Northern Exposure

Ex Gratia Payments in Pension Plan Allowed

By Lyne Duhaime

On June 21, 2011, in Canadian Jewish Congress v. Polger, the Court of Appeal of Quebec overturned a decision of the Superior Court that had ordered an employer to pay millions of dollars in pension benefits based only on an alleged practice and without proper written documentation to that effect. The pension benefits in this case were deemed to be ex gratia payments only, not required to be paid to all departing employees by virtue of policy or practice.

Leona Polger and Abraham Smajovits had worked for the Canadian Jewish Congress for 36 and 22 years respectively when they were dismissed following a reorganization. Not surprisingly, they sued for termination pay. They included in their action a claim for supplemental pension benefits that they said weren’t provided in their defined contribution pension plan.

Polger and Smajovits argued that the employer had an unwritten policy of supplementing its employees’ pension plan either by making special contributions to their pension fund or by paying them additional pensions upon retirement.

They argued that the policy flowed from a longstanding practice that resulted in a hybrid pension plan — allowing retiring employees who were the beneficiaries of a defined contribution plan to receive a supplementary pension for a total annual pension amounting to two percent of their average annual salary over the last five years of service for each year of service. These were the supplementary benefits they argued they were entitled to.

Trial judge’s decision
The trial judge agreed. The judge said the employer’s practice of pension enhancement became binding upon termination. On that basis, the judge ordered the employer to pay Polger and Smajovits $2,030 per month and $4,582 per month respectively for the rest of their lives — amounting to potentially millions of dollars.

Court of appeal’s decision
The employer appealed. The Court of Appeal agreed with the employer and overturned the trial decision. In doing so, the Court of Appeal didn’t agree that the evidence supported there being a binding policy or practice that would warrant the payment of pensions calculated according to the defined benefit “two percent formula.”

In the view of the Court of Appeal, all that the evidence showed was that ex gratia payments in a variety of forms were made over the years to a certain number of employees upon request only and following a decision by the board of directors or by management on a case-by-case basis.

There was no general, uniform, and established practice of granting employees additional pension advantages. Certainly, the evidence didn’t establish that the employer ever agreed, directly or indirectly, to transform the defined contribution pension plan offered to its Quebec employees into a defined benefit pension plan or to remedy, systematically, its perceived inadequacies.

Employers must nevertheless protect themselves
Although the Court of Appeal’s decision comes as a relief to Canadian employers who may on a case-by-case basis offer more generous benefits to certain employees, employers must protect themselves when they do so. In such cases, employers across Canada must make it clear that such benefits are paid on an ex gratia basis only and not commit themselves to providing those benefits in the future.