General Motors of Canada tried to cheat its pensioners   

 

There is nothing more egregious than for employers to cheat their pensioners. However, when General Motors of Canada (GM of Canada) in Ontario tried to do just,  that they lost their attempt in an Ontario Court.    

 

In Joseph Michael O’Neill v. General Motors of Canada, a lawsuit also filed by 3,296 other former employees, the judge found in favour of the plaintiffs. 

 

Retirement benefits, such as extended health care and life insurance, are obviously important to retired employees and their families. No one disagrees with this. Nor is there any disagreement about the fact that retirement benefits can be changed even after the employee has retired, provided the contractual language allowing the employer to do so is clear and unambiguous.

                   

In this particular case in Ontario, GM of Canada substantially reduced the health care and life insurance benefits of former salaried and executive employees after they retired.  Under the “reservation of rights clauses” that were in place over the years in question, GM of Canada had every right to reduce the benefits, even retirement benefits, while the salaried employee was actively employed, but the court ruled that GM of Canada in this particular case had no right to do so after the employee had retired.

Let me tell you why GM of Canada decided that they wanted to reduce the benefits of their retired employees. Brace yourselves. Here it comes. GM of Canada said that the cuts were part of their restructuring plan that would cut costs because they were in a financial crisis. Imagine if you will that you have taken out a life insurance policy for $200,000 and you have paid all the premiums for that amount of coverage over a period of many years. And then, after you die, your wife applies for the $200,000 and is told that because of a financial crisis facing the insurance company, there are cuts in the benefits and all she is going to get is half of what your premiums paid for. That would be equally outrageous. 

GM of Canada no doubt has faced billions of dollars’ worth of liabilities this decade, most of which has become due as vehicle production declined in Oshawa. Further, pension costs are scheduled to soar, interest-free loans from governments will hit their repayment date and payments on a note issued to finance health care costs start kicking in as production commitments the company made to the federal and Ontario governments in 2009 expired.  Although GM of Canada and the auto industry have recovered, the new reality is that auto makers are engaged in a relentless drive to cut costs in all markets around the world. That has contributed to an increasing sense of vulnerability for the industry in Canada, where the rise in the value of the Canadian dollar has sent manufacturing costs higher.

But why should those former employers who worked faithfully over the years have to have their benefits reduced which they paid for especially when the CEO of GM of Canada and other board members are collectively raking in millions of dollars each year as their salaries and bonuses?

GM of Canada believed it was entitled to do so because of a provision in the ‘benefit documents’ that allowed the company “to amend, modify, suspend or terminate any of the benefit programs at any time.” Even then, while the employees were faithfully working for the firm and contributing towards their pensions, GM of Canada knew all along that it might actually reduce the pension benefits—which is what they actually did after many of the employees were retired. Did the employees know this was going to happen sometime in the future while they were working for GM of Canada?

 

The salaried retirees, some of whom had worked for decades at GM of Canada were repeatedly told by their employer in the benefit documents that they could rely on the promised health care and life insurance benefits. If what was really intended on the part of GM of Canada that it would cut their benefits if the company wanted to recover from its own losses, then GM of Canada should have told their employees while they were still working, in a language that was clear and unambiguous. Instead, they were actually outright lied to. It reminds me of that infamous shell game—now you see it and now you don’t.

 

In September 2009, GM of Canada sent a letter to its salaried retirees, advising them that it would reduce their life insurance benefits starting in 2010. The amount of the basic life insurance benefit, for employees who retired between January 1, 1995 and January 1, 2010, would be reduced to $25,000 effective January 1, 2010, and further reduced to $20,000 effective July 1, 2010. Many of the retirees were counting on a basic life insurance benefit of $100,000 or more. The reduction to $20,000, at a time in their lives when few would be able to purchase affordable replacement coverage was, to say the least, significant.                                      

 

Lynn McCullough, who replaced Mr. O’Neill as the representative plaintiff, had worked at GM of Canada for 44 years. He retired in 2008. Like the other salaried retirees who retired after January 1, 1995, Mr. McCullough’s health care benefits were reduced and, in his case, his basic life insurance coverage was cut from $155,000 to $20,000. Mr. O’Neill passed away in 2012.

 

There were two motions before the judge. The plaintiffs brought a motion for partial summary judgment to determine Common Issues (A) and (E) namely, whether GM of Canada was contractually entitled to reduce post-retirement benefits after the employees’ retirement, and whether GM of Canada made an actionable misstatement in a letter regarding basic life insurance benefits. In response, GM of Canada brought a cross-motion for partial summary judgment on Common Issues (B) and (C) dealing with “new hires” and “early retirees.”   

 

 The judge was mindful of the general legal proposition that contracts must be interpreted as a whole and not in a piecemeal or selective fashion. In other words, whether GM of Canada was contractually entitled to reduce post-retirement benefits after the employee had already retired would depend upon an “objective” interpretation of the entire agreement which must include the interaction between what was said in the body of the benefit documents and what rights were reserved in the ROR clause. (Reservation of Rights clause)      

 

GM of Canada’s post-retirement benefits were not governed by a single document. There was no stand-alone ‘benefits agreement’, The judge had to examine all 260 of the documents listed in Schedule A in order to answer the questions before him—namely, what if any promises were made, what rights were reserved, and was GM of Canada contractually entitled to reduce the health care and life insurance benefits after the employee had already retired despite promises made to the contrary? The relevant benefit documents consisted of booklets, brochures, letters and other communications provided to the salaried employees over the years in question.

 

It is often said the law of contracts protects the reasonable expectations of the parties, or more specifically, the expectations induced by the conduct of others.. Based on the numerous and repeated reassurances provided over the years by GM of Canada in the body of the benefit documents, the judge found that the salaried employees could reasonably expect that they could plan for and rely on a core of health care and life insurance benefits that would be provided to them in their retirement years. He said that it was reasonable for the salaried employees to expect retirement security.

 

The judge considered the company’s oft-repeated reassurance that the benefits information “should be of interest to your family and a useful tool for your own financial planning.”     

 

For example, the 1975 booklet Highlights of Your Benefits, said this:

“As a GM Salaried Employee…you enjoy one of the finest and most comprehensive employee benefit packages in the industry. GM has been and continues to be a leader in providing a broad range of benefit programs to protect employees and their families. Today’s GM benefits are an important factor in making your life more enjoyable and the future of yourself and your family more secure.” unquote

Would the employees feel more secure if they knew that their benefits of $100,000 would be reduced to only $25,000 so that their employer could later use the money cut from their benefits to help their employer defray some of its costs? I hardly think so. The salaried employees reasonably expected that their core of health care and life insurance benefits would continue post-retirement and would be provided for the rest of their lives. 

Courts have recognized that because of the importance of employment to individuals and the need to protect employees who are generally vulnerable in the bargaining relationship, employment contracts are unlike ordinary commercial contracts.

 

Legal commentators have noted that in employment law, these policy goals inform the interpretive process, and as a result, in the absence of “clear language mandating some other result,” employment contracts are interpreted so as to protect employees. Further, employees rely on the doctrine of good faith and in particular the employer’s implied duty under an employment contract to exercise unilateral powers in good faith. It is an integral tool in the interpretation of the employment contract, regardless of the specific terms of the contract, flowing from the inherent power imbalance between employee and employer, which exists not only when the contract is formed, but throughout its performance.

 

The contract at issue in this case had to be interpreted through the lens of good faith. The employer had to be presumed to have acted in good faith in drafting the ‘reservation of rights’ clause. The contract should be interpreted in a way that gives effect to the most fundamental aspect of the employment relationship, which is compensation for the services an employee has performed. An interpretation in line with the duty of good faith favoured the plaintiff’s claim that the benefits could not be reduced after the employee had retired, reasonably relying on the oft-repeated reassurances of retirement security.

 

The judge ruled that GM of Canada was not contractually entitled to reduce the health care and basic life insurance benefits after the salaried employees had retired. When the unclear and ambiguous ROR clause is interpreted and assessed in the context of the oft-repeated reassurances in the body of the various benefit documents of retirement security and when the applicable principles of contractual interpretation are properly applied, it becomes readily apparent that GM of Canada was not contractually entitled to do what it did.

 

The company says that it will appeal the ruling however I don’t think their appeal will be successful. Their intention to appeal is evidence that the directors of GM of Canada interests are in making more money for themselves rather than directing their interests in the welfare of their former employees and their families. If GM of Canada loses its appeal, they will have to return the money they have taken from the retirees and also pay them the accumulated interest and court costs.