A tale of an unfettered discretion exercised reasonably – changing the provisions of a policy governing benefits which form part of the T&Cs of employment

On 24 November 2020, the Labour Appeal Court (LAC) handed down judgment in Skinner & 208 Others v Nampak Products Limited & Others. The appeal related to a decision of the Labour Court by Moshoana J which found that Nampak, represented by writer hereof, could unilaterally change its level of contribution in respect of the Appellants’ post-retirement medical aid benefit (PRMA).

25 Jan 2021 5 min read Employment Law Alert Article

At a glance

  • The Labour Appeal Court (LAC) ruled in the case of Skinner & 208 Others v Nampak Products Limited that Nampak had the right to unilaterally change its contribution towards post-retirement medical aid benefits.
  • The dispute arose when Nampak introduced a cap on the monthly contribution it would pay towards the benefit due to difficult trading conditions and rising medical aid costs.
  • The LAC found that the clause in the policy granting Nampak the discretion to alter its contribution was valid and that Nampak had exercised its discretion reasonably, considering its operational needs and commercial rationale.

Since this alert is a follow up on our previous article on the Labour Court judgment, titled Changing the Provisions of a Policy governing Benefits which form part of the terms and conditions of employment, which alert was published on 1 July 2019, we will only recap the central facts which are of importance to the current discussion.

The Appellants are all former or current employees of Nampak. As part of their contracts of employment they qualified for medical aid benefits in terms of a policy (the Medical Aid Society Contribution: Employees and Pensioner Policy) which was incorporated in the terms and conditions of their employment.

Clause 3.3.3 of the policy reads as follows:

‘Subject to the provisions of clauses 3.3.6, 3.3.7 and 4, the Company will pay 100% of the medical aid contribution where the employee has at least 25 years’ continuous years’ service in the Company and 10 years’ membership of a Company acknowledged medical aid society at the date of retirement and was employed prior to 1 June 1996…’

Whereas clause 4.1 of the policy read as follows:

‘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 aid 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.’

Facing difficult trading conditions, and having employed other cost cutting measures, Nampak, having considered its legal position and taken legal advice thereon, introduced a cap on the amount of the monthly contribution that it was prepared to pay towards the PRMA benefit to manage the extra-ordinary costs associated with medical aid inflation over which it had no control.

The Appellants approached the Labour Court claiming that the decision to cap the PRMA benefit constituted a breach of their conditions of employment (breach of contract) and alternatively that Nampak’s decision to cap the benefit constituted an unfair labour practice (ULP).

In dismissing the matter, the Labour Court held that the decision to cap the benefit could not constitute a breach of contract as the use of the phrase “subject to” in clause 3.3.3 of the policy was a clear indication that the policy intended to create a condition applicable to the contribution to be made by Nampak in future. Further, the Appellants failed to lead evidence on non-performance or malperformance by Nampak so there could be no breach of contract. The Labour Court found that the capping of the benefit could not be faulted on the evidence as Nampak had acted lawfully and with a clear commercial rationale.

On appeal, the LAC was called upon to determine whether clause 4.1 of the policy, which granted Nampak the ‘sole discretion’ to alter its contribution, was valid. In addition, thereto, whether the discretion, if it were valid, had been exercised reasonably.

In determining the validity of clause 4.1 of the policy, the LAC dismissed the Appellants’ contention that the clause was void for vagueness. It found that this was untenable as the object of clause 4.1, reserving Nampak’s discretion to alter its PRMA liability in respect of eligible employees who were still employed and had not yet retired, was clear and unambiguous.

Further, the LAC found that the right to the benefit in clause 3.3.3 only vested in the Appellants at retirement and stated that while clause 3.3.3 conferred eligible employees with the right to 100% of the PRMA contribution, this right was specifically subject to clause 4.1.

The LAC endorsed the Labour Court’s finding that clause 4.1 was valid and Nampak could alter its contribution amount at its ‘sole discretion’. This discretion, however, is not unfettered as it must be exercised reasonably. Moving on to determining whether Nampak had exercised its ‘sole discretion’ reasonably. The LAC emphasised that a contractual discretion ought to be exercised reasonably, arbitrio bono viri, meaning that the relevant party must not act in bad faith and should endeavour proportionally to balance adverse and beneficial effects of the proposed decision or action. 

In the circumstances, the LAC held that a breach of contract or unfair labour practice could only exist if it was shown that Nampak exercised its discretion in terms of clause 4.1 of the policy unreasonably or unfairly.

Considering the Appellants’ contention that Nampak’s decision to cap the PRMA benefit was unfair or unreasonable because, according to them, Nampak could afford to pay the full benefit, the LAC held that the issue of affordability was not decisive. Further, that when assessing whether the employer had acted reasonably or fairly in exercising its discretion, its operational needs ought to be a relevant factor for consideration. In dismissing the Appellants contention and accepting Nampak’s commercial rationale for capping the PRMA benefit, the LAC went on to conclude that an employer’s intention to increase profitability was an entirely legitimate commercial rationale. Thus, exercise of the discretion within that context could not be considered unreasonable. Having regard to the evidence before it, the LAC went on to find that Nampak was indeed in a tough position and constrained in its operations and pursuit of profitability by a number of cost-factors and adverse business conditions, including the indisputable fact that medical inflation was outstripping the CPI by a considerable margin.

Evidence of the mounting commercial difficulty was clear from Nampak’s decision to consult affected employees and endeavour to reach a cash offer to buy out the individual PRMA benefits. The fact that more than 70% of the active employees accepted the cash offers, was evidence that Nampak had made reasonable and advantageous offers to all the concerned employees, including the Appellants. In finding that Nampak had exercised its discretion reasonably with no evidence of any illegitimate or ulterior motive and dismissing the appeal, the LAC held that the Labour Court had not erred in concluding that the employer had not acted in breach of contract.

This judgment is an important reminder to employers to ensure that their company policies adequately make provision for them to adjust their position and obligations in accordance with compelling operational and commercial requirements, within the ambit of legal permissibility.

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