Hydro One Inc v Ontario and the Statutory Interpretation of “Significant”

On January 11th, 2010, the Ontario Court of Appeal (“ONCA”) released its decision in Hydro One Inc. v. Ontario (Financial Services Commission), 2010 ONCA 6 [Hydro One], permitting the Financial Services Commission of Ontario (“FSCO”) to order a partial wind-up of a pension plan affected by the reorganization of a business where a “significant” number of employees have been affected. The court used a contextual approach to determine the definition of “significant,” taking into consideration the circumstances surrounding the reorganization.

Background

From 2000 onwards, various initiatives implemented by Hydro One Inc. resulted in a number of workers leaving their jobs. In particular, a merger of two former affiliate corporations affected 3,700 employees and the laying off of 126 employees. At the time of the merger, Hydro One had a single defined benefit pension plan in place (“the Plan”). Seventy three employees that were terminated were part of the Management Compensation Plan (“MCP”). The Plan formed part of the collective agreement and did not distinguish between MCP and regular employees. So even though MCP employees were not members of the union, they would still benefit from any enhancements or changes to the Plan. However, upon termination, none of the employees received any pension enhancements.

To counter this inequity, two ex-workers, Marino and Jones, applied to the FSCO for a partial windup of Hydro One’s pension plan such that they could take advantage of their statutory early-retirement benefit. After being denied by FSCO, Marino and Jones requested a hearing from the Financial Services Tribunal to review the FSCO decision. The Tribunal overturned the FSCO decision and ruled in favor of the employees. Hydro One appealed to the Divisional Court and lost for a second time. The Ontario Court of appeal upholds the Tribunal decision, indicating a third loss for Hydro One.

The Employee’s Argument

Marino and Jones applied for a partial windup under section 69(1)(d) of the Pensions Benefit Act, RSO 1990, c P.8, which states that a Superintendent may order partial windup if “a significant number of members of the pension plan cease to be employed by the employer as a result of the discontinuance of all or part of the business of the employer or as a result of the re-organization of the business of the employer” [emphasis added].

The main issue of the case was whether the number of members was “significant” enough to fall under section 69(1)(d) of the Act and whether the initiatives implemented by Hydro One was a “re-organization” as per the Act. The Superintendent said no on both counts. However, the Tribunal, the Divisional Court and the Court of Appeal came to a different conclusion.

Decision and Analysis

Standard of Review

The issue at hand was a matter of statutory interpretation of the word “significant.” The ONCA held that a standard of correctness should be used in reviewing the Tribunal’s interpretation of s. 69(1)(d) of the Act, while a standard of reasonableness should be used in reviewing Tribunal’s application of s. 69(1)(d) to the particular facts of the case. The court held that the issue was of central importance to the legal system as a whole and outside the Tribunal’s specialized area of expertise, and such interpretation of “significant” was “neither factually laden nor highly technical,” which would “tilt the balance in favor of the deferential standard of reasonableness on the statutory application issue.” However, the issue also involved balancing multiple interests in competing constituencies.

Statutory Interpretation

After examining the words “in their entire context and in their grammatical and ordinary sense”, the court concluded that the word “significant” should be used flexibly. The word was given an elastic definition and the FSCO had considerable latitude in taking the circumstances surrounding the reorganization into account. A fixed approach should be avoided in favor of a dynamic, contextual and case-specific approach. The court concluded that a subset analysis was consistent with the remedial nature of the Act.

Methodology for Interpretation

The prior judgment dealing with this particular issue had set out various methods to interpret the word “significant”:

(a) A “Ratio Analysis,” which compared the number of pension plan members whose employment had been terminated as a result of the business reorganization (73 MCP members terminated) with the number of active members of the plan as a whole (3913 members). The FSCO used this method of analysis and concluded that 1.8% was not significant enough to allow for partial wind-up.

(b) An “Absolute Analysis,” which considered the number of terminated plan members on an absolute, non-comparative basis.

(c) A “Subset Analysis,” which compared the number of members falling within a defined subset of plan member (73 MCP members terminated) with the total number of active plan members in that subset (379 MCP members). Using this analysis, the percentage of employees terminated increased to 20%, which was considered to be “significant” under the Act.

Implications

The Subset Analysis broadened the application of the word “significant” in cases where business reorganizations affected employee rights. The court held that the FSCO may use this Subset Analysis when assessing the significance of a pension plan and ordering a partial wind-up.

While the Tribunal tried to limit the application of this plan to “rare” circumstances, the Divisional Court and Court of Appeal added no such limitation. This decision has the potential to open the door for FSCO to declare partial wind-ups even when there are a small number of plan members involved. The threshold for declaring partial wind-ups has been lowered significantly, making it difficult for plan members and sponsors to accurately predict the circumstances when a partial wind-up can be declared.

Yet this debate over the meaning of “significant” and partial wind-ups may no longer be relevant as of Jan 2012. Recent bills to amend the Act, specifically Bill 236, eliminate partial windup. Employers would no longer have to distribute their surplus based on the test in the Act.

Nevertheless, Hydro One will continue to be a relevant case during the transition period. Until the Bill is passed, employers engaging in restructuring activities should understand the implications of this decision and plan accordingly. The contextual analysis favoured by the court involves further investigations into circumstances surrounding corporate reorganizations impacting pension plan members. It has the potential of leading to increased administrative costs in investigations, planning, and paperwork for pension plans in the interim.