FOR SEVERAL YEARS, COMMENTATORS HAVE PREDICTED that companies will need to deal with the escalating cost of the health benefits they provide to their retirees. General Motors, which has recently incurred huge losses, provides health benefits for retirees that economist Paul Ginsburg refers to as “a relic from another era.” Taking its cue from the auto sector, Nortel Networks announced this past summer that it was eliminating post-retirement benefits for employees who were under 50 or who had less than five years of service.

Legal claims by individuals to such changes pose daunting challenges: retirees are often on limited and fixed incomes, they must cope with the financial impact of the changes, and their former employers are often large and well funded. Class actions offer a means of pursuing these claims, and can be so well suited for these cases that the Ontario Superior Court of Justice in Ormrod v. Etobicoke referred to such class actions as the “quintessential” use of this proceeding.

A class action, however, is a purely procedural vehicle. To protect against the reduction or elimination of retiree benefits there must be a substantive legal claim, which is based on the presumption that those benefits vest or crystallize on retirement. More than a decade ago, the Supreme Court of Canada in Dayco v. C.A.W. confirmed this presumption, relying on a line of cases from the United States. Remarkably, since that time there have been few cases that commented on or developed a Canadian approach. In fact, in approving a recent settlement of a class action involving 50,000 retirees against the Ontario government for changes to benefits(Kranjcec v. Ontario), the Superior Court of Justice noted the “lack of Canadian precedents” in this area, which creates “uncertainty.”

Along with the challenges posed by the state of the law, there can be significant evidentiary hurdles to overcome in pursuing these cases. In a class action there must be “common issues,” which means that the representation about what would happen(or would not happen)to an employee’s benefits after retirement must be based on the same communications from the plan sponsor, and such communications must be sufficiently clear to ground a claim that the retirees’ benefits were intended to vest. As well, while part of such a class action will involve a claim for the restoration of benefits that were eliminated or reduced, the issue of damages can be complicated and expensive to sort out in a fair and reasonable manner.

This uncertainty is not necessarily a bad thing. Not knowing how litigation will turn out forces people to consider compromises. The factors that arise in retiree benefit class actions, such as an aging class and, sometimes, an ailing company, militate in favour of a resolution that is quick and final. In this last respect, class actions also offer companies a level of protection that would otherwise be difficult to obtain because of the binding nature of class action settlements.

A class action settlement that is approved by a court is binding on all class members who chose not to opt out of the case. Opt outs are exceedingly rare in these cases, so companies and their retirees can reach an agreement on how their benefits will be treated going into the future that is binding not only on the company, but also on the retirees. Plan sponsors will not face additional law suits from retirees if a resolution of this kind can be reached, and this finality allows both retirees and companies to plan their futures with greater confidence.

The “bargain” about how employees will be treated in their retirement can sometimes be less certain when it comes under the scrutiny of a legal proceeding. To the extent that plan sponsors did not clearly communicate their intentions in the past, class actions offer a vehicle by which companies and retirees can clarify post-retirement arrangements and, if necessary, reach a new agreement that is lasting and clear to all concerned.

Michael Wright is a partner at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto. He was Class Counsel in Kranjcec v. Ontario.

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