Informal Employment Contracts and the Battle over Retirement Benefits

Abstract

Weak economic growth and the resultant financial pressures have made post-retirement benefits a tempting target for cutbacks, in both the private and public sectors. Unlike pensions themselves, ancillary retirement benefits such as supplementary medical coverage are often vaguely defined. If they are part of the contract of employment, an attempt by the employer to reduce them represents a breach of contract. The employment contract is often quite informal, and there is room for debate about which promises were contractual. In two recent decisions in BC and Ontario, retirees were able to convince the court that the benefits were contractual. Each case hinges on its own facts and the evidence on past communications, and how they fit with the contractual principles of offer, acceptance and consideration.

Part of the problem is that the details of these benefits are often presented to the employees only after they have accepted the position. This allows the employer to argue that they are non-binding, gratuitous promises. Under the unilateral contract principle, the employee can accept by performance. However, there is a question of whether any consideration is provided by the employees to make the contract binding. In this case, it can be argued that the economic hypothesis of the efficiency wage is relevant. This hypothesis posits that better remuneration positively influences employee loyalty and productivity, providing consideration in exchange for the employer's offer of the enhanced benefit.

Keywords: class actions, retirement benefits, breach of contract, employment law, consideration, efficiency wage

JEL Classification: J26, J32, K12, K31