The Wronko case puts employers on notice when it comes to changing group plans.
A recent Ontario Court of Appeal decision has severely limited an employer’s ability to change an employee’s contract of employment— even with advance notice. While the case dealt with a change to an individual contract, the Court’s reasoning seems to apply in the group context as well. And the Supreme Court of Canada’s refusal to hear an appeal in the case has left employers wondering how to safely proceed.
In Wronko v. Western Inventory Services Ltd., Western wanted to amend Darrell Wronko’s employment contract to reduce his severance entitlement. When he refused to sign the new contract, Western gave him two years’ notice of the change. He continued to work throughout that period but also continued to refuse the change. At the end of two years, Western sent him a copy of the new contract, stating that there was no job for him if he failed to accept it. Darrell Wronko sued Western for constructive wrongful dismissal.
Under the law, a unilateral change to a fundamental term of an employment contract is equivalent to an outright termination. In the Wronko case, there was no dispute that the change was fundamental. It was clear that Darrell Wronko did not accept the change to his contract. Accordingly, the Court of Appeal reasoned that the old contract remained in force. It awarded him damages based on the original severance provisions.
The Court stated that in situations where an employee resists a fundamental change, the employer can give notice of termination, followed by an immediate offer of new employment on the revised contractual terms. The offer of new employment would often offset most of the employee’s damages. However, the exact effect would depend on the nature of the new terms and any applicable statute or existing employment contract.
While the Wronko decision may be workable in an individual setting, applying its principles in a group setting is problematic. Consider an employer that is contemplating eliminating its defined benefit pension plan or replacing it with a defined contribution plan. Would either change be considered fundamental? How is this measured in a group context? Is it measured on an individual member basis, since the value of the benefit varies with the age, service and earnings level of each employee?
How would the employer be able to manage its overall compensation practices when there will inevitably be a mixed response from its employees? Should it follow the Wronko case and terminate those employees who object to the change?
Does providing employees with advance notice of an anticipated change offer any relief for employers? This tactic has often been used in cases of group benefits changes in the past, but the Wronko case seems to say that it is not enough.
Formal documents containing the terms of pension, benefits and compensation plans often include a wide power to amend or discontinue the plan. Would that give an employer more latitude to change or discontinue a group plan?
There was hope that these questions could be raised on the appeal, but that hope is now gone. On Oct. 9, 2008, the Supreme Court decided not to hear the appeal. So the Court of Appeal decision stands, which, while based on a single employee’s contract, appears to have much wider application. However, terminating and offering to rehire an entire workforce in order to change the terms of a group plan is undesirable from a legal, practical and workforce management perspective.
Until the courts are asked to apply the principles found in the Wronko case to a group situation, employers face uncertainty and should seek specific advice before changing any pension, benefits or compensation plans.
Sheldon Wayne and Steve Pibworth are legal consultants with Hewitt Associates. sheldon.wayne@hewitt.com; stephen.pibworth@hewitt.com
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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the December 2008 edition of BENEFITS CANADA magazine.