Supreme Court Eases the Way for Eliminating or Modifying Retiree Benefits
As a result of a recent Supreme Court decision, employers gained substantial ground in the ongoing battle over whether retiree health and other welfare benefits can be unilaterally modified or terminated. In M&G Polymers USA, LLC v. Hobert, 2015 WL 303218 (January 26, 2015), the Supreme Court held that disputes over retiree benefits should be decided by applying ordinary principles of contract law, but without application of any inference in favor of the retirees (rejecting an approach endorsed long ago in International Union v. Yard-Man, Inc., 716 F. 2d 1476 (6th Cir. 1983)).
This dispute arose when a group of retirees, who were once represented by a union, sued their former employer over the meaning of several expired collective bargaining agreements. The retirees claimed that the expired union contracts gave them and their spouses a right to lifetime contribution-free medical benefits. The employer and the union, however, had agreed to change those benefits under a newly negotiated contract.
The lower courts ruled in favor of the retirees. Based on the Yard-Man approach, the lower courts found that in the absence of a specific durational provisions relating to the retiree medical benefits, a general durational clause was not controlling with respect to benefits that allegedly were held out to retirees during their working years (possibly as delayed compensation or rewards for past services). On review, the Supreme Court reversed and sent the case back to the lower court (6th Circuit) for a re-determination, with instruction to apply ordinary principles of contract law only. In doing so, the Court expressly struck down the Yard-Man approach.
The Court observed that Yard-Man “failed to consider the traditional principle that ‘contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement,’” and that “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.” Accordingly, the Court ruled that each analysis should start with whether the contractual language is ambiguous and, if so, that ends the matter; but, if the language is ambiguous, the analysis can then move to a review of extrinsic evidence to help identify the parties’ intent.
The Court’s decision now gives employers more certainty about the legal analysis that needs to be done in order to determine whether medical and other similar welfare benefits, such as life insurance, for retirees, particularly those formerly represented by a union, can be reduced or eliminated.
Employers who have a desire (or perhaps a need) to cut benefit costs should feel somewhat more secure, and possibly inspired, to undertake a legal review of their retiree benefit programs and re-evaluate whether they can amend, modify or terminate those programs. In the more recent past, it has been a best practice for employers to reserve an express contract right to amend, modify or terminate retiree benefits at any time and for any reason. Employers that have done so should have a clear path when altering retiree benefits. For employers that have not done so, a close examination of relevant contract terms is recommended and advisable before action is taken to amend, modify or terminate retiree benefits.