1 July 2019 by Employment Alert

Changing the provisions of a policy governing benefits which forms part of the T&Cs of employment

On 20 June 2019, the Labour Court handed down judgment in Skinner & 208 Others vs Nampak Products Limited & Others (Labour Court: case no: JS197/16) in a matter concerning the provision and limitation by Nampak of a post-retirement medical aid benefit (PRMA) contained in an applicable Policy. The Policy formed part of the eligible employees’ terms and conditions of employment.

The Applicants mainly consisted of future pensioners, with some having retired during the course of this litigation. To qualify for PRMA benefits upon retirement, certain pre-requisites had to be met pertaining to a minimum length of service with Nampak and a minimum period of membership, first with Nampak’s internal medical scheme, and thereafter with Discovery. Nampak’s in-house scheme was taken over by Discovery several years ago due to the costs associated with its operation.

The Applicants had been entitled to a 100% contribution in respect of their PRMA benefits which was not sustainable. Nampak was facing difficult trading conditions and so on 25 September 2014, having considered its position and taken legal advice thereon, it introduced a cap being on the amount of the monthly contribution that it was prepared to pay towards such benefit. The aim was to manage the extra-ordinary costs associated with medical inflation over which Nampak had no control.

The Applicants’ claim was on three bases:

  • breach of contract: the decision to cap allegedly constituted a breach of the Applicants’ conditions of employment, including Nampak’s decision to retain the PRMA liability upon the sale of certain businesses in South Africa;
  • unfair labour practice (ULP): did Nampak’s exercise of a discretion to cap the benefit constitute an unfair labour practice; and
  • whether the purchasers of the businesses that Nampak had sold should assume the liability in respect of the PRMA benefits for their employees who had transferred from Nampak.

Onus

The onus in respect of these claims rested on the Applicants. It was agreed for the purposes of this trial that, in addition to the contractual claim, only substantive fairness of the ULP claim would be determined by the court.

Interpretation of the Policy

The relevant clauses read as follows:

Clause 3.3.3

“Subject to the provisions of clauses 3.3.6, 3.3.7 and 4, the Company will pay 100% of the medical and contribution where the employee has at least 25 years’ continuous service with the Company and 10 years’ membership of a company acknowledged medical aid society at date of retirement … .”

Clause 4.1

“The Company may at its sole discretion in respect of future pensioners set a maximum level at which it is prepared to contribute towards medical society benefits. The pensioner will be responsible for the difference between the actual medical aid society contribution levied by the applicable medical aid society and the maximum level set by the Company”.

The court found that when parties use the phrase “subject to”, they intended to create a condition applicable to the contribution to be made by Nampak in future. The clause permitted Nampak to exercise its’ “sole discretion” thereby giving it wriggle room to take account of financial costs and the need to curtail same.

For the Applicants to show that there had been a breach of contract, they would have had to lead evidence of non-performance or malperformance by Nampak. The court concluded that the Applicants failed and the cap was not contrary to the provisions encapsulating Nampak’s rights under the Policy.

Could Nampak exercise an unfettered discretion?

The court said if it was wrong to conclude Nampak’s discretion was unfettered, then it would need to consider whether the discretion had been exercised “arbitrio bono vino”, meaning “the decision of a good man”, namely a reasonable decision. This is an objective test.

The court found that Nampak had:

  • taken steps to establish the legality of its intended actions;
  • before proposing the cap to its board of directors, it had engaged in an exercise that considered all relevant aspects of its intended action; and
  • the board had robustly engaged on the issues and “considered all angles including the possible termination for operational requirements had the discretion not been exercised”.

The court found that these steps constituted the actions of a good man. It said: “A good man would take steps to arrest a financial situation that may have a serious ripple effect-loss of employment”.

Where a party seeks to enforce a common law right, it would be inappropriate to combine the principles applicable to the interpretation of contracts with a right to a fair labour practice enshrined in the Bill of Rights. The court gave the example of restraints of trade clauses contained in a contract of employment. When courts interpret restraints of trade, they do not do so by taking into account a right to an unfair labour practice. Hence, the contract of employment should be interpreted like any other contract. Accordingly, the claim for breach of contract failed.

Did Nampak commit any unfair labour practice?

To succeed on this ground, the Applicants had to prove whether there was an “act or omission” which was unfair. The Applicants asserted that Nampak’s decision:

  • had been arbitrary;
  • had been exercised to accommodate the buyers of the businesses that had been sold by Nampak;
  • demonstrated no regard to the contractual rights and consequences for the Applicants’; and
  • was exercised without considering the availability of other funds to secure their PRMA benefits.

The Applicants were critical of Nampak’s sale of businesses and not passing the PRMA liability to the “new” employers, but the facts indicated that unless that liability was retained, the sale of those businesses may well not have succeeded.

The court found that Nampak had acted lawfully and with a clear commercial rationale in mind. It was a contradiction to suggest that where there is commercial rationality, there is unfairness. It was “not for the court to decide whether capping was the correct answer to rising financial costs”. Nampak did not act with any ulterior motive.

The Applicants were aware of the declining profitability of the business and that it was reasonable to investigate ways to limit a burgeoning PRMA liability. The court mentioned “… in passing that this court and the LAC accepted that it may be fair to dismiss an employee for operational requirements if he/she refuses to accept a change to terms and conditions of employment”.

The ULP claim was dismissed.

Conclusion

The court rejected both the Applicants’ claims and refused to pass the PRMA liability to the purchasers of the businesses sold as there was no basis to do so.

The writer acted for Nampak in this litigation.

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