IBM has been ordered to pay more than $23 million to 451 active and retired employees of its plant in Bromont, Que., a decade after its decision to unilaterally amend a clause in its defined benefit pension plan.
The case is a warning to employers about the importance of properly documenting and communicating to employees that a pension plan can be amended at any time, says Marie Garel, a pension and benefits lawyer at Borden Ladner Gervais LLP.
“In order to reduce the risks of litigation, a care must be taken with the content of information provided to the employees. I know it’s difficult to communicate such complex information and to communicate it in such a way that all employees understand, but something that is pretty clear and not very complicated is a caveat to the fact that you can modify such a plan because the risk is an employer is going to be bound by some representation or a documentation that it gave many years ago.”
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The origins of the case date back to 1994 when IBM announced it was going to replace its defined benefit plan with a defined contribution plan. The software company’s existing employees were given the option to opt out of the new DC plan and continue accruing benefits in the DB plan. The DB plan had a bridge benefit, which aimed to encourage employees to take early retirement, allowing workers to receive around $7,000 a year between the time of their early retirement and the time they reached the age of 65.
Though IBM offered existing employees a 40 per cent increase in accumulated contributions if they agreed to transfer to the new DC plan, most employees opted to continue in the DB plan, preferring to take advantage of the eventual bridge benefit.
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About 10 years later, in January 2006, IBM told its employees it was terminating the bridge benefit for employees who retired after Dec. 31, 2007. At the same time, it terminated its health insurance coverage for employees over the age of 65.
In December 2008, Jean Samoisette, a former IBM employee, instituted a class action lawsuit against the company. At the time of the above-mentioned changes to the pension plan, Samoisette was not yet eligible for the bridge benefit. He was entitled to take early retirement in 2008. In his case, the benefit amounted to approximately $110,000. IBM claimed it had never guaranteed that the pension plan would never be changed.
In his judgment, delivered in June, Justice François P. Duprat concluded IBM could not renege on the representation it had made to its employees with regards to the bridge benefit. He held that the benefits package provided to the company’s employees, including the pension plan, the bridge benefit and the retired workers’ health benefits, formed an integral part of their remuneration and, as such, were governed by their contract of employment with IBM.
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The judge did acknowledge, however, that these benefits could be changed unilaterally and that employers may reserve the right to do so at any time. “This decision, in a nutshell, confirms the state of Quebec law as related to pension plans and the fact that the basic legal principle is that an employer can modify a pension plan,” says Garel, noting that it was the Court’s opinion that the evidence presented didn’t support the conclusion that the company had made any representation to the effect that the pension plan would never be amended.
The Court held that the employees had relied upon the information provided by IBM when making the decision to remain in the existing defined benefit pension. It concluded that IBM could not withdraw the bridge benefit from its employees, and IBM was ordered to pay all the individual claims relating to the bridge benefits, amounting to a total of $23,519,000 with interest.
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However, the judge found that IBM had in fact reserved its right with respect to the change to its health insurance coverage. The same principle applies, says Garel. “In the case of the pension plan, the judge concluded that, yes, an employer can amend a pension plan. What he did analyze was the fact that all the documentation given to the employees didn’t have a caveat to the effect that the plan could be modified.
“With the health-care plan, all the documents provided to the employees clearly indicated that the health-care benefits could be modified. So there was a caveat to that effect and it was clear. IBM never made any representation to the effect of modifying the employment contract.”
In a statement, IBM said: “IBM is gratified that the Court recognized the company’s right to modify its benefit plans to meet changing times and conditions. In particular, the Court ruled that IBM could change health benefits to ensure that the company remains competitive. IBM is disappointed, however, that the Court accepted plaintiffs’ misconstruction of certain statements to award the plaintiffs pension benefits to which they were not entitled.”
IBM is currently reviewing its options with regards to appealing the judgment.
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