And the Employee Said to the Employer: “You Can’t Touch This”

March 2014

Article by: Jennifer Hogan

On December 13, 2013, the Supreme Court of Canada (SCC) issued its decision in IBM Canada Ltd. v. Waterman, 2013 SCC 70, confirming that employers may not deduct earned pension benefits from wrongful dismissal damages.


When IBM dismissed Waterman without cause in 2009, he was a 65 year old employee with 42 years of service. He was also a long-standing member of IBM’s defined benefit pension plan (the “Plan”). Under the Plan, IBM contributed a percentage of Waterman’s salary on his behalf and the Plan guaranteed specific benefits, which became vested over time, upon retirement.

At the time of his termination, Waterman was entitled to a full pension under the Plan and his termination had no impact on the amount of his pension benefits. IBM advised Waterman that on termination he would be treated as a retiree and that he must begin receiving monthly benefit payments as of that date.

Waterman subsequently sued IBM to enforce his contractual right to reasonable notice. IBM took the position at trial that Waterman’s pension benefits should be deducted from the salary and benefits otherwise payable during the reasonable notice period.

This argument was rejected by the trial judge and the B.C. Court of Appeal.

The Supreme Court of Canada Decision

The SCC dismissed the appeal, finding that Waterman’s pension benefits were not deductible from his wrongful dismissal damages.

In the Court’s view, the general principle of compensation (i.e. that damages for breach of contract should put the plaintiff in the economic position that he or she would have been in had the defendant performed the contract) was not a full answer to the issue.

The Court observed that there are exceptions to this principle, one of which is the exception for private insurance and other benefits (the “Private Insurance Exception”). The Court observed that this exception applies “not only to insurance benefits… but also to other benefits such as pension payments to which an employee has contributed and which were not intended to be an indemnity for the type of loss suffered as a result of the [employer’s] breach”.

Thus, the Court relied on the fact that Waterman had earned the pension benefits through his years of service, and that the pension benefits were not intended as an indemnity for lost wages, to find that the Private Insurance Exception applied in this case. According to the majority, the pension benefits in question were akin to a property right and, as such, Waterman had an enforceable right over the benefits.

In reaching its decision, the majority also considered broader policy objectives. In particular, the majority was concerned that deducting benefits would provide an incentive for employers to dismiss pensionable employees before other employees because of the cost savings. The Court was clear that “[t]his is not an incentive the law should provide”.

Lessons for Employers

This decision affirms that, in general, an employer is not entitled to deduct a benefit from wrongful dismissal damages if it is not an indemnity for the loss caused by the breach and the employee has contributed in order to obtain entitlement to it. Accordingly, pension benefits cannot be deducted from wrongful dismissal damages.

While the Court’s ruling is undoubtedly to the benefit of employees, it remains to be seen what the Court will do if faced with a provision in an employment agreement that restricts an employee from receiving pension benefits and employment income simultaneously.