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title

Two Cautionary Tales for Employers

DATE

November 1, 2004

EXPERTISE

Employment and Labour

Ontario Labour and Employment Law Group

What you don't know can hurt you. A recent case[1] from the New Brunswick Court of Queen's Bench suggests that there is no difference between honest and negligent misrepresentations. In this case, the Court found that a forestry company had "negligently misrepresented" pension information to two former employees, albeit innocently. It held that even if a misrepresentation is made honestly, the Court may now require the employer to compensate employees for any damage resulting from their reliance on incorrect pension information. According to this decision, when incorrect information is discovered, an employer has a duty to immediately inform employees who have relied on it and give them the correct information.

The Ontario Court of Appeal has released a decision[2] which may make it tougher for employers to implement unilateral changes to employment contracts.

ACCIDENTAL NEGLIGENCE - EMPLOYERS HAVE A DUTY TO GIVE CORRECT PENSION INFORMATION

Background

Two long-time employees of Valley Forest Products Ltd. were laid off as a result of downsizing. In 1992, they were sent new information about their pensions and were asked to select one of four options: a monthly pension beginning at age 65; an early reduced monthly pension available at age 55; a lump-sum payment into a locked-in retirement account or registered pension plan; or a deferred life annuity.

The employee relations superintendent calculated the reduced amount for the early pension for the men. Based on this information, both men decided not to take the lump-sum payment and left their money in the company's pension plan. The superintendent learned in January 1993 that the formula he had used was wrong and that a different formula applied to laid-off employees. This meant that the early monthly pension amount was actually significantly reduced. The superintendent only informed a third former employee, to whom he remembered having given the incorrect information, of this mistake.

It was not until ten years later, when the former employees applied to receive their early retirement pensions, that the two men learned that their benefits were substantially less than they had expected. As a consequence, they sued the company for negligent misrepresentation.

Decision

In deciding whether or not there was an honest misrepresentation for which the employer was liable, the judge applied a five-part test developed by the Supreme Court of Canada in Queen v. Cognos Inc.[3]

Did there exist a duty of care based on a "special relationship"?
Was the representation untrue, inaccurate, or misleading?
Were the misrepresentations negligently made?
Were the representations reasonably relied upon?
Did the reliance cause detriment to the plaintiffs?

Both parties agreed that there was a duty of care based on the special employer-employee relationship between the parties. The Court found that the superintendent, by unknowingly using an incorrect pension formula, had provided misleading and inaccurate information. The plaintiffs relied on the information in making their decision to leave their money in the pension plan and take an early retirement. The two men claimed they would have or might have taken the lump-sum option had they been given the correct information. The Court required the employer to disprove this, but the employer failed to offer evidence on point.

The Court found that the representations made by the superintendent were negligently made and that honesty was no excuse. In addition, the employer was held to have been plainly negligent in not informing the plaintiffs of the correct information in January 1993 when the superintendent first became aware of it.

Commentary

If Ontario courts follow suit, employers may have to compensate employees for any damage resulting from their reliance on incorrect pension information, and the same rule may potentially apply to other employee-related matters, even if the misrepresentation is made innocently. While an appeal is pending in New Brunswick, this case is nevertheless a reminder that employers need to remain diligent in the preparation of financial information on which employees might rely and must quickly and broadly disseminate corrections if mistakes are discovered.

Employers often rely on third-party providers to issue pension statements. In such situations, the employer would likely remain liable for disseminating incorrect information. Consequently, an accuracy check of the information prior to its distribution would be prudent. In light of the Graham decision, employers may wish to review their practices in issuing pension statements and, to minimize the opportunity for error, consider limiting the frequency and amount of information to that which is required by statute, contract or otherwise.

UNILATERAL CHANGES TO CONTRACTS ARE BECOMING TOUGHER TO IMPLEMENT

Facts

The plaintiffs were commissioned sales agents for the Prudential Insurance Company of America (Prudential). When Prudential was acquired by Liberty Insurance Company of Canada (LICC), the Prudential employment contract was assumed by LICC. It provided for amendments to agents' compensation schedules by the employer and allowed for termination of the schedules by either party upon written notice. Two years after the acquisition, LICC changed the commission rates and added quotas to its agents' contracts. In accordance with the contract, LICC gave the agents more than 90 days' notice of the intended change. The plaintiffs refused to sign the new contract and, as a result, LICC subsequently terminated their employment for cause.

Trial Decision

The Ontario Superior Court of Justice found that the reduced commissions and new quotas did not constitute constructive dismissal. The Court found that the new rates of commission offered by LICC were competitive in the marketplace and were made "based on sound business reasons." The plaintiffs also failed to prove that the changes would have resulted in a loss of income.

The trial judge held that the dismissals were justified because LICC had acted in accordance with the terms of the original contract. She held that LICC had a contractual right to make unilateral changes to the agreement. The plaintiffs' refusal to sign the new agreement, in the Court's view, amounted to a repudiation of an essential term of the agreement - that is, LICC's right to amend the compensation plan.

Appellate Decision

The issue before the Ontario Court of Appeal was whether the agents' failure to acknowledge LICC's right to amend the compensation plan constituted repudiation of the contract. Writing for a unanimous Court, Juriansz J.A. found that it did not.

Juriansz J.A. took the view that the trial judge had not considered the question in light of the importance of providing protection to employees, who are recognized as a vulnerable group in society due to the bargaining power imbalance in many employer-employee relationships.

The Court's decision suggests that employers should give employees more time to evaluate contract changes before they are forced into either accepting the changes or disagreeing with them and claiming constructive dismissal. While LICC had the right to amend the contract or offer a new contract, the Court of Appeal held that the employees were under no obligation to accept it and could not be terminated for refusing to do so. In addition to the 90-day notice period necessary for amendments to the contract, LICC was therefore required to give proper notice in order to terminate the plaintiffs' employment.

Commentary

As a result of this decision, it may become more difficult for companies to unilaterally change employment agreements, even when a clause in the agreement stipulates that they can do so. As it now stands, the Liberty Insurance case establishes a precedent that employees may not be legally required to accept contract changes and, if they refuse, the employer must provide additional notice if it chooses to terminate the employment relationship.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

[1]. Graham v. St. Anne-Nackawic Pulp Co., [2004] N.B.J. No. 148.

[2]. Belton v. Liberty Insurance Co. of Canada, [2004] O.J. No. 3358.

[3]. [1993] 1 S.C.R. 87.

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