Mitigate corporate liability through employee communication

If done right, communication can enhance an employer’s benefit program by ensuring that employees understand and profit from promised benefits. If done wrong, employee benefits communication has the potential to create significant legal liability for employers.

This potential for employer liability has been repeatedly exposed through Canadian court challenges involving the communication of employee benefits. The following are leading examples.

SPOUSAL WAIVER
In the case of Deraps v. Labourers’ Pension Fund of Central and Eastern Canada, the Deraps were advised by a pension counsellor that Mr. Deraps could receive a pension in either of two forms: a lower monthly pension during his life with a survivor benefit payable to his wife upon Mr. Derap’s death; or, if Mrs. Deraps signed a spousal waiver form, a higher monthly pension during the lifetime of Mr. Deraps with no survivor benefit upon his death.

The Deraps chose the higher monthly amount payable for the lifetime of Mr. Deraps, and Mrs. Deraps signed the required Ontario spousal waiver form. At no time were the implications of signing the spousal waiver form explicitly explained to the Deraps.

As a result, it wasn’t until after her husband’s death that Mrs. Deraps fully understood that by signing the spousal waiver form she had waived her entitlement to a pension benefit from the fund. In finding the plan administrator liable for the amount of the benefit Mrs. Derap’s would have received if she hadn’t signed the waiver, the Court stated that the failure to divulge necessary information was as misleading as providing incorrect information.

PRIOR SERVICE
In Spinks v. Canada, Spinks attended an employee information session when first employed. At that time, the employer explained its pension plan but failed to let Spinks know that he could choose to count service with a prior employer under the new employer’s pension plan. Such an election would have greatly enhanced the value of the pension payable to Spinks at retirement.

Even though the communication had taken place 17 years before the date Spinks brought his action, the Court found in favour of Spinks, noting in its judgement that “missing information can be as harmful as mistaken information.” Again, as in Deraps, it was the failure to fully inform the employee that got the employer in trouble.

INSURANCE COVERAGE
A similar set of facts existed in Lehune v. Kelowna (City). Here, Lehune, who was about to retire, was provided with inaccurate and incomplete information about his life insurance coverage.

The employer’s labour relations and benefits supervisor told Lehune that his insurance coverage could not be extended beyond his retirement (Lehune was terminally ill at the time with cancer). In reality, the employer’s insurance policy did extend for 31 days beyond retirement and also had a conversion privilege that would have allowed Lehune to continue the coverage as a separate individual policy. Again, the failure to properly inform the employee of the true nature of the benefits resulted in liability for the employer.

COST-OF-LIVING ADJUSTMENTS
Finally, in Campbell v. Teachers’ Retirement Fund, Mr. Campbell was informed by fund employees over the telephone that he would receive cost-of-living adjustments on his pension from the date he last made contributions to the fund.

Prior to retiring, Campbell took a two-year leave of absence during which he did not make any contributions to the fund. When he did eventually retire, he was informed that cost-of-living increases were actually provided from the date of retirement, not the date of last contribution.

Even though the misrepresentation was verbal and not well remembered by either party, the Court found in favour of Campbell. In so doing, the Court indicated that the fund owed a duty to provide accurate information to those it knew would be relying on that information.

HOW TO AVOID COURT CHALLENGES
The legal basis used in many of the employee communication court challenges, including those cases noted above, is “negligent misrepresentation.” Canadian case law indicates that an employer will be found liable of negligent misrepresentation if it is demonstrated that the:

a) employer owed the employee a duty of care based on a “special relationship;”

b) information provided to employees is “untrue, inaccurate or misleading” or was misrepresented;

c) employer was negligent in providing the information;

d) information was relied on by the employee in a reasonable manner; and

e) employee suffered damages as a result of relying on the information provided by the employer.

SPECIAL RELATIONSHIP
Courts in Canada have usually found that the relationship between an employer and its employees is a “special relationship,” which gives rise to a duty of care when communicating employment matters. Generally speaking, this duty of care requires that the information communicated to employees be accurate and not misleading, since it is eminently foreseeable that employees will use and rely on the information provided.

Negligence will be found in situations where the employer has not taken reasonable care to ensure that the information communicated to employees is accurate. If an employee can also show that the information provided was relied on to the employee’s detriment and that the employee suffered damages as a result of such reliance, the employer will be found liable for negligent misrepresentation.

Since it is usually within the competence of employers to provide correct and complete benefits information and foreseeable that employees will rely on this information, employers are often at a disadvantage when trying to defend against a claim of negligent misrepresentation. The task is not made any easier by Canadian courts that tend to show more sympathy for employees in employee/employer disputes. That being said, there are steps employers can take that will assist in minimizing the potential liability inherent in employee communication.

GOOD COMMUNICATION PRACTICES
As with many benefit issues, employers should start off by instituting a good governance framework. In respect to employee communications, the goal of this framework should be to ensure that the right people are providing the right information at the right time. Communication practices that should be considered when creating such a framework include:

1. Designate communication to a small number of specific individuals. It is easier to monitor a small group of individuals and keep them informed then a larger, less cohesive group. Also ensure that the selected group is well trained in the benefits provided and that they understand the importance of proper benefits communication.

2. Know your target audience. Understand their level of sophistication. Do not overlook difficulties employees may have with language or the fact that non-employee beneficiaries, such as spouses, may also need to be provided with relevant information.

3. Make sure all written information is simple, current and correct. Err on the side of detail.

4. Be proactive. Take the initiative to advise employees of their benefits and the changes made to those benefits as soon as possible. Do not wait to be asked by employees.

5. Make sure that employees have access to as many information sources as possible (for example written material or Web sites). Hold refresher seminars so that employees are always given an opportunity to update their knowledge.

6. Keep a record of all communications made with employees. Where possible, have two human resource employees at a communication session so corroboration is available.

7. Get regular feedback from employees. Employees are best positioned to let you know whether communication tools and materials are effective. Improve your communications programs based on their feedback.

8. Review and analyze your communications tools at least annually. Check your internal Web site and written materials to ensure they are clear and complete. If you use a consultant call centre or an insurance provider’s Web-based tool, call the centre yourself and visit their Web site to see if these tools remain effective.

9. Finally, as demonstrated by the cases discussed above, remember that when communicating with employees, it is not only what you say that can get you into trouble, but also what you do not say.

As case law in Canada suggests, employers are being held to a demanding standard when communicating with their employees. The standard requires that information communicated be accurate, relevant and complete. As such, it is no longer enough that employers simply disclose information to employees. Employers must also ensure that such disclosure is done with reasonable care.

As cases like Deraps, Spinks, Lehune and Campbell so aptly demonstrate, if reasonable care is not taken, employers risk exposure to liability and the significant costs that such liability so often creates.

Mark Rowbotham is a senior pension associate at Fraser Milner Casgrain. He can be reached at (416) 367-6757 or [email protected]

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