In O’Neill v. General Motors of Canada Limited, the Ontario Superior Court of Justice held that General Motors of Canada Limited (GM) did not have the contractual right to reduce the level of post-retirement health care and life insurance benefits provided to salaried employees who had retired.  This case illustrates the importance of clear and unambiguous reservation of rights (ROR) language in documentation related to post-retirement benefits where an employer wishes to retain the right to reduce such benefits after the date of retirement.

As part of its restructuring during the 2007-2009 financial crisis, GM significantly reduced the health care and life insurance benefits of non-unionized former salaried and executive employees who had retired, relying on the ROR clauses in the benefit documents that purported to allow the company “to amend, modify, suspend or terminate” any of the benefit programs “at any time”.  The reductions affected employees who had retired on or after January 1, 1995.  Affected retirees (and their spouses and beneficiaries) commenced a class action in the Ontario Superior Court of Justice, and a motion was eventually brought for summary judgment to determine whether GM had the contractual authority to reduce the healthcare and life insurance benefits for employees after they had retired.

The parties produced 260 documents, consisting of booklets, brochures, letters and other communications provided to salaried and executive employees over the years in question.  Aside from one-off letters and other communications, the documents fell into 5 groups of booklets or brochures.  The court held that based on the numerous and repeated reassurances provided by GM in the body of the benefits documents over the years, the salaried employees had a reasonable expectation that they would receive a core of health care and life insurance benefits in their retirement and that the benefits would continue to be provided for life.  The court also found that the benefits were provided as deferred compensation for services rendered and were not provided gratuitously.

The court found that the use of ROR clauses in the benefits documents was sporadic prior to 1994 (and their scope and content were uneven), and ROR clauses were used with regularity commencing in 1994.  As the reductions to post-retirement benefits applied to employees who retired on and after January 1, 1995, the court focused on the ROR clauses in the documents from 1994 onwards.  Specifically, the ROR clause added to many of the benefits documents in 1994 provided that:

“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.” [emphasis added]   

While there were several of variations of the ROR clause in the benefits documents, the court focused its analysis on the iteration of the ROR clause quoted above as it was the most explicit.  The question before the court was whether the above ROR clause was sufficient in the context of the overall benefits documents to allow GM to reduce health care and life insurance benefits after retirement.  The court held that, in the case of salaried employees, the clause was not sufficient for the following 5 reasons:

  1. The ROR clause refers specifically to “salaried employee”, and the court held that one could reasonably interpret the ROR clause as permitting (and limiting) GM’s right to make changes to the retirement benefits for a salaried employee while the employee is still an active employee, but not after the employee retires;
  2. The court invoked the “contra proferentem” principle - i.e., where a provision of a contractual document is ambiguous or capable of more than one reasonable interpretation, it must be interpreted against the interest of the party that drafted it (in this case, GM); 
  3. Referring to the “special place of employment contracts”, the court held that in the absence of clear language mandating some other result, employment contracts are to be interpreted to protect employees;
  4. The court held that an employer has an implied duty under an employment contract to exercise unilateral powers in good faith, and an interpretation of the ROR clause consistent with the duty of good faith supported the claim that benefits could not be reduced after the employee had retired; and
  5. The court noted that subsequent conduct of the parties can be relevant in contractual interpretation.  In this regard, the court referenced a 2012 version of the ROR clause (which reserved the right to “amend, modify, suspend or terminate any of its benefit programs (including benefits) and policies covering employees and former employees, including retirees, at any time, including after employees’ retirements”), and stated that the 2012 version of the ROR clause offers evidence of the meaning the parties attributed to the pre 2012 versions of the ROR clause. In short, amending a contractual provision could be viewed as an admission that a different interpretation should be attributed to the prior contractual provision.

With respect to former executive employees, the court held that the governing documentation (the Canadian Supplemental Executive Retirement Program, or CSERP), consistently provided that the benefits under the CSERP were “not guaranteed” and “may be reduced or eliminated with prior approval of the Board of Directors”.  When an executive employee retired, the executive was required to sign an acknowledgment that he/she has read the terms of the CSERP including the provision permitting the reduction of benefits.  Accordingly, the court held that GM had the contractual right to reduce the level of post-retirement supplemental pension, liability insurance and supplemental life insurance benefits applicable to executive employees after they had retired.

Comments

The O’Neill case shows that the courts set the bar high for ROR clauses in post-retirement benefit plans.  Employers that wish to maintain flexibility to reduce post-retirement benefits after the date of retirement should consider reviewing the ROR language in their historic benefits documentation to ensure that such right is provided in clear and unambiguous language, and consider whether any revisions are necessary or appropriate.  Given reason #5 cited by the court, employers should exercise care in making any revisions to the ROR clauses to ensure that the contemplated revision is viewed as a clarification and not as a form of subsequent conduct which suggests an undesired interpretation should be attributed to the previous version(s).