Non-Union Retirees Win Class Action Lawsuit Over ReducedBenefits in O’Neill v. General Motors of Canada

Contracts is an ancient, well-trodden area of the law, and contract cases rarely get to the Supreme Court. A recent case that might make it there concerns a move by General Motors (in dire financial straits at the time) to reduce the health and life insurance benefits of its non-union retirees.

The case is a class action, O’Neill v. General Motors of Canada, 2013 ONSC 4654, with the class consisting of over 3,000 retirees. There is a substantial amount of money at stake, as well as some interesting legal issues in interpreting informal contracts. General Motors has already announced that it will appeal the decision that Justice Belobaba made in favour of the plaintiffs.

These were not unionized employees, so there was never a formal written contract. The judge had to infer the contract by reading through the more than 260 brochures and information circulars distributed to employees over the decades. The court record quotes the effusive language of some of these, made when GM was rich and secure, promising their loyal employees gold-plated benefits for life.

As is often the case with contracts, one of the issues in dispute was a type of exclusion clause. A few of the documents (out of the 260) mentioned that GM reserved the right to change its benefits programs.

The judge found that, taken as a whole, the documents provided the retirees with a reasonable expectation that their benefits were guaranteed for life. GM’s occasional disclaimers were few and far between, and vague. Given this finding, a number of legal principles worked against the defendant, starting with the contra proferentem rule, which weighs even more heavily in an employment contract.

Class counsel argued that this breach of contract finding should also apply to the salaried employee who had reached the prescribed age and years of service, and thereby became eligible to retire, but continued to work. Regrettably, given my interpretation of the ROR clause (i.e. changes can be made during active employment but not after the employee has actually retired), I am unable to include the retirement-eligible employees who continued working and whose benefits were reduced while they were still actively employed.  (para 81).

This seems to be contrary to the economic logic of a contract in which deferred compensation is part of the bargain.  Earlier, the judge had noted that that these benefits were not gratuitous promises by GM to its employees.   They were part of the consideration in the employment contract:  

In numerous benefit documents, beginning in at least the mid-1970’s, GMCL reminded employees that the benefits represented a substantial cost to the company and were an important part of the “compensation from your job”; that “your benefits, in a very real sense, are a part of your compensation”; and that “the combined GM benefit plans add significantly to the total pay you receive for the work you do.”  (para 39).

For every day of work that has been done, part of the post-retirement benefits has been earned, on a quantum meruit basis, as deferred compensation.  As a matter of contract, it should not be open to the employer to “reserve the right” to withdraw benefits that have already been earned.   An employee who is 64 years old and has worked for 40 years but not yet retired has already earned most of the benefits that will be due after retirement.

Issues of this type will loom large in the coming years as the forces of global competition press employers to cut back on their compensation costs.

Outside the public service, only a small and diminishing share of Canadian employees is covered by formal union contracts.   The way that the courts interpret the informal contracts that govern the employment relationship has a very significant impact on the economic well-being of employees and the rights of employers.   It will be interesting to see how the appeal in this case proceeds.