Given the economic uncertainty, is it time to alter your benefits?

With all the uncertainty in the air these days, many Canadian employers are looking at how to contain or cut costs.

That could mean temporary layoffs, work-sharing arrangements or reduced hours. It could also mean making changes to employee benefit plans.

But there are both legal and best practice considerations to take into account, say three experts talking to Canadian HR Reporter.

Risks of constructive dismissal claims

The biggest distinction, as it relates to the employment relationship, is whether employees are unionized or not, says Mathias Link, partner at Fasken in Toronto.

“If you're unionized... it's much more difficult to make changes to benefit plans that negatively affect employees. So, whether it's reducing or eliminating STD or LTD, scaling back on paramedical, something like that, really, what the parties agree to in the collective agreement is going to dictate what you can do.”

For non-unionized employees, the real risk in making changes to benefits that are in the negative — so taking away as opposed to giving more — is that it gives rise to a potential claim for constructive dismissal, he says.

“When you're trying to reduce costs, you may think, ‘Okay, well, I'll leave the salary or the hourly wage alone, but I'll just achieve some cost savings through reducing benefits.’ Well, those are terms and conditions of employment, and depending on how significant they are, both in terms of the percentage of the overall compensation package a) and b) the importance of the particular benefit to the particular worker, the removal or the reduction of that may itself give rise to a constructive dismissal claim.”

Even if an employer argues that it was in financial distress so that should mitigate against a constructive dismissal, the courts have been very clear – as with COVID-related decisions and layoffs – that doesn’t matter, says Link.

“Similar to... the employer arguing, ‘Well, the reasonable notice period should be less because it's a hardship on me’ — the courts have got no time for that.”

What’s allowed in changing plans?

For the most part, employee benefit plans can be altered during a scheduled redesign, but rarely because of financial stress, says Ross Gascho, partner at Fasken in Toronto.

“Part of it might have to do with contractual arrangements with their insurer in that they're locked into paying a particular premium, and that premium isn't going to change for the life of the contract.”

In changing the benefit plans, it’s about changing the terms of their contract, he says.

“It's giving notice and ironing out the terms of any amendment that has to be made to the contract, because the contracts are typically written in such a way that it can't be amended unless the insurer signs off.”

If an employer is facing some kind of financial emergency, the first thing to look at is what plans are amenable to reduction, which could include, for example, variable pay plans, says Gascho.

“What kind of plan do you have? What does the plan say about the employer's ability to amend or terminate it? Are there other expectations around the employer's ability to amend or terminate?”

In particular, there are often statements in employee communications about the “long life” of many plans, and ‘It's here for you’ and that sort of thing, he says.

“And then [it’s about] what has the company's practice been? Have they ever done this before, in a period of financial distress?”

Reduced hours and eligibility

One important consideration when it comes to employee benefits is the impact of reduced hours. If an employer decides to cut back to save on costs, that can heavily affect eligibility, says Faizal Mitha, chief sales and innovation officer for Hub International’s Employee Benefits division in Canada.

“There's hours-per-week limitations on a per-class basis for employees. So, [employers] really have to look at what class of employee is within their benefits plan. Are they really looking to do temporary layoffs and what is the minimum requirement? How do they calculate the minimum requirement? For some of them, it's done over an average of a month; sometimes it's over an average of a quarter. It really depends.”

If there is a potential that people drop below the hours requirement, the employer has to decide: no longer continue benefits for those people or make it a contract adjustment with the carrier, he says.

“Sometimes, that adjustment could push the carrier below their threshold, so having a strong advocate to help them through that process will be critical.”

The impact of reduced hours can depend on the terms of the plan, says Gascho.

“Some plans say that you continue in the plan even if you cease to meet the eligibility requirements, as if you were a new employee. And there are others that say, for example, ‘If you cease to be full time, you're no longer qualified.’”

The rules of the benefits plans are all over the place, says Link.

“You don't want to assume that simply because someone was hired on a full-time basis and then meets the — usually it's a 90-day — continuous employment threshold before they're eligible under the contract, doesn't necessarily mean that they may maintain eligibility,” he says.

And with many plans, particularly for smaller employers, once you drop below an average of 20 or 30 hours a week, employees are no longer able to participate in the benefit plan: “That's a term of the agreement.”

Altering retirement plan options

Another huge part of employee benefits is retirement savings plans — but employers will want to take note of the regulations involved before considering changes.

In Ontario, for example, there's a notice requirement if an employer decides it want to reduce or cease matching contributions for a limited period, says Gascho.

“You cannot do it retroactively; you have to make that kind of change only looking forward.”

Other plans are easier to amend on a fast basis, such as group RSPs and deferred profit-sharing plans, he says.

“Similarly, there's no statutory requirement to how much notice you have to give before changing the employer contribution rate. But then we get into... the employment law issues around ‘How much notice do you have to give under common law before you make a change of that nature?’”

There's not a lot of statutory law for this area, says Gascho.

“The main law is if you're amending or even terminating a pension plan… you're into significant notice requirements to the members, and depending on the kind of pension plan, you might be triggering some financial obligations that you didn't have. So, it's not a quick fix to any financial issues that an employer is facing.”

Downsides to reducing contributions

While it may be possible for an employer to stop or lower contributions to a retirement savings plan, there are implications for employees, says Mitha.

“If you're an employee and your employer stops the contributions, then you stop the contributions. And these times always happen when the markets are down. So, by both of you not contributing when the market's down, you're missing that upside opportunity. So, it's really a double whammy.”

With markets going down, people may be making “erratic decisions” on their RSP program to get out of the market altogether and move into money market, so selling low to buy high later, he says.

That’s why providing strong financial education is a good idea, says Mitha.

“Not that the employer can get involved, but [it’s about] offering that through either their insurer or their advisor. I think that that'll be key to help them through this rocky period, but then also helping people that are being laid off to help transition their assets to wherever they need to do and go down that path as well.”

Extending benefits to laid-off employees

That’s another key area of consideration for employers: extending benefits to laid-off employees. But that can be tricky, he says.

“You have to meet the Employment Standards Act, and you have to figure out what your maximum extension period is under your benefits contract, because sometimes, if the benefits lapse, but the temporary layoff continues, you're now offside,” says Mitha.

“So, it's extremely critical for them to be in regular touch with their advisor and their insurer to make sure that whatever temporary layoff period that they select aligns with their benefits continuation period.”

It also depends on the terms of the of the contract, as to who is eligible for extended benefits, says Gascho.

“Some contracts are very specific that the employee must be actively at work. Others only require that the person be in an employment relationship,” he says, citing the issue of people at work or on layoff: “It tends to be plan-specific.”

Assessing employer offerings

Today’s economic uncertainty related to tariffs recalls previous downturns of 2008 and 2022, along with the COVID pandemic, says Mitha.

Many employers are “taking a wait-and-see approach” when it comes to cost-cutting, include changes to benefits, he says.

Ideally, three to six months prior to renewal, HR should assess where it stands from a headcount standpoint, how the tariffs are going to impact the business, and then look at their drug plan, their demographics, and then make some proactive decisions, he says.

It's important for an employer to look at what is core to their offering, says Mitha.

“There's employers that are on the spectrum of ‘We're offering health insurance versus health benefits.’ Health insurance is those things that only happen to a few people — if they do, they're devastating. And health benefits are things like vision care, which are great to have, but if it took away my vision care tomorrow, is my family and my financial situation going to be in hardship?”

Managed formularies

One area that could bring significant savings for employers in redesigning their benefits is drug plans by using managed formularies instead of open ones, he says.

That can involve looking at every new drug that comes to market in certain categories, deciding whether they're cost-competitive relative to their peers to treat the same condition, and whether they're clinically effective relative to their peers, says Mitha.

“Things like managed formularies, I definitely see playing a larger role right now. It's just employers have been reluctant to rock the boat, but I think this type of [economic] uncertainty might lead to that,” he says.

“I definitely see employers taking a harder look at that, because you're not cutting plans, you're just making more efficient and effective plans, and… from what I've seen for the last decade of employers that have taken this approach, it’s like 10 to 12% savings year over year, on the drug side.”

Communicating benefits changes

The other consideration for HR is leveraging no- or low-cost benefits that provide value, such as employee discount platforms, reduced home and auto insurance, virtual care, and EAPs with capped rates, says Mitha.

But overall, employee communications are very important when it comes to any changes to benefits – real or considered, he says.

“Communicate early, even when the answer is ‘We're not sure yet’… because I think many employers are in that space, they really aren't sure yet. They feel the uncertainty, there's trepidation, because Trump could tweet something tomorrow, and all of a sudden there's no risk, or it's a bigger risk, and like a seesaw, we're going back and forth.”

So regular messaging, that’s frequent and transparent, goes a long way in showing some vulnerability from a corporate communication standpoint, says Mitha.

And that should go alongside manager training.

“Whatever message that they cascade from the top-down, employees will always trust that their manager says more than corporate communications,” he says. “So, whatever plan that they have for outreach has to include the manager training and the manager FAQs to help them through.”