TORONTO - Ontario's Liberal government vowed Friday to fight a proposed class-action suit by employees at scandal-plagued eHealth Ontario, who have taken the first step in the legal action to get pay raises.

Hundreds of employees at the electronic health records agency were promised merit increases of 1.9 per cent and bonuses averaging 7.8 per cent this year, despite a Liberal government order to freeze public sector wages for two years.

After the planned increases were reported in March, Health Minister Deb Matthews told the eHealth board to take another look at the plan in light of the government's wage freeze, which was announced in the 2010 budget to deal with a deficit now at $16 billion.

"I did not direct them (to rescind the wage hikes)," said Matthews. "What I did was say 'Go back, take another look at this and think about it in the context of our fiscal reality, and in the context that eHealth is working hard to earn back its reputation."'

EHealth Ontario was at the centre of a scandal three years ago over untendered contracts and expense account abuses after the ombudsman found the agency spent $1 billion but had very little to show for it. David Caplan, the health minister at the time, was forced to resign because of all the negative publicity surrounding eHealth.

The eHealth board did the right thing in cancelling the promised pay hikes and bonuses, said Matthews.

Shibley Righton, a Toronto law firm, sent eHealth a letter dated July 19 in which it said it was starting a class action for "breach of contract and unjust enrichment arising from eHealth's recession and non-payment of the merit increase and performance incentives."

Dozens of eHealth employees signed a petition to start the class-action suit, said Jaqueline King of Shibley Righton.

"These aren't just senior vice-presidents that aren't getting a bonus," said King. "These are people that were promised a bonus and make probably a lot less than you and I in most cases ... and then are told 'No, sorry. It's not that you don't deserve it or that you didn't earn it."'

The New Democrats said the Liberals didn't properly think through the consequences of their voluntary public sector wage freeze and should not waste more money fighting the eHealth workers in court.

"We've got the (Dalton) McGuinty government talking a big game about controlling costs and obviously not ... contemplating how this commitment conflicts with promises and contractual obligations to its employees," said NDP justice critic Peter Kormos. "Rather than resolve the issue as the government should be doing in a speedy manner, it's going to spend hundreds of thousands of dollars defending a lawsuit that probably has not got a defence."

Written letters outlining each employee's merit increase and bonus pay that were given to eHealth workers last spring will provide them with strong evidence for their class-action suit, added Kormos.

The Progressive Conservatives said the merit pay increases should never have been offered to eHealth workers in the first place

"Merit pay is for completing a job on time and on budget," said PC critic Jim Wilson. "Dalton McGuinty failed spectacularly on both counts."

Matthews vowed to defend taxpayers in court from the eHealth workers who want their raises.

"It's not just unfortunate, it's wrong that they're taking this legal action," she said. "We will do everything we need to do to protect the people of Ontario."

EHealth Ontario did not immediately return calls Friday for comment on the proposed lawsuit.

The government announced in the 2010 budget that it wanted about one million public sector workers, from civil servants to nurses and teachers, to accept a voluntary wage freeze to trim the deficit.

However, many arbitrators have ignored the proposed wage freeze because the Liberals did not introduce legislation to back it up, so public sector workers from nurses to police have continued to get pay hikes in their new contracts.

The government says it will not provide the extra funding to hospitals, municipalities or any of its agencies to cover wage increases for a two-year period, and warned they will have to find the money within their existing budgets.