On Friday December 13, 2013, the Supreme Court of Canada
released its decision in IBM Canada Limited v. Waterman,
relating to whether damages awarded to an employee for wrongful
dismissal should be reduced if the employee receives pension
benefits as a result of the dismissal. The majority of the Court
decided that pension benefits should not be deducted from wrongful
This matter came before the courts after Richard Waterman, a
42-year employee, was terminated by IBM Canada without cause, with
two months' working notice. Shortly after his termination, Mr.
Waterman obtained part-time alternative employment. At the time of
dismissal, Mr. Waterman was 65 years old and eligible for pension
Mr. Waterman sued IBM Canada for wrongful dismissal, on the
basis that he was entitled to a longer reasonable notice period
upon termination. The Supreme Court of British Columbia determined
that IBM breached Mr. Waterman's employment contract by failing
to provide him with reasonable notice and that he was entitled to
an additional eighteen months of notice. As such, Mr. Waterman was
awarded the income and benefits that he would have earned during
the eighteen month notice period, less the income that he earned in
his alternate employment during the notice period. However, the
Court did not deduct the pension benefits paid to Mr. Waterman
during the notice period from his damage award.
IBM appealed this decision to the British Columbia Court of
Appeal on the single issue of the deductibility of pension
benefits. The Court of Appeal dismissed the appeal, concluding that
pension benefits are not a form of salary replacement, which could
be deductible from a damage award, but are instead earned and
belong to the employee. IBM again appealed this decision to the
Supreme Court of Canada on the same issue. IBM argued that under
the law, damage awards should place the plaintiff in the economic
position that he or she would have been in had there been no breach
of contract, and not in a better position (the "compensation
principle"). As such Mr. Waterman's damages should be
reduced by his pension, because otherwise he would be receiving
both his regular salary and pension for the same period, and would
therefore be placed in a better position than he would have been if
the contract was fulfilled. The Majority of the Court determined
that pension benefits fall into an exception to the compensation
principle and dismissed the appeal, affirming that pension benefits
are not deducted from damage awards for wrongful dismissal.
It is also noteworthy that the Majority of the Court spent some
effort distinguishing this decision from one of its previous
decisions, Sylvester v. British Columbia, which determined
that disability benefits were to be deducted from damages awarded
for wrongful dismissal. The Court's decision in Sylvester had
previously led to some uncertainty in the law around the
deductibility of pensions from damage awards. The Majority
highlighted that in Sylvester the disability payments were
entirely funded by the employer and the benefits were intended to
be an income replacement. Conversely, in the current decision, the
employee earned the benefits, had ownership in the benefits and
they were not an indemnity for lost earnings.
Though this decision will certainly provide welcomed clarity and
will lead to more certainty around the deductibility of pension
benefits from damage awards, it is important to recognize that it
is limited to unmodified pension benefits. That is, the Majority
did not address situations where an employer offers an employee an
enhanced pension to compensate the employee for early retirement
upon termination. However, the jurisprudence from lower courts does
suggest that damage awards can be reduced by the amount of the
enhanced portion of the benefit. The reasoning of the Supreme Court
in the current decision, while not addressing this issue, does not
appear inconsistent with this conclusion.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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