Scaling back benefits

Can an employer reduce benefits if they're greater than legislative minimums?
By Brian Kenny
|Canadian Employment Law Today|Last Updated: 05/14/2014

Question: If an employer offers certain benefits (such as vacation entitlement or overtime pay) that are better than employment standards minimums, are there any legal issues or liabilities if those benefits are scaled back to the legislated minimums?

Answer: An employer is, not surprisingly, entitled to offer terms and conditions of employment that are more favourable than the minimums outlined in the applicable employment standards legislation. Oftentimes, the legislation will include an explicit stipulation to that effect as well as a prohibition against attempting to contract for lesser benefits than the statutory minimums. For example, employers may offer an hourly rate of pay or a vacation entitlement that exceeds the minimum entitlement. If an employment contract (or a collective agreement) provides a greater benefit to an employee that is directly related to the same subject matter as a minimum standard in the relevant legislation, then the greater benefit will prevail over that minimum standard. It is important to note that an employer cannot rely on a greater benefit in one standard to compensate for a lesser benefit in another.

Once implemented, the benefits become part of the employment contract, but an employer is not obligated to provide more favourable benefits forever. If the employer decides to scale back the more favourable benefits, several issues may arise.

The issues largely stem from the concept of consideration in contracts and the requirement for notice to make a contractual change. Consideration is anything of value promised to another party when making a contract. The exchange of this item of value cements the contractual relationship, so to speak. If no element of consideration flows to one party or the other, no valid contract is formed and all of the rights and entitlements thought to exist therein are essentially void.

This concept becomes particularly important when dealing with the question of how and when an employer can make changes to an existing employment contract. The employer is bound by the employment agreement it has made with the employee for the duration of the term to which it has agreed. The term may be definite or indefinite in duration. Consideration flows both ways in the first instance as the employer receives the services of the employee and the employee receives the employment benefits offered by the employer as compensation for services.

If the employer subsequently unilaterally changes the terms and conditions of the employee’s employment by scaling back the benefits it originally agreed to provide, without providing some additional consideration to the employee to compensate for the changes, the new or revised employment agreement may be rendered void.

In such circumstances, if a revised agreement is rendered void for lack of consideration, the original employment agreement would continue to govern the employment relations between the parties. This result can be problematic if the employer believes it has acquired the ability to implement a change and acts upon that belief. In other words, the employer may be obligated to continue operating under the terms of the original agreement and will not be protected from an ensuing complaint or challenge from the employee if it fails to do so.

As an alternative, it is possible for the employer to give proper and reasonable notice of a fundamental change to the employment contract in order to affect that change. The prevailing case authority, the Ontario Court of Appeal’s 2008 decision in Wronko v. Western Inventory Service Ltd., would seem to suggest an employer must give the employee reasonable notice of the implementation of a change if the employee does not agree to it. The appropriate notice period is calculated based on the usual factors, such as length of service, age, and level of position. The case law further suggests that such notice of change should clearly and explicitly function as termination of the current contract and an offer of re-employment under a new one which includes the changes to the terms and conditions. At the expiry of the reasonable notice period, the employee must then either accept the change and the offer of re-employment or become effectively terminated from that workplace. In this case, new consideration is not an issue because one employment relationship has ended and another has begun, so the original exchange of value suffices.

The bottom line is that to scale back the terms and conditions of an employment contract mid-term, the employer must either provide additional consideration to the employee to effect such changes or, in the case of contracts with an indefinite term, provide reasonable notice that an existing contract is coming to an end and a new one is to commence. In the former, it must be something more than simply the promise of continued employment, which on its own will not constitute “additional consideration.” In the latter, if the employer has properly terminated the existing contract by providing the appropriate notice, then the consideration for the new contract, with the changes, is re-employment.

At the extreme end, the consequences of an effort to scale back could be problematic. If too many terms and conditions are scaled back, and fundamental changes to the employment contract are made without proper notice, then the employer could be exposed to a constructive dismissal claim from the employee if it is determined the employee could not continue in that employment under the new circumstances imposed unilaterally by the employer.

In the unionized context, any changes to the benefits outlined in the collective agreement, which are the subject of the collective bargaining process, may not be reduced without further negotiation with the union.

For more information see:

Wronko v. Western Inventory Service Ltd., 2008 ONCA 327 (Ont. C.A.).

Brian Kenny is a partner with MacPherson Leslie and Tyerman LLP in Regina. He can be reached at (306) 347-8421 or bkenny@mlt.com.