ambiguity in their favour.

Consider The Context. When drafting a benefit-limiting clause into an employment contract, and communicating it to employees, employers should consider the context.

Employee Expectations. Consider how employees might reasonably expect to have their benefit affected by the limiting clause.
Compensation. Employers should be cautious and conscious of whether they represent the benefit as a form of compensation in employee communications.
Vulnerability. Keep in mind the degree of the employees’ vulnerability.
Subsequent Conduct. Be aware of how future arrangements between the employer and the employees might colour the employees’ – and the courts’ – interpretation of the limiting clause. McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Pension & Benefits Team to discuss this topic or any other legal issue.

© McInnes Cooper, 2013. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Click here to request our consent.

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