Making the cut

When it comes to reducing benefits, consider employee morale and legal concerns
By Nancy Shapiro and Darryl Hiscocks
|Canadian HR Reporter|Last Updated: 04/01/2016

There is no question employee benefits can be a significant expense item on an employer’s income statement. Reductions in employee benefits are, therefore, often considered as a possible source of cost savings. 

But reducing anything that’s given to an employee is not likely to be received in a positive manner. As a result, a benefit reduction must first be carefully considered and then implemented with a “damage control” strategy in mind. It is rare for employees to challenge changes made to benefits by their employers if employers incorporate three basic pillars when it comes to changing benefits.

• Make the changes companywide.

• Have a relatively small impact on the employees, both as a group and individually.

• Use a “feel good” message.

Employers should consider cost-saving measures first. These include the introduction of a co-pay or premium sharing mechanism or the elimination or scaling back of an à la carte option on some of the more expensive benefits, such as moving to generic drugs only or imposing lifetime maximum limits on dental claims.

And given the current legal landscape, reductions to certain benefits — such as retiree benefits — should be approached cautiously, if at all.

When seeking to cut costs, a company should also explore how benefits can be delivered more cost-effectively through changes to the delivery model. 

If that is not an option and cuts are required, the employer should try to avoid cuts to the benefits most valued by the workforce. Those tend to be the ones employees use all the time, namely dental and drug coverage. 

The benefit valued the least tends to be disability coverage — likely because the vast majority of people, rightly or wrongly, do not expect to need to use the benefit. Long-term disability coverage can be a costly benefit and its elimination may provide the cost savings an employer is searching for. 

Legal considerations

From a legal perspective, there are no specific legislative restrictions in Ontario on a company’s ability to change, reduce or eliminate benefits. In the union context, a company needs to consider whether there are limitations imposed by the collective agreement on the ability to make the cut. 

Outside of the union context, a company should consider whether the changes being proposed would be considered “fundamental” as a matter of law. If the changes are fundamental and imposed unilaterally without reasonable notice, the company’s actions may amount to a constructive dismissal. This can give rise to claims by the employees for damages and, in extreme situations, may entitle employees to cease reporting to work and pursue claims far in excess of the value of the benefits being removed.

The case law that has developed to date has generally shown a benefit reduction equal to less than 10 per cent of an employee’s annual compensation does not constitute a constructive dismissal. On the other hand, reductions having a value of 10 per cent or more of an employee’s annual compensation may constitute a constructive dismissal.

Obviously, the greater the reduction, the greater the risk of a constructive dismissal finding. However, any single employee benefit is unlikely to have a value in excess of 10 per cent of annual compensation and, therefore, its removal may be fairly “safe” in the sense it will be unlikely to amount to a constructive dismissal.

However, that does not mean a benefit can just be changed without the risk of further liability by the employer. Any change will still be a change to the terms and conditions of the employment relationship and, therefore, it should ideally be made with common law reasonable notice to the affected employees, unless the employer has contractually reserved a right to make the change or the change is so insignificant that the employer decides to implement it without such notice. 

The amount of notice that is reasonable requires a review of such factors as the nature of the benefit, its value, the availability of a replacement benefit and any special circumstances of any individual affected by the change. If reasonable notice of the change is provided, it will materially reduce the risk of liability to the company making it. 

If the change is made in the absence of reasonable notice, the company risks liability for damages to each of the affected employees during the period for which notice should have been provided. For example, if an employer eliminates employee group life insurance coverage “effective immediately” and one of the employees dies the next day, the estate of that employee would have a claim for damages for breach of contract. 

The principal claim would be for damages equal to the life insurance that would otherwise have been paid in respect of the employee’s death. As replacement life insurance coverage can require medical examinations and take time to procure, advance notice of the elimination or reduction of such coverage is imperative and the potential exposure for failing to do so can be high. 

Further, before any benefit is eliminated or reduced, employee contracts should be reviewed to consider any provisions requiring notice of any benefits changes or requiring specific benefits to be provided. Employers should reserve the right to make unilateral changes to employee benefits at any time in their contracts, and clearly stipulate the amount of notice that will be given to make such a change.

Provisions in employee contracts requiring no notice of a benefit change or elimination may not be enforceable, so employers are cautioned against taking this approach in favour of the stipulation of a provision of 30 days’ notice.

Consider the impact

Accordingly, considering the impact a benefit reduction will have on employees is an important part of the analysis. It’s a good idea to take a “We are all in this together” approach to benefit reductions and to make smaller benefit cuts companywide, as opposed to larger cuts targeted at only a segment of a team. Deciding a particular employee group will “suffer” is particularly bad for morale and employee retention in that group. 

Ideally, the elimination of a benefit will be matched with the announcement of a new or improved benefit, possibly something that does not cost the company as much financially, but acts as a morale boost. The most appreciated employee benefit that may add no actual cost to a company’s bottom line is additional vacation time, particularly if the company is undergoing a business volume reduction — although, obviously, employers are not in business to pay employees to take time off from work.

Explaining to employees why a benefits cut will be made and advising that everyone, including management, is undergoing the same change can go a long way to making these announcements go more smoothly. Additionally, announcing that the cut is being made as an alternative to job cuts — where that is in fact true — together with a statement about the value the company places on each and every one of its team members, can have a positive or moderating impact on employee morale.

Employees know benefit cuts can happen. The selection of those benefits being cut, as well as the messaging of the cut, are instrumental in ensuring as little negative impact on employee morale as possible — while reducing legal risks. Seeking legal advice as to a company’s obligations in advance of benefit cuts will also ensure liability is not inadvertently incurred.

Both based at law firms in Toronto, Darryl Hiscocks is counsel at Torys and Nancy Shapiro is a partner at Koskie Minsky.

Add Comment

  • *
  • *
  • *
  • *