Class actions a potent weapon for employees

The significant downsizing of Nortel's workforce has been on the front pages of newspapers over the last 18 months. Employees were offered severance packages based on a formula that took into account age, years of service, seniority and other factors.

Many employees chose not to litigate, even when the offers were less than what could have been achieved in court. Employees were concerned about legal fees, the delay and uncertainties inherent in the court process and the difficulties of suing a large employer.

But the litigation landscape changed significantly when Nortel terminated the employment of Robert Isaacs. Isaacs, 54, was a senior manager at Nortel terminated without cause after 33 years of employment. Nortel offered him two options: two months’ notice, a lump sum equivalent to six months’ salary and benefits and pension eligibility; or 16 months' salary in lieu of notice, subject to mitigation.

Instead of rejecting the offer and commencing the traditional wrongful dismissal action, Isaacs started a class-action suit against Nortel on behalf of all employees age 50 or older who were dismissed in December 2000.

A class action is litigation brought forward on behalf of an identifiable group and not any one member of the class. If and when the class action is resolved, it binds all members of the group, unless certain specific opt out provisions are exercised by an individual. The class-action process has many advantages for the plaintiff's group. Ontario counsel could openly negotiate contingency fees, which had been prohibited in Ontario until very recently.

The prohibitive costs of expert reports and legal fees, which often render individualized litigation uneconomic, could be spread among all members of the class. By changing the economics of litigation, class actions make it much more feasible for individuals to band together and sue a large corporation. Furthermore, employees who believe the class-action resolution is not appropriate have the option of opting out of the class action.

In Isaacs the court defined the members as being employees over 49 who had been dismissed within a specific period of time and who had certain vested pension rights under Nortel Networks’ limited managerial and non-negotiated pension plan.

The court also defined which issues should be subject to the class action. Many of the issues dealt with complex pension issues which arise under the Ontario Pension Benefits Act when a significant portion of a business is being restructured or discontinued. Pension litigation is complex and requires expensive expert advice. It would have been completely uneconomic for Isaacs to retain actuaries simply to challenge the calculation of his own pension entitlements.

Isaacs' thinking, however, was that all employees over 49 were entitled to much more severance than Nortel's initial offer had provided and all of these employees were being short changed, as a class, with respect to pension entitlements.

By proceeding with a class action, Isaacs found a way to challenge the severance offers provided not just to him, but also to all employees in a similar position. His lawyers were prepared to operate by way of contingency. Since the case would involve a large number of employees and entitlements, the lawyers had an interest in pursuing an expensive pension case.

The judge, however, explicitly refused to include any employee who had signed a release in favour of Nortel in the class action, even though the statement of claim alleged the releases had been procured by way of material fraudulent misrepresentation. The judge held the issue of whether releases ought to be set aside would be highly individualistic and, therefore, should not proceed by way of a class action. This part of the judge's decision highlights the importance of obtaining a release whenever a severance settlement is negotiated.

The use of a class proceeding is not new. Eaton's employees commenced a class action against their insolvent employer. K-Mart Canada Ltd. faced a huge class proceeding when it terminated more than 3,000 employees five years ago. Employee class actions usually do not proceed to trial and most do not even get to the discovery stage. Settlements are often quickly negotiated on behalf of class members, as employers also wish to avoid the uncertainties of litigation.

Employers who are considering mass terminations should consequently factor in the risk of class litigation in developing severance packages.

Neena Gupta is a partner at Goodman and Carr LLP practising in the firm's Human Resource Management Group. She can be reached at or (416) 595-2480.

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