Who Needs “Reservations”? Court Rules On Employer’s Ability To Reduce Retiree Benefits

by Dentons
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In an era where finding efficiencies and cost-cutting are often important tools for business, a question faced by business is how and whether benefits in place for current employees and retirees can be changed.

A recent decision of the Ontario Superior Court, O’Neill v. General Motors of Canada, 2013 ONSC 4654, provides significant guidance to employers on this question.

In the face of severe economic pressures facing its business, the employer, General Motors (GM), sought to reduce the retiree benefits available to its employees. There were three groups of individuals affected by GM’s attempted reduction:

  • Current salaried employees, who were eligible to retire but who had not yet done so;
  • Retired salaried employees; and
  • Retired executive employees.

The Court approached the issue from a contractual standpoint, considering the reasonable expectations of both GM and the employees in each class, and examining whether, with respect to each group of employees, GM had contractually “reserved the right” to make changes pursuant to a reservation of rights (“ROR”) clause in its contracts. The Court accepted that if GM had made it clear in its contractual documents (such as benefit booklets, benefit summaries and other communications to employees) that it could make changes in future, then it had the right to do so. The Court also made clear, however, that the ability to make changes had to be explicit – clear and unambiguous – and that any ambiguity would be resolved in favour of the employees, since GM was the drafter of the documents.

In looking at the reasonable expectations of the parties, the Court started out by examining the booklets that GM had distributed to the salaried employees over the years, and in particular the representations that GM had made in those booklets. The booklets contained statements that the benefits being provided “should be of interest to your family and a useful tool for your own financial planning”, that they “are an important factor in making your life more enjoyable and the future of yourself and your family more secure”, and that “basic life insurance will be continued for you for your lifetime”, and the Court concluded that these statements were “representations” made by GM that the salaried employees could “rely on a core of health care and life insurance post-retirement benefits that would continue unchanged for the remainder of their life”, and that this was a form of deferred compensation and not a gratuitous benefit.

The Court also referred to the ROR clause introduced by GM in 2012 (after the commencement of the litigation), which contained the following language (the “2012 ROR clause”):

“General Motors of Canada Limited (“General Motors”) reserves the right to amend, modify, suspend or terminate any of its programs (including benefits) and policies covering employees and former employees, including retirees, at any time, including after employees’ retirements.” (emphasis in original)

The Court held that this clause was “clear and unambiguous”, and suggested that had it been in place during the retirees’ employment, it would have allowed GM to make changes to the benefits of retirees, even after retirement. While strictly speaking these comments are “obiter” (i.e. they were not necessary to the actual decision and therefore are not legal precedent), these comments are extremely helpful to employers in designing effective ROR clauses in benefit plans, particularly retiree benefit plans.

The Court then considered the ROR clauses that GM had in existence prior to the salaried employees’ retirements. Although various ROR clauses had been used over the years, for the purpose of the decision the Court focused on what it concluded was the most explicit clause that had been in existence during the salaried employees’ employment:

“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.”

The Court found that this ROR clause did not allow GM to make changes to retirement benefits after the salaried employees retired. The Court relied on the fact that the ROR clause referred only to “salaried employees”, and did not suggest that GM reserved the right to make changes after employment ended (i.e. when the individual was no longer a “salaried employee”, but rather a “retiree”). Given the fact that ambiguities in these clauses are interpreted against the drafter (the employer), and the need to be explicit when limiting benefit entitlements, the Court found that the ROR clause in existence did not apply to enable GM to reduce retiree benefits after retirement. The Court specifically referred to the 2012 ROR clause (outlined above), and indicated that this modification suggested that prior to 2012 GM had not intended to reserve its right to make changes post-retirement.

Ultimately, therefore, the Court found that salaried employees who retired prior to 2012 had the right to have their existing retiree benefits maintained unchanged through their retirement, and GM did not have the right to make any changes to the retirement benefits in respect of this group, because until 2012, GM only retained the right to make changes to retiree benefits before an individual retired. That said, given the terms of the ROR clause in existence before 2012, GM could make changes to retiree benefits that would be applicable to existing salaried employees (including those eligible to retire but who had not yet actually done so) once they retired.

The Court came to a different conclusion with respect to the retired GM executives, who were subject to a different program, being the “Canadian Supplemental Executive Retirement Program (“CSERP”). The Court relied on the fact that different representations were made in the documents issued to executives to conclude that GM had sufficiently reserved its rights to make post-retirement changes to the benefits that the executives had been promised. The Court relied in particular on the following differences between the CSERP documentation and the salaried employee documentation:

  1. It was clear that the CSERP was not “pre-funded”, and that benefits were provided from GM’s current earnings;
  2. The statements to the executives made clear that the benefits were “not guaranteed” and could be “reduced or eliminated with the prior approval of the Board of Directors”;
  3. Upon retirement, the executive was required to sign a document specifically including a statement that “benefits paid under this Program may be reduced or eliminated with the prior approval of the Board of Directors”.

The Court held that these facts, in combination, made it sufficiently clear to the executives when they retired that the CSERP could be changed by GM in future, which was different from the understanding of the salaried employees. The Court therefore concluded that GM was entitled to reduce the benefits provided to the executives, even after their retirement.

This decision underscores the need to take care when drafting ROR clauses, to ensure that any right to make changes in future is clear and explicitly includes a right to make changes after retirement. Although GM was unsuccessful in certain respects, the case provides a very useful guide to be used in drafting such clauses, and should be reviewed closely when preparing or revising a benefit plan.

O’Neill v. General Motors of Canada, 2013 ONSC 4654 (CanLII)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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