OCTOBER/NOVEMBER 2009

Short Term Cost Savings could mean Long Term Problems…

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Whether the forecasted economic turnaround is in the near future, or still far off, financial planning around Benefit Plans should take a long-term approach. Although employees may be more understanding of cuts to benefit plans during economic uncertainty, the long-term effects of cuts may do more harm than good. If an employer reduces an employee’s compensation they may even be at risk for Constructive Dismissal.

Constructive Dismissal
A unilateral change in a benefits policy can constitute constructive dismissal where the benefit had become an integral part of the employee's contractual benefits. No constructive dismissal will occur, however, when there is no contractual entitlement to the benefit.

How deeply can you cut employees’ compensation before triggering a constructive dismissal?

a) At common law:
i.   As little as 4% has been enough
ii.  Risk increases significantly after 5%
iii. Beyond 10% a finding of constructive dismissal is almost certain

b) Under the Employment Standards Act, Ministry of Labour suggests that up to 10% is generally permissible, i.e. “pay cuts of up to 10 per cent will not be considered as substantial”

Applying this guideline, as the majority of Canadian benefit plans cost in the range of 3% to 5% of payroll, material changes to the benefit plan should not be construed as constructive dismissal. Of course this will be contingent on the level of earnings of each individual employee and each employee’s reaction will reflect the value the employee places on the benefit plan.

Communication is key to ensuring employees are receptive to plan design changes. A plan design review should occur periodically to ensure benefits remain relevant to your employees and consistent with corporate goals and objectives. Should you have an organizational need to contain costs, we recommend advising employees as soon as possible. Employees appreciate honesty and prefer to be informed of upcoming changes.

Remember, Sanofi-Aventis Healthcare Surveys have repeatedly found that employees would prefer to contribute more to the cost of benefits than to have their benefit plan reduced. In the 2009 survey, 43% of employees would prefer to pay higher premiums, while 23% would prefer to pay more when they use the services. Only 14% would prefer to have their coverage reduced to keep their costs the same*.

When reviewing the benefit plan, many employers look to the Health plan for potential savings that can be provided through reductions in coverage. Recent experience by Pitney Bowes in the U.S. revealed that by making medications for chronic conditions more affordable by ensuring they were reimbursed at 90% instead of the previous 75% or 50%, employees were more compliant, reducing the number of visits to the hospital emergency and the number of hospital admissions. Hospital visits result in a cost of absence and potentially, short or even long-term disability costs. Careful attention is required to ensure plan design changes do not shift the cost of one area of the plan to another area, and shifting to disability is particularly insidious as these costs are not immediately recognized, while the Health savings are.

We work with our clients to design Benefit Plans that reflect their corporate culture, are considered competitive within the marketplace, but also have the tools in place to weather the economic ebbs and flows. When designing Plans for our clients, we provide suggestions based on their specific requirements, however we always suggest building in cost-containment measures in order to prevent Plan costs from escalating out of control.

*Source: The Sanofi-Aventis Healthcare Survey 2009

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