A recent Court decision from Ontario emphasizes the need for employers to be careful when promising compensation and benefits to employees. The case was a class action law suit brought by over 3000 retired employees of General Motors of Canada Ltd. challenging the decision of GM to reduce their post-retirement benefits. The principles of the decision apply to any compensation provided by an employer to existing or former employees.
In December 2007 GM announced various reductions in its post-retirement benefits to take effect over 3 years. The changes were stated to be a result of the financial pressures that GM was facing during the economic slowdown. The group of retired salaried employees challenged this decision.
The Court was asked to review a variety of benefit related documents that had been issued by GM over the years including booklets, brochures, letters and other communications. GM had made numerous and repeated reassurances over the years that its salaried employees could reasonably expect to plan and rely on the core health care and life insurance benefits in retirement.
However, GM had included in its documents, from time to time, a “reservation of rights” clause (“ROR”). One version of this clause stated that GM “reserves the right to amend, modify, suspend or terminate any of its programs (including benefits)…”.
Despite the ROR clause, the Court held that GM did not have the right to terminate or reduce the post-retirement benefits. It relied on a number of contractual principals in reaching this conclusion. First, the ROR clause was not “clear and unambiguous”. The ROR clause referred to “salaried employees” and did not refer to “retired employees”. The Court found that the ROR clause in place prior to 2007 was not clear and unambiguous but in fact could be interpreted to only reserve GM’s rights to change the benefits in respect of salaried employees and not retired employees. Second, the Court applied the principle of Contra Preferentum. Under this principle, an ambiguous provision will be interpreted against its drafter. GM drafted the ROR clause so the ambiguity was resolved against GM. Third, the Court noted that employment contracts are a special form of contract in which there is generally a vulnerability in the bargaining relationship. Employment contracts are not to be treated like ordinary commercial agreements. In the absence of clear language mandating a particular result employment contracts are to be interpreted so as to protect employees. Finally, the Court stated that employers have a duty of good faith and must exercise any unilateral powers in good faith.
The lesson to be learned from this decision is that policies, booklets, letters and other communications in which employers set out benefits and entitlements need to be carefully worded to reserve the ability to amend or delete such provisions in the future. Clear and precise language must be used and employers should consider as many contingencies as possible in drafting such language.