Canada: Class Actions & Retiree Benefits — New Risks?

Last Updated: March 22 2005

Article by Gordon McKee and Holly Reid, ©2005 Blake, Cassels & Graydon LLP

This article was originally published in Blakes Bulletin on Pensions - February 2005

Canadian employers have, for decades, used substantial employment benefits packages to attract and retain employees. These benefits packages often include a variety of post-employment benefits for retirees (including life insurance, prescription drug, supplementary health and dental benefits). For employers, one attractive feature of these retiree benefits is their low up-front costs.

To date, the potential long term costs and liabilities associated with these retiree benefits programs have not received significant legal or media attention. However, this appears to be changing.

Employers are increasingly looking to reduce or to eliminate the retiree benefits offered to both current employees and retirees in an attempt to address the rising costs of the benefits plans. The need for such cost-cutting is fuelled not only by global competition, an ageing workforce, and skyrocketing health care costs, but also by recent changes to Canadian accounting standards. These changes ensure that employers are required to estimate the present-value cost of retirement benefits for the life of retirees, often resulting in a liability on their books of up to several billion dollars, and a corresponding need to quickly reduce that liability.

However, a decision to reduce retiree benefits, particularly for former employees already in retirement, entails significant legal risks, which are further heightened by the advent of class action litigation. Although class proceedings in the employment context are relatively rare, recent cases demonstrate that reductions to retiree benefits are joining pension plan surplus disputes as fertile new ground for such litigation.

The Reduction of Retiree Benefits

If an employer wishes to change the benefits package offered to current employees, the employer can provide employees with common law reasonable notice of the change, in order to avoid liability (and litigation) relating to those changes. However, reasonable notice concepts do not readily apply in the context of changes to retiree benefits. After all, faced with changes to their benefits, retirees cannot choose to resign their employment, claim that they have been constructively dismissed, or obtain alternative employment to mitigate their losses. Further, compared with active employees (who generally wish to retain their employment) retirees have little to gain and potentially much to lose by consenting to changes to retiree benefits.

The Supreme Court of Canada addressed this issue in the context of a unionized workplace dispute in Dayco (Canada) Limited v. The National Automobile, Aerospace and Agricultural Implement Workers Union of Canada. Although the main issue to be decided in Dayco was whether a provision in a collective agreement requiring an employer to pay retirement benefits could survive the expiration of the agreement, the Supreme Court also considered an employer’s ability to alter retirement benefits provided to retirees following retirement. Following consideration of the U.S. case law in this area, the Supreme Court accepted the proposition that retiree benefits could be altered or terminated if the parties anticipated and contracted for such an eventuality in the collective agreement. As such, although retirement benefits are accrued entitlements that vest at the time of retirement, the scope of that entitlement will depend upon the terms of a collective agreement or employment contract, including any reservation by an employer with respect to changes to, or termination of, retiree benefits programs.

Certification of Retiree Benefits Class Actions

Pursuant to the Class Proceedings Act, 1992 (the CPA), a court must certify an action as a class proceeding. Courts consider the purposes of the CPA in deciding whether certification should be granted. These purposes are judicial economy (reducing the time, expense and resources spent in litigation), increased access to the courts (encouraging the hearing of small claims which might not otherwise be heard), and behaviour modification (deterring potential corporate defendants from illegal conduct). There have been two significant contested certification decisions in Ontario dealing with retiree benefits, and a number of other retiree benefits class actions are currently working their way through the courts.

Ormrod v. Etobicoke (Hydro Electric Commission) considered the elimination of a premium cost-sharing arrangement. In 1988, the Etobicoke Hydro Electric Commission (the Commission) had agreed to pay 50% of the premium costs for retirees receiving coverage under its retiree health and dental benefits program. When premium cost-sharing was announced, the Commission did not specifically reserve a right to alter the premium cost-sharing arrangement. In June 1996, the Commission announced that premium cost-sharing would be phased out, such that retirees would ultimately become responsible for 100% of the premiums for the retiree benefits program. Ormrod, on behalf of the retirees, commenced a class proceeding, arguing that the Commission’s decision to pay 50% of the premium cost was a term of the retiree’s employment contracts that vested upon their retirement, and, as such, the unilateral elimination of the premium cost-sharing arrangement was a breach of contract. The retirees sought damages for the premiums which would have been paid by the Commission under the premium cost-sharing arrangement. There were 85 retirees receiving retiree benefits in June 1996.

Justice Winkler certified the proposed class proceeding in 2001. He found that there were virtually no individual issues to be determined as there were, in essence, multiple claims for liquidated damages that could be easily decided after the common issues had been determined. If the class was not certified, the retirees would have to bring individual actions in Small Claims Court. As such, Justice Winkler held that the certification of the class would increase the retirees’ access to the courts and reduce the time and expense of litigation. Following Justice Winkler’s decision, the parties reached a settlement, requiring the Commission to pay the retiree group $450,000.

In Kranjcec v. Ontario, the proposed class proceeding related to the Government of Ontario’s longstanding practice of extending employee health, dental and hospital benefits negotiated by itself and the Ontario Public Service Employees’ Union (OPSEU) to retirees through various Orders-In-Council (OICs). The proposed class of retirees included about 51,000 individuals – a far cry from the 85 class members in Ormrod.

Starting in September 1978, the Government distributed various booklets regarding the retiree benefits program provided through the OICs to the retirees. The retiree benefits were amended from time to time to mirror those benefits negotiated by the Government and OPSEU for active employees. Generally, changes to the retiree benefits program served to increase or enhance the benefits for which the retirees were eligible. However, in June 2002, the Government purported to reduce and, in some cases, eliminate certain benefits from the retiree benefits program, while also increasing other benefits. As a result of these changes, Kranjcec commenced an action under the CPA, arguing that the reduction of the retiree benefits constituted a breach of the Canadian Charter of Rights and Freedoms, a breach of the retirees’ employment contracts and a breach of the fiduciary duty owed to the retirees by the Government.

Justice Cullity certified Kranjcec as a class proceeding in January 2004, finding that the retirees constituted an identifiable class, and that their claims raised a variety of common issues. Although he recognized that the interests and entitlements of some retirees could vary (depending on when they retired and their health care needs and benefits usage), Justice Cullity focussed on the fact that the proposed class included approximately 51,000 retirees. Based on the size of the class, certification would increase the retirees’ access to the courts and reduce the time and expense of litigation. Justice Cullity held that any conflicts of interest between Kranjcec and other class members could be addressed by the CPA’s opt-out process, whereby individual class members could choose whether or not to participate in the class action.

Most recently, in Markle v. Toronto (City), the City of Toronto consented to the certification of a class proceeding involving a claim by a number of its retirees for prescription drug and out-of-province benefits coverage after they reached age 65. Although the City acknowledged that a class proceeding was the preferable procedure for determining the retirees’ claims, it also asserted that the prescription drug and out-of-province benefits had never been included in its retiree benefits program for retirees over the age of 65. The retirees took the position that such benefits were provided pursuant to a by-law passed by the Council of the former Municipality.

Despite the fact that the City consented to the certification of the retirees’ action as a class proceeding, Justice Nordheimer was required to ensure that the action met the requirements of the CPA before doing so. In this respect (and with little analysis concerning the facts of the matter), Justice Nordheimer found that the retirees’ entitlement to certain benefits was a common issue that would be best resolved through a class proceeding, and that the proposed representative plaintiffs could fairly represent the interests of the class members.

Most retiree benefits disputes have an impact on a relatively large number of individuals, and they can be cumbersome or impractical to resolve on an individual basis. In this respect, the use of class proceedings legislation is perceived by some as a cost-effective way of protecting the rights and interests of retirees. This perception, coupled with the increasing pressure on employers to minimize the substantial liability created by retiree benefits plans in light of the ageing workforce and health care costs, will no doubt encourage the commencement of class actions relating to retiree benefits. What remains to be seen is whether retiree benefits class actions will continue to be certified even where significant individual differences and conflicts between class members exist – and how courts will balance the interests of employers and retirees in developing substantive legal principles relating to changes to retirement 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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