Changing a benefits plan

Question: What kind of notice does an employer have to give when making significant changes to a benefit, such as a pension plan or paramedical coverage?

Answer: The answer to this question will depend largely upon the contractual terms of the employment relationship, as well as the policies in place. At common law, a substantial change to a fundamental term of the employment contract constitutes constructive dismissal. This can take the form of a decrease in compensation, a demotion, a transfer to a different geographical location, or any other type of change to a fundamental term of the relationship. It most certainly would include benefits such as pension plan or paramedical coverage. As a result — and based upon the wording of the question we assume that it will be “significant” or substantial change — then at common law such a change would constitute constructive dismissal.

If that is the case, there are a few options available to the employer. One would be to negotiate the change by offering some form of consideration in exchange for the employee’s acceptance of the new benefits. This consideration could take the form of a one-time bonus, a promotion or increase in salary, or anything else of value. The reason consideration is required is that in order to have a legally enforceable contract, there must be “consideration” — or benefits — flowing to both parties. Even if the employee was to “sign off” on the changes by accepting them, this would not necessarily be enforceable unless she was obtaining something in exchange for her agreement to do so.

Another option available to the employer would be to give notice of the change. Since the employer would effectively be terminating the existing employment contract and implementing a new one, the amount of notice required would be the same as the amount of notice required in the event of a regular dismissal. In the absence of contractual terms which state otherwise, this would be based on the common law notion of reasonable notice, which takes into account a multitude of factors including the employee’s length of service, age and position. In situations where the change will affect a large number of employees, the most prudent course of action would be to provide each employee with the amount of notice to which the employee with the greatest entitlement would receive. In other words, if assessing the amount of notice for three employees, and one would be entitled to three months of notice, another to four and the third to five, the most prudent approach would be to provide five months of notice to each of them.

Of course, it is always open to the parties to enter into contractual terms that would replace common law principles. This is one reason why I always advocate that every employee enter into a written contract of employment. Among other things, the employer can retain discretion to change or replace the existing benefit plans at its option. While this cannot be done in an abusive fashion or in bad faith, such contractual terms can provide the employer with far more discretion to implement such changes without the requirement of providing consideration or notice.