Pension Benefits not Deductible from Wrongful Dismissal Damages, says Supreme Court of Canada

January 2014

Article by: Ryan Copeland

Previously printed in the CCH’s Focus on Canadian Employment and Equality Rights (CEER) Newsletter.

Damages for wrongful dismissal are typically calculated so as to place dismissed employees in the position they would have been in but for the breach of contract. Accordingly, courts award dismissed employees damages equivalent to the pay and benefits they would have received in the proper notice period. However, general rules are not universal and, in IBM Canada Limited v. Waterman, [2013] S.C.J. No. 70, a 7-2 majority of the Supreme Court of Canada created a new and important exception to the compensation principle by holding that pension benefits should not be deducted from wrongful dismissal damages awards.

The case arose after IBM terminated Mr. Waterman’s employment without cause. At the time of termination, Mr. Waterman was 65, and therefore qualified for full benefits under IBM’s defined benefits pension plan. Nonetheless, Mr. Waterman sued IBM for wrongful dismissal, and at trial was awarded 20 months’ pay and benefits in lieu of reasonable notice. IBM had argued at trial that Mr. Waterman’s pension benefits should be deducted from the wrongful dismissal award. The trial judge and the B.C. Court of Appeal disagreed.

The Supreme Court of Canada characterized the issue raised by IBM’s appeal as a “compensating advantages” problem, whereby Mr. Waterman had a form of “double recovery” flowing from IBM’s breach of contract. That is, the breach allowed Mr. Waterman to claim not only the 20 months’ pay, but also draw on his pension benefits. In contrast, had IBM given Mr. Waterman 20 months’ working notice, as required by the contract of employment, Mr. Waterman would have still been working and therefore would not been able to draw on his pension.

At law, compensating advantages are not deducted from damages awards in two well-established scenarios. First, for policy reasons, charitable gifts to a plaintiff, such as in the case of donations to a family which has lost its house to fire, are not deductible from the damages awarded against a defendant’s wrong. Second, benefits received by a plaintiff through private insurance are not deductible from damages awards.

The principles underlying the private insurance exception have been applied to determine the treatment of a variety of other payments that do not originate in contracts of insurance, such as disability, CPP and EI benefits. In IBM, the Court drew on those earlier cases to set out a number of factors to be examined when determining whether pension benefits should be deducted from an employee’s damages award. The first factor is the nature and purpose of the benefit: if it is designed to be an indemnity against the loss of wages, then the case is stronger for deduction. Whether the employee has directly or indirectly paid for the benefit premiums is another factor to consider, albeit one that is still subject to some controversy. For example, it is clear from an earlier Supreme Court of Canada decision that disability benefits will be deducted when the premiums were only paid by the employer. Unfortunately, despite noting some strong criticism, the Court in IBM chose not to resolve whether such benefits would be deductible if the employee paid for at least some of the premiums. That said, and despite a somewhat cautious approach, the Court was prepared to say that in general, where a benefit is not an indemnity for wage loss and the employee has contributed in order to obtain the benefit, it will not be deducted from wrongful dismissal damages.

In Mr. Waterman’s case, the Court held that the pension plan was not an indemnity for wage loss, but was instead a form of retirement savings. The Court also found that although IBM made all the payments to the pension plan, Mr. Waterman had earned those payments through his years of service and so it was he, and not IBM, who contributed to the plan. Indeed, the payments made by IBM were made in Mr. Waterman’s name, and principles of pension law dictated that it was Mr. Waterman, and not his employer, who contributed to and “owned” the pension benefits. Thus, the proper view of the pension benefits, said the Court, was that they were a form of delayed compensation for Mr. Waterman’s work.

Further distinguishing the pension benefits from wage loss indemnity was the fact that the pension benefits, unlike disability benefits, would not be reduced by other amounts earned by the employee. That is, the pension benefits were freestanding entitlements because they were not linked to or defined by the extent of the actual income loss.

The fact that this was a defined benefits plan, as opposed to a defined contribution plan, was expressly dismissed by the Court as having no significance, since the purpose of both types of plan is not indemnity for wage loss.

The Court then examined the employment contract as a whole and determined that the parties could not be taken to have agreed to use Mr. Waterman’s pension entitlements to subsidize his wrongful dismissal. In support of that conclusion, the Court noted that had Mr. Waterman been dismissed prior to retirement, he would have received wrongful dismissal damages and yet retained certain rights under the pension plan to either a deferred pension or its commuted value. Those pension rights, however, would not have affected his wrongful dismissal damages. Rather, the value of any pension entitlements lost during the notice period, if any, would have been included in his compensable losses. Second, the pension plan contemplated that Mr. Waterman could have, once he retired, claimed pension benefits and worked a job with another employer, or even worked for IBM after he reached the age of 71. Thus, unlike in a disability benefits scenario, where such benefits are reduced with earnings, it could not be said that it was incompatible with the employment contract to receive both unreduced pension benefits when also earning wages.

Lastly, the Court addressed several policy concerns, including the equal treatment of employees and deterring undesirable practices. The Court held that non-deduction from wrongful dismissal damages promoted equality, because it treated Mr. Waterman similarly to the employee who had not reached retirement age but who could retain rights to a deferred or commuted value pension, or to the employee who had reached age 71 and could work for IBM while retaining his pension benefits. With regard to undesirable practices, the Court held that if pension benefits were deducted from damages awards, it could create an incentive for employers to terminate employees who had reached pensionable age, since all things being equal, those terminations would be cheaper on account of that deduction. Not surprisingly, the Court did not consider that to be a desirable outcome.

In the result, the Court held that Mr. Waterman’s pension benefits were not deductible from the damages award, and dismissed IBM’s appeal.

Given Canada’s workplace demographics, with its relatively large numbers of baby boomers, many of whom are already entitled to full or partial pensions at termination, the IBM case has some very important consequences for the law of wrongful dismissal. Unfortunately, despite some strongly voiced criticisms of the importance of who pays for the benefits, the Court failed to resolve the issue of whether employee-paid disability benefits should be deductible from wrongful dismissal damages awards.