Employers struggling with the cost of retiree health benefits will be interested in a recent class-action settlement approved by the Ontario Court of Justice in Smith, Heinman and Nother v. Labatt Brewing Company that reduces benefits, thereby providing substantial cost relief to the employer, while still preserving important benefits for the retirees.

 

As a result of the 1994 Supreme Court of Canada decision in Dayco, employees have a vested right to benefits at the time of retirement, explains Morneau Sobeco Senior Consultant Lois Gottlieb.

"But the scope of that entitlement will depend on whether a particular collective agreement or employment contract says, 'yes, you have these rights, but if something happens in future, you can change that,'" she says.

Because nonpension benefit plans are largely unregulated and not well documented, Mercer Principal Marcel Théroux suggests there is often a good reason retiree benefits are vested: so the employer can't change them. However, he says, "This one had some language in it upon which the employer could base a reasonable argument, so that's why they probably ended up with roughly a one-third to two-thirds saw-off."

"A couple of years ago, employers had the luxury of looking at alternative designs and ways they could do things consensually. Now a lot of employers are in deep financial difficulty. They have no choice about making changes," says Hicks Morley LLP Partner Elizabeth Brown.

While she agrees with Gottlieb that unilaterally modifying or eliminating retiree benefits can result in legal action against the employer, Brown says there is often a trend to negotiation and a settlement that will ultimately result in some savings for employers.

"I think employers are more prepared to do their research and take their chances. But I wouldn't counsel an employer to breach the contract just to bring on the litigation, because there are other complicating factors," she continues.

Even so, Théroux suggests employers do not necessarily have to be afraid of employees organizing themselves, and bringing a class action. "Maybe it is the lesser of two procedures and the more inexpensive procedure, [rather] than just continuing with the status quo," he says.

"Paradoxically, the use of a class action [in this case] was not necessarily totally adversarial as far as the employer is concerned," says Théroux. "This mechanism basically gave employees a voice, so they could negotiate with employers. It really did not turn into a 'winner takes all' adversarial dispute.'"

"You'll get different views from different people, but I think Elizabeth is quite right," says Koskie Minsky Partner Mark Zigler, who acted for the Labatt Retiree Committee. "To take a chance cutting benefits and letting employees sue you — I don't think Labatt did that. I don't think they thought they would get a lawsuit."

Zigler distinguishes this situation from surplus cases where parties frequently apply for class-action certification jointly in order to have a settlement structure.

"A friendly resolution with retirees to reduce their benefits — that sounds unrealistic! It's one thing to get a friendly resolution to share surplus, but if the only option here is to give back, why would that happen?"

Nevertheless, Gottlieb views the Labatt settlement as a pretty good outcome for both parties. "The employer had to give up something. The employees had to give up something. You can fight these things, but at the end of the day the settlement is in everyone's favour if you can negotiate early enough."

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The Labatt chronology

In 2006, rising health care costs prompted Labatt Brewing Company Limited to formally review

its health benefits program for employees and retirees.

Following an analysis of nine years of claims data and benchmarking in similar industries, the company decided, effective March 1, 2007, to make changes to its health benefits program for salaried employees and retirees, and communicated its intentions.

Pre-March 2007 plan

The health benefits plan that was in force before March 2007 provided unlimited lifetime coverage for drugs and for most other medical benefits, with annual deductibles of $25/single and $50/family.

March 2007 proposals

Under the March 1, 2007 plan, Labatt proposed to impose a cumulative lifetime cap of $50,000 per person on health protection benefits. It also proposed to reduce the lifetime maximum for

out-of-country emergency coverage from $1 million to $50,000, as well as make changes to the dental plan.

Employees organize

Almost immediately an informal group of retirees was formalized as the "HELP ME! Committee," which included a national steering committee of representatives from every region in Canada. Committee members reached out to over 700 retirees, raised $240,000 and retained Koskie Minsky LLP.

When preliminary discussions with Labatt did not produce a resolution, a class action was commenced with a view to compelling Labatt to provide to retirees and their eligible dependants the health benefits that had existed before March 1, 2007. After the plaintiffs served their certification record in October 2007, the parties agreed to proceed to two-day mediation.

Although the mediation was unsuccessful, it was a catalyst for continuing negotiations that resulted in the settlement agreement ultimately approved by the court.

Settlement

The settlement contemplates a modified plan that will have the same terms as the benefits plan that existed before March 1, 2007, with these changes:

Annual deductible will be increased to $350/single and $700/family.

Hospital coverage was set at 50% of the cost of a semi-private room.

Emergency out-of-country coverage was capped at a lifetime maximum of $200,000 per person.

Retirees and their dependents must use generic drug substitutes unless a physician specifies a name brand.

The proposed settlement will close the class effective January 1, 2009, and persons retiring after this May/June 2009 will not be entitled to participate, but nothing will preclude those persons from pursuing a subsequent individual or group claim.

Employer/employee savings

As a result of the settlement, the employer was able to save between $4.2 and $5.9 million, as opposed to the $8.2 million they hoped to realize under the March 2007 proposal. Furthermore, the settlement achieves savings for class members of between 25% and 50% of the costs that they would otherwise have borne under the March 2007 plan