Canada: Ontario Court Rules On Reducing Retiree Benefits

Although the Ontario Superior Court ruled against General Motors of Canada Limited (GMCL) in O'Neill v. General Motors of Canada, the decision provides additional guidance for employers on how to properly reserve the right to change benefits for retired employees.

Background

On July 17, 2013, the Ontario Superior Court of Justice found that GMCL was not permitted to reduce the retirement health care and life insurance benefits for 3,297 salaried employees and surviving spouses who retired after January 1, 1995 but before October 20, 2011. The Court did find that GMCL was permitted to reduce the retiree benefits for 67 executive employees. It has been reported that GMCL intends to appeal the decision.

The reductions in benefits which GMCL was defending related to health care benefits affecting availability of semi-private hospital coverage, the right to add new dependents for coverage, out-of-province coverage and co-payments on the cost of prescription drugs. In addition, life insurance benefits were being reduced from C$100,000 or more to C$20,000 over a period of time.

Like the prior benefits cases decided in Canada to date, the Court's determination was based on an interpretation of the contracts between GMCL and its employees. In the case of the salaried employee group, the Court found that there was a breach of contract and that GMCL's attempts to reserve its rights to change benefits were not sufficiently clear and unambiguous. With respect to the executive employees, the Court found that there had not been a breach of contract because GMCL had been clear with the executives that the benefits were not guaranteed and could be reduced or eliminated with the prior approval of the Board of Directors.

The decision is interesting as it gives full consideration to what type of reservation of rights to amend or eliminate benefits will be required to reduce benefits for already retired prior employees.

Decision Concerning Salaried Employees

After reviewing some 260 employee communications, the Court concluded that there was a reasonable expectation that the salaried employees would have certain of these benefits for the remainder of their life. The Court went on to comment, as previous Courts have commented, that benefits were provided as deferred compensation for services rendered and not gratuitously.

In coming to its decision, the Court quoted from some of the company's prior statements about the retiree benefits offerings, for example its reassurance that the benefits information "should be of interest to your family and a useful tool for your own financial planning." The 1975 booklet Highlights of Your Benefits, said this:

Furthermore, the Court referred to passages in GMCL's You and Your Benefits binder dated 2004 and subtitled, "A Handbook for Salaried Employees in Canada," and noted that in the "When You Retire" section, there was an explicit reassurance that "Your health care coverage...will be provided at GM's expense for your lifetime." In the section labeled, "In the Event of Death," the basic life insurance coverage is explained as follows: provided the eligibility requirements are satisfied (not at issue here), "your basic life insurance will be continued for you for your lifetime."

After reviewing statements of the sort extracted above, the Court then considered whether GMCL's reservation of rights to amend clauses in the various plans were sufficient to allow it to reduce or eliminate the benefits with respect to already retired employees. In this regard, the Court found that many of the benefits documents in the relevant period contained the following reservation of rights language:

The Court contrasted that reservation of rights language with the provision as amended in 2012 which reads as follows:

The Court did concede that it was not reasonable to have this reservation of rights clause in every letter or communication that went to members but that it was sufficient if such a clause was included in the main benefit documents that were provided to employees.

The Court contrasted the reservation language in the pre-2012 provision and the 2012 provision. The Court found that while the 2012 provision was clear and unambiguous that a change could be made to retiree benefits, the earlier language was not.

In reaching its decision in favour of the retired salaried employees, the Court relied on the doctrine of contra proferentem, which provides that a provision that is ambiguous or capable of more than one reasonable interpretation should be interpreted against the drafter, having regard to the customary context of unequal bargaining power between employees and employers. The Court also noted that because the benefits related to the employment context, the Court said "in absence of 'clear language mandating some other result', employment contracts are interpreted so as to protect employees". In addition, the Court noted that the duty of good faith favours the employee claim that benefits could not be reduced after the employee had retired given the repeated reassurances by GMCL of retirement security.

The Court also considered the situation of a group of early retirees who had signed a document containing an acknowledgement of GMCL's general reservation of rights and had also signed releases in favour of GMCL. The Court found that the language used did not expand the prior reservation of rights provisions that were inadequate. Moreover, the release was not applicable to claims that the early retirees were not aware of at the time that they signed the release.

Decision Concerning Executive Employees

The Court found that the documents with respect to the retired executive employees permitted GMCL to make post-retirement benefit changes as the foundational documents clearly stated that benefits were "not guaranteed" and "may be reduced or eliminated with the prior approval of the Board of Directors." In addition, when the executive retired, they were required to sign a document that provided that the executive had read and understood the terms of the Program including that "benefits paid under this Program may be reduced or eliminated with the prior approval of the Board of Directors". Finally, when they retired, the individuals were asked to sign a Monthly Benefits Authorization form which provided (just above the signature line) that "benefits paid under this Program may be reduced or eliminated with the prior approval of the Board of Directors."

Conclusion

While we await the appellate Court's ruling on these issues, the lower court's analysis of and conclusions as to what constitutes a sufficient reservation of the right to amend employee benefits programs for retirees must be carefully considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.