Canada: Can An Employer Implicitly Waive Its Right To Amend The Pension Plan And The Benefits Package Of Its Employees?

This was the question answered in a recent judgment rendered by the Superior Court on June 13th, 2016, ordering IBM to pay more than $23 million to 451 active and retired employees of its plant in Bromont in connection with the company's decision to unilaterally amend a clause in its pension plan.

Case Facts:

IBM operates a plant in Bromont which employs hundreds of non-unionized workers.

Throughout the period in question, IBM offered its employees a defined benefit pension plan, which included a bridging benefit that aimed to encourage employees to take early retirement. This bridging benefit allowed workers to receive approximately $7,000 a year between the time of their early retirement and the time they reached the age of 65.

In 1994, during a period of economic difficulty, IBM announced that it was going to replace its defined benefit pension plan with a defined contribution pension plan. However, the company's existing employees were given the option to opt out of the defined contribution pension plan and continue accruing benefits under the defined benefit pension plan, which contained the above-mentioned bridging benefit. IBM offered each of its employees a 40% increase in accumulated contributions if they agreed to transfer to the new plan. Despite this, the employees opted to continue with the existing plan, preferring to take advantage of the eventual early retirement bridging benefit.

Some ten years later, in January 2006, IBM advised its employees that it was terminating the bridging benefit for employees retiring after December 31st, 2007. At the same time, the company terminated its health insurance coverage for employees over the age of 65.

In December 2008, Jean Samoisette, a former IBM employee, instituted a class action lawsuit against the company. At the time of the above-mentioned changes to the pension plan, Mr. Samoisette was not yet eligible for the bridging benefit. He was entitled to take early retirement in 2008. In his case, the benefit amounted to approximately $110,000.

IBM claims that it had never guaranteed that the pension plan would never be changed.

The Decision:

In his judgment, the Honourable Justice François P. Duprat concluded that IBM could not renege on the representation it had made to its employees with regards to the bridging benefit they were on the verge of being eligible to receive upon early retirement.

The Court held that the benefits package provided to IBM's employees, including the pension plan, the bridging benefit and the retired workers benefits, formed an integral part of their remuneration and, as such, were governed by their contract of employment with IBM.

The judge acknowledged that these benefits could however be changed unilaterally and that employers may reserve the right to do so at any time. Moreover, the judge found that IBM had in fact reserved its right with respect to the health insurance coverage after the age of 65.

It was the Court's opinion that the evidence presented did not support the conclusion that the company had made any representation to the effect that its pension plan would never be amended. The Court relied on certain economic aspects, including, amongst others, IBM's efforts to secure a better return on investment for its shareholders as well as its desire to control the escalating costs of employee benefits amongst its subsidiaries, to arrive at the conclusion that the employer was justified in amending its group insurance plan.

However, the following point is what interests us most about the Court's judgment, where the judge found that IBM, through its conduct, had implicitly waived its right to amend its pension plan in such a discretionary manner.

Basing itself on a broad interpretation of the notion of "representations", the Court held that the employees had relied upon the information provided by IBM when making the decision to remain in the existing defined benefit pension plan. In the Court's view, at that given moment, those particular employees had planned for their future retirement, having not only taken into account the pension amounts that they stood to receive, but also the bridging benefit they were eligible for.

It is important to note that, until the changes were announced in 2006, neither the pension benefit statements, the explanatory guidebook distributed to the employees, nor the pension estimate software, included any clause to the effect that the pension plan could be amended by the employer.

The Court eventually concluded that IBM could not withdraw the bridging benefit from its employees, the latter forming an integral part of the remuneration which the employees would expect to receive when they retired.

The class action lawsuit of the workers and ex-employees of IBM was therefore granted in part, and IBM was ordered to pay all the individual claims relating to the bridging benefits, amounting to a total of $23,519,000 with interest.

This decision illustrates the importance for employers to take the necessary measures to communicate to their employees, in a clear and transparent fashion, that their existing fringe benefit plans may be unilaterally amended at any time. Failing to clearly measure the reach of announcements and representations made to employees with regard to existing employee benefit programs may prove to be extremely costly, as demonstrated by the case at hand.

IBM claims that it is currently reviewing its options with regards to appealing the judgment. Therefore, the case will probably continue to attract growing interest.

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