Employers have no right to change the terms of promised retiree benefits once an employee retires. That is the essence of a decision released this month by the Supreme Court of British Columbia (Lacey v Weyerhaeuser Company Limited, 2012 BCSC 353).
The five plaintiffs in the case were salaried retirees of Weyerhaeuser or its predecessor, MacMillan Bloedel. The terms of their employment as salaried employees included the right to retiree health benefits, fully paid for by the company. The plaintiffs retired between 1991 and 2000. As of January 1 2010 the company announced that it was reducing its contribution to the cost of the coverage from 100% to 50% and that retirees would be responsible for future cost increases. The plaintiffs sued for damages for breach of contract.
The key questions raised in this case concerned the nature of the promise by the company to provide retiree benefits – specifically:
-
whether it formed part of the retirees' employment contracts;
-
whether the benefits were provided gratuitously or as a form of deferred compensation;
-
whether the company had the right to make changes to the benefits; and
-
whether the rights of the retirees vested on retirement.
The retirees did not have formal written employment contracts during their employment.
The court examined all of the evidence concerning the promise of retiree benefits, including:
-
employee booklets and other summary documents;
-
messages given during employee seminars and retirement seminars;
-
insurance policies;
-
retirement letters and releases; and
-
the terms of an advance tax ruling obtained by the company.
The advance ruling was discounted because the terms of the ruling, which supported the view that the benefits were provided on a purely gratuitous basis, were not communicated to employees. The court also reviewed how the company accounted for the benefits under Financial Accounting Standards Board guidelines.
All of the evidence pointed to the company making a promise to employees of lifetime retiree health benefits that were fully paid for by the company. In addition, the company did not clearly reserve its right to make changes to the benefits until a version of an employee booklet in 2002. In December 2007 the company sent a letter to all retirees advising that it was instituting a scale of premiums to be paid by retirees. This letter was evidently sent in error and later retracted. However, the letter stated that the company had the right to change or terminate the benefit policies.
In October 2009 a letter was sent to retirees announcing the company's decision to reduce its contribution to the plan to 50% of its cost at that time. As a result, retirees who desired to remain covered under the plan would have to pay 50% of the cost and also bear 100% of the cost of future premium increases.
The court engaged in an analysis of contract law in the employment law context. First, the court confirmed that "although the common law requires a contract to have a measure of certainty to be legally enforceable, the degree of certainty is relaxed in the field of employment law". It further held that:
"courts will strive to uphold vague and incomplete contracts of employment by making reasonable inferences from the parties' verbal statements, written documentation, past practices and generally accepted standards of industrial behaviour."
Based on the descriptions of the benefits in the employee booklets and as communicated in the employee seminars, the employees would have understood the benefits to be lifetime benefits. Also, the court held that the benefits were understood to be a form of compensation, rather than just a gratuitous benefit provided by the company.
Employees were encouraged to look at the entirety of their benefits when making comparisons with compensation at competitor companies. The court held that:
"The objective evidence leads me to conclude that the retirement health benefits were intended as a form of deferred compensation, that the offer to continue to provide those benefits was a term of a contract between MB and its employees, and that as such it is enforceable." (Emphasis added.)
The court further found that the company contracted with the employees to pay the present and future premiums for its retirees and their spouses in full without any co-payment by the retirees. The obligation of the company was to continue to provide the retirees with the extended healthcare benefits that were available at the time of their retirement.
Concerning the reservation of rights to make changes to the benefits or to terminate the benefits, the court found that the company had reserved such rights concerning its pension benefits, but not its retiree health benefits. The company included one statement in a 1994 brochure, giving it the right to "make changes from time to time" to the benefit programme. The court did not find this statement to be specific enough to be enforceable against the retirees. The court held that:
"No right to make changes in health benefit coverage specifically after the retirement date was asserted in the Partnerships binder. No such reservation of rights appears in any of the letters that are in evidence addressed to employees that outline their retirement benefits... These factors all give weight to the proposition that 'changes' would only affect current employees, not those who had already retired."
The court further held that:
"it would reasonably have been within the contemplation of both MB and its employees that retirees had a particular need for security; that persons on a fixed income would have a particular desire for certainty and predictability. Therefore a more restricted interpretation of the reservation of a right to make changes, as affecting only current employees, would be at least as reasonable as the broader interpretation. Given these two reasonable alternative interpretations of the language in the Partnerships binder, I find the reservation of the right to make changes to be ambiguous. I therefore interpret the language contra proferentem, against the interests of the party who drafted it and who relies upon it."
The court held that the purported reservation by the company to make changes would, at most, have entitled the company to make changes before an employee's retirement to the benefits to which they would later become entitled on retirement.
Having found that the company did not properly reserve a right to make changes to the retiree benefits for employees who had already retired, and that the provision of the benefits in this case was a form of deferred compensation, the court also confirmed the principle that "a right under a common law contract of employment to deferred compensation on retirement is one which vests".
The court reviewed the case law in Canada and the United States on the vesting of benefits. The court cautioned against relying on the presumption in US case law against the vesting of retirement benefits. That presumption arises from its unique statutory framework, which has replaced the concept of deferred compensation applicable to retiree benefits which exists in Canada.
The company, having received the value of the employees' labour, was obliged to continue to compensate them during retirement under the terms that had been promised. The right to the benefits vested in the employees on retirement, at which point the company's obligation was determined.
This decision is instructive for several reasons:
-
The courts will look to a myriad of documents and oral evidence to determine the contents of an employment contract. It is important for an employer to be consistent in its messages in order that its promise to employees and retirees be clear.
-
The courts will view an entitlement to retiree benefits as a form of deferred compensation, unless an employer makes it clear that the benefits are provided on a purely gratuitous (unearned) basis.
-
If retiree benefits are found to be deferred compensation, once an employee retires the right to the benefits will be found to have vested.
-
Exactly what is promised will be closely scrutinised by the courts; where there is ambiguity, it will likely be resolved in favour of the retiree. It is important for the terms to be crystal clear.
-
An employer may reserve the right to make changes to retiree benefits. In order to be enforceable, the right must be unambiguous and include the right to modify or terminate the coverages. Furthermore, it must be clear that the right extends to benefits after retirement.
Another issue that frequently arises, although not in this case, is determining when an employee becomes entitled to retiree benefits. In many cases entitlement to retiree benefits has been tied to retiring on a company's defined benefit pension. Now, with the decline of defined benefit pension plans and the elimination of mandatory retirement, the concept of retirement has become less clear.
For further information on this topic please contact Mark Newton at Heenan Blaikie LLP by telephone (+1 416 360 6336), fax (+1 416 360 8425) or email ([email protected]).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
