© Copyright 2000 Rogers Media. The following article first appeared in the June 2000 edition of BENEFITS CANADA magazine.

Legal Aid

There is a right way and a wrong way to communicate your plan. Know the law, and follow the leaders.

By Marsha Reid

Employee communication is a vital component of any effective pension and benefits program. From glossy brochures to intranet-based systems, plan sponsors invest a substantial amount of resources and time in developing communication programs to en-sure plan members understand their benefits. But what happens if the information an employee receives is not correct? Is the plan sponsor liable if the individual acts on that inaccurate information?

A recent court case in Ontario highlights the importance of ensuring that information given to employees is accurate. This past September, the Ontario Court of Appeal in Deraps vs. Coia et al. held that a plan sponsor was liable for failing to advise a member and his spouse of the consequences of signing a waiver to a survivor pension that resulted in the spouse receiving none of her partners' pension money upon his death.

In the Deraps case, the employee learned that he was terminally ill with lung cancer. He belonged to a union-sponsored pension plan. He and his spouse met with a representative of the plan sponsor to discuss payment of a disability pension. The representative had prepared two calculations. One calculation showed how much his monthly pension would be if it were paid in a joint and survivor form. Under this option, a survivor pension equal to 60% of his monthly pension would continue to his spouse, for her lifetime, upon his death.

The second calculation illustrated how much the employee's monthly pension would be if it were paid only for his lifetime. The second option provided a much higher monthly pension than the first one, and the member elected to receive the higher, lifetime pension.

However, under the Pension Benefits Act (PBA) of Ontario, a member who has a spouse upon retirement must receive a joint and survivor pension unless the spouse waives entitlement to the survivor pension. In the Deraps case, the spouse was asked to sign the standard waiver form, which she did. Consequently, the member received a pension for his lifetime only.

Eight months later, the member died. When his spouse inquired as to the pension benefits payable on his death, she was advised that there were no survivor benefits payable because she had waived her entitlement to a survivor pension. The spouse then told the plan sponsor that when she signed the waiver, she didn't understand that it would result in her not receiving any pension on the death of her husband. Ultimately, she sued the plan sponsor for negligent misrepresentation.

In order to successfully sue for negligent misrepresentation, certain criteria must be satisfied. First, there must be a duty of care based on a special relationship. The information provided must be either inaccurate, misleading or untrue, and the person who gave the information must have acted negligently. In addition, the recipient of the information must have relied on the misinformation to his or her detriment.

ANATOMY OF A LAWSUIT

In the case of Deraps, the trial court ruled in favour of the spouse. This decision was appealed to the Divisional Court of Ontario, which found in favour of the plan sponsor. The Ontario Court of Appeal overturned this decision and ruled in favour of the spouse.

There were a number of factors critical to the court's decision. First, the court found that a special relationship existed and that, therefore, the representative owed a duty of care when providing information on the pension plan to the member and his spouse. This special relationship arose because the plan sponsor was a fiduciary under the PBA. Moreover, this duty applied to the representative.

Under the PBA, a plan sponsor is permitted to employ other persons to act as its agent in carrying out its responsibilities with respect to administration of the pension plan provided that it is reasonable and prudent to do so.

On this point, the court noted that the plan sponsor had sent a letter to members announcing that the representative had been hired to answer their pension inquiries. Accordingly, the representative was deemed to have, and in fact was held out by the plan sponsor as having, specialized knowledge and skill as the agent of the plan sponsor.

The issue then became one of whether or not the representative had acted negligently in advising the member and his spouse. A person giving advice is required to exercise reasonable care with respect to the statements or representations that they make. Whether or not reasonable care is exercised depends on the circumstances of each individual case. Generally, the courts will consider a number of factors such as the formality of the inquiry, the purpose for which the statement was made, the consequences of an inaccurate statement, the expertise of the adviser and the sophistication of the recipient.

In light of these factors, the court found the plan sponsor's representative had acted negligently. To begin with, the waiver form given to the member and his spouse was complicated and it did not clearly spell out the consequences of signing the document. For example, nowhere on the form did it state that by signing the waiver, the amount of survivor pension payable on the member's death would be zero.

In addition, the verbal explanations provided by the representative were ambiguous and vague. Given the special relationship that existed between the parties, and the representative's expertise, the representative had an obligation to ensure that the member and his spouse explicitly understood that by signing the waiver, the spouse would get nothing on her husband's death. The representative could not make the assumption that the member and his spouse understood the consequences of signing the waiver.

IMPLICATIONS FOR PLAN SPONSORS

The decision in the Deraps case illustrates that a plan sponsor will be held accountable to an exacting standard of care when communicating with plan members. Agents of the plan sponsor will also be held to the same standard of care.

In the case of Deraps, the agent happened to be an employee of the plan sponsor, but an agency relationship can also exist in which the plan sponsor outsources plan administration and communication to third-party administrators.

While Deraps involved the communication of pension benefits, it has implications for the communication of non-pension benefits as well. It adds to the growing number of cases that have established that a plan sponsor has a duty of care when communicating information to employees and members. The central difference between negligent misrepresentation cases involving pension benefits and non-pension benefits is that, with respect to pension benefits, the special relationship giving rise to the duty of care is the fiduciary relationship created by statutes regulating pension plans, such as the PBA.

Similar legislation does not exist in Canada for non-pension benefits plans, but the courts have applied common-law principles to find that a similar duty of care can exist when an employer or plan sponsor communicates information to employees and members with respect to other types of benefits plans.

Marsha Reid, LLB, is a manager of private client services with Deloitte & Touche in Toronto.

Six steps for minimizing legal risk.

1. Keep it simple. Ensure written communication is in plain language.
2. Review and revise. Regularly review written communications for accuracy and ensure they are kept up-to-date.
3. Spell it out. Be explicit in verbal discussions and written communications with members. Don't assume that the member understands everything.
4. Assign an expert. Give one individual or, if appropriate, individuals (internal or external) the mandate to answer benefits questions. Ensure that these individuals have the appropriate expertise and receive ongoing training to keep on top of legislative developments and plan changes.
5. Establish a game plan. Processes should be established, and followed, for the types of information that may be given verbally, for information which must be provided in writing and for information which requires a personal meeting with the employee or member.
6. Leave a paper trail. Notes of verbal discussions and hard copies of e-mail responses should be kept on-file.

Plan members are holding plan sponsors accountable for the information they receive. Here's a round-up of recent Canadian case law.

Caie vs. Caterpillar of Canada (Ontario, 1998). A plan member sued his employer for negligent misrepresentation and breach of contract upon receiving a surplus payment significantly less than what was originally estimated to him. While the employee was not successful, the court noted that the individual did not specifically plead that the employer should have warned him that his surplus entitlement as estimated could fluctuate depending on interest rate changes between the time of the estimate and the date of payment. The court's comments indicate that if the employee had pleaded that the employer had a duty to warn, there may have been a different outcome.

Ford vs. Laidlaw Carriers (Ontario, 1994). A group of employees successfully sued for breach of contract and negligent misrepresentation when, in the course of offering a special early retirement program, the plan sponsor gave an incorrect valuation date for valuing employer stock held in the deferred profit sharing plan. The value of the employer's shares were significantly lower on the correct valuation date, resulting in much smaller payments to the employees than they were originally advised. Once learning of the mistake, the employer failed to promptly communicate this information to employees.

LeHune vs. City of Kelowna (British Columbia, 1994). A terminally ill employee about to retire was advised by the benefits supervisor that his group life insurance policy could not be converted upon retirement to an individual policy. In fact, it could. The plan member's spouse successfully sued the employer for misinformation.

Campbell vs. Board of Administrators Teacher's Retirement Fund (Alberta, 1993). A plan member successfully sued the pension fund when it inaccurately advised him that he would receive cost of living adjustments from the date of his last contribution to the plan, rather than from the date of pension commencement.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."