Another recent Ontario class action case provides reasons for careful attention when changing employee benefits and pensions. 

Standard “Reservation of Rights” Clause Insufficient to Allow Reduction in Benefits after Retirement

In O’Neill v. General Motors, a class action was started by about 3,000 retired employees and surviving spouses against General Motors of Canada Limited (GMCL) after GMCL reduced benefits.

Under standard reservation of rights (“ROR”) clauses, GMCL retained the right to make changes to the benefit programs.  The language applicable for most of the relevant period is common in policies and plans and provided:

General Motors reserves the right to amend, modify, suspend or terminate any of its programs (including benefits) and policies by action of its Board of Directors or other committee expressly authorized by the Board to take such action.  The Programs, benefits and policies to which a salaried employee is entitled are determined solely by the provisions of the applicable program, benefits or policy.

GMCL argued that these contractual provisions allowed them to reduce employee benefits after retirement.  In the wake of financial hardships, between 2007 and 2009, GMCL substantially reduced the health care and life insurance benefits of non-unionized salaried and executive retirees.  Cuts were made to benefits of employees retiring after January 1, 1995, including reduction of a basic life insurance benefit from $100,000 or more to $20,000.

The court found that GMCL had breached its contract with the significant majority (98%) of the class, as the contractual language was not sufficiently clear on GMCL’s right to reduce retirees’ benefits after retirement.  It made this decision based on 5 factors:

  1.  The ROR clause was not clear about GMCL’s right to make changes to the health care and basic life insurance benefits after the salaried employee had retired.
  2. The unequal bargaining power between employees and employers and cited Lacey v. Weyerhaeuser Company Limited [link to blog] for the proposition that ROR clauses in employment agreements should be read strictly, particularly when the question is whether changes can be made after the employee has retired.
  3. One rule of interpreting employment contracts is that, in the absence of clear language mandating some other result, they should be interpreted to protect employees (as they are drafted by the employer).
  4. Employers have an implied duty under an employment contract to exercise unilateral powers in good faith.  The contract should therefore be interpreted in a way that gives effect to the most fundamental aspect of the employment relationship of compensation for the services an employee has performed.
  5. GMCL knew how to draft a clear and unambiguous ROR clause and did so later.  A subsequent amendment confirming that changes could be made “after retirement” supported the finding that the ROR clause was not sufficiently clear.

The Court found that the executive retirees (in contrast to the salaried employees) knew from the outset that their retirement benefits were not guaranteed and could be reduced or eliminated after retirement.  The factors that distinguished these groups were that executive retirees were provided with a document that made clear that benefits (i) were not pre-funded and (ii) were not guaranteed and could be reduced.  Furthermore, when executives retired, they signed a document acknowledging that benefits may be reduced.  Therefore GM was entitled to reduce their benefits after retirement.

Of note, the Court held that the ROR clause allowed the employer to reduce benefits for active employees, even if they were eligible to retire.

What this Means to You:  Importance of the “Full Package” of Communications

This decision confirms the importance of ensuring that benefit plans have clear language authorizing amendments, including reductions in benefits.  It also continues the practice of considering all other documentation provided to employees to determine the “bargain” with employees and whether it was made clear that the benefits could be reduced.