Changing post-retirement benefits tricky

2 recent cases highlight need for clear, unambiguous language
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/22/2013

Non-Unionized employers facing increasingly costly post-retirement benefits — promised during better times — could have a hard time cutting back those perks, judging by two recent cases.

Both General Motors of Canada and Weyerhaeuser had their requests to reduce extended health-care and life insurance benefits to retirees denied, largely because of unclear language used in past documents and communications.

“It certainly has sort of become the litigation of the day,” said Lisa Chamzuk, a partner at Lawson Lundell in Vancouver.

As costs skyrocketed for active employees and retirees, “the weight of this benefits program became heavier for the companies to carry, so suddenly what was historically just there on the side of anyone’s desk became front and centre,” she said.

In Lacey v. Weyerhaeuser, the Court of Appeal for British Columbia looked at whether the employer acted lawfully by unilaterally reducing its contribution to the cost of medical benefits provided to retired, salaried employees, or whether it was contractually bound to maintain its contribution.

In looking back at handbooks and documents, the trial judge found the benefits were described in 1985 as “a significant form of compensation to you.” And when it came to the medical plan for retirees, the company (then MacMillan Bloedel) said it would “pay the cost of your premium” and “provide an extended health plan.”

When management instituted the retirement health benefits, it did so gratuitously — but this initial, subjective intention changed.

“Over a considerable period of time, there was a pattern of (the company) telling its salaried employees that they would have these benefits for life upon retirement,” said Justice Richard Low. “I consider it particularly significant that (the company) referred to the retirement benefits as an ‘entitlement.’”

By remaining with the company until retirement, each employee was entitled to the promised compensation, he said.

“It has to be presumed that compensation for labour performed prior to retirement would have been greater if the promise had not been made.”

While the company could change the terms of employment during the course of employment, “it could not change those terms after the fact, when the retired employee no longer had the option to seek more attractive employment within the salaried labour market. Once the employee retired, a unilateral change in retirement benefits… clearly was a breach of contract,” said Low, adding contractual intention is determined by viewing the evidence cumulatively and objectively.

GM ‘felt entitled’

More recently, in July, Ontario’s Superior Court of Justice looked at GM’s move to substantially reduce the health-care and life insurance benefits for former salaried and executive employees after they retired.

GM felt entitled to do so because of a provision in the benefits documents that allowed it “to amend, modify, suspend or terminate” any of the benefit programs “at any time.”

In all, about 260 benefit documents were examined, including brochures, booklets, letters and announcements, “mindful of the general legal proposition that contracts must be interpreted as a whole and not in a piecemeal or selective fashion,” said Justice Edward Belobaba.

Salaried employees could reasonably expect they could plan for and rely on a core of benefits that would be provided upon retirement, found the court. As an example, a 2004 handbook stated “health-care coverage… will be provided at GM’s expense for your lifetime” while “basic life insurance will be continued for you for your lifetime.”

The benefits were also not provided gratuitously, he said.

“It is beyond dispute that the benefits in question were earned by the salaried employees and were viewed by (GM) itself as deferred compensation for services rendered.”

For example, in the mid-1970s, documents mentioned the benefits were an important part of the “compensation from your job” and they “add significantly to the total pay you receive for the work you do.”

And the courts have repeatedly found that benefits are enforceable as a matter of contract, said Belobaba.

“Although offered unilaterally, they become contractually enforceable as employees continue to work.”

In the end, the company was not contractually entitled to reduce the benefits after the salaried employees had retired, said the court, adding “retirement benefits can be changed even after the employee has retired, provided the contractual language allowing the employer to do so is clear and unambiguous.”

‘Smorgasbord’ of documentation

Many of these types of benefits plans were not written terribly well so it’s important to look at the “smorgasbord” of documentation to figure out the overall promise to employees, according to Daniel Hayhurst, a partner at Gowlings in Toronto.

“Critical, ultimately, to a decision of the court is what did employees know and when did they know it? And what rights did the company have?” he said.

“People have to know what they’re entitled to, people have to know what their rights are… and to the extent that they don’t have that, then an employer’s at risk and the courts are going to construe the employment contract in a way that’s against the employer.”

Both cases hinge on the fact that the companies used language that suggested to the active employees that part of their compensation came in retirement through these benefits, said Chamzuk.

“Once both courts were comfortable that that promise was made, that was the determining factor,” she said. “As long as (employees) understand that this is a hope rather than a promise, it’ll be easier for an employer to make those changes down the road.”

Modifying a program by reducing parts of the coverage that are not that expensive or drawn upon would mean a less risky approach than the wholesale cutting of a program, and would be less offensive to retirees, said Chamzuk.

“Retirees, generally speaking, understand these benefits are expensive and aren’t looking for the companies to go under in order to supply them, so a more reasonable approach to how they’re trimmed reduces the risk from an employer’s perspective too.”

When it comes to post-retirement benefits, there are different categories of employees: those already retired, those close to retirement and those several years from retirement, according to Ralph Nero, a partner at Fasken Martineau in Toronto.

“There are going to be different standards for each of those categories and you would take a different approach potentially for each of those categories. But, at the end of the day, these types of benefits are regarded as contractual in nature, so they’re seen to be something that vest on retirement, and whether you can or cannot make changes is very much dependent on whether you have properly reserved the right to make changes in the future.”

But if employers have not yet acted in this way, there’s still time, he said.

“It’s probably a question of picking your battles and deciding your risk tolerance or risk aversion,” said Nero.

“If you want to keep these benefits in place or if you want to reserve the right to make changes, there’s always going to be a benefit (in) doing it properly, at some point in time — i.e. now — because maybe the changes that you’re making won’t allow you to go backwards very far but it definitely can make changes going forward that will help you.”

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