In this challenging economic climate, some employers have
attempted to eliminate or reduce post-retirement benefits for
retired employees. In two recent cases, employers were found
to be not entitled to reduce post-retirement health and life
insurance benefits. Courts in both Ontario and British
Columbia have ruled that, under the respective plans before them,
the employer's "reservation of rights"
("ROR") to make such changes was not sufficiently clear
In appropriate circumstances, an employer may be able to reduce
benefits to current retirees. These cases provide further
guidance about when such reductions are legally permissible.
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
semi-private hospital coverage, the addition of new dependents,
out-of-province health coverage, prescription drug co-payments 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.
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 favour 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
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
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
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.
Take Away for Employers
Both decisions confirm that employers may be entitled to amend
retiree benefits prior to 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
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.
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