The Supreme Court of Canada has released its highly anticipated
decision in Waterman v IBM Canada Ltd., dismissing IBM
Canada Ltd. ("IBM")'s appeal. This decision clarifies
the law regarding whether an employer can deduct pension benefits
from damages for wrongful dismissal.
Background of Waterman v IBM Canada Ltd.
Richard Waterman ("Waterman") worked for IBM for
approximately 42 years prior to his dismissal without cause at the
age of 65. Immediately following his dismissal, Waterman began
receiving pension benefits pursuant to IBM's Defined Benefit
Pension Plan (the "Defined Benefit Plan"), a
non-contributory pension plan.
Waterman sued IBM for wrongful dismissal. One of the issues to
be determined at trial was whether the pension benefits paid to
Waterman should be deducted from an award for wrongful dismissal
The Supreme Court of British Columbia Determines Pension
Payments Not Deductible
IBM argued that the Supreme Court of Canada's reasoning in
Sylvester v British Columbia, where the Court held that
disability benefits received by an employee during the notice
period could be deducted from an award of damages, should be
applied to the pension benefits received by Waterman. However, the
trial judge determined that he was bound by earlier case law which
established that pension payments were not deductible.
The British Columbia Court of Appeal Upholds Trial
The British Columbia Court of Appeal agreed with the trial judge
in the result, finding that the pension benefits paid to Waterman
were in addition to his salary, not a payment of salary or in lieu
of salary, such as disability payments.
The Court stressed that whether or not a former employee will be
entitled to both salary and payment of his or her pension benefits
during the notice period will turn on the construction of the
contractual arrangement between the parties. There was no express
provision in either the Defined Benefit Plan or the accompanying
Interpretation Document which stated that an employee could not
receive both salary and a pension. Although usually an employee
would not receive both salary and pension benefits at the same
time, the Court noted that this was not the "usual"
situation; in this case, IBM had breached its employment contract
with Waterman by dismissing him without cause and proper notice,
thus triggering the pension payments.
The Supreme Court of Canada Dismisses IBM's Appeal
The Supreme Court of Canada dismissed IBM's appeal, finding
that pension benefits are a form of deferred compensation for an
employee's service, similar to a form of retirement savings,
and thus pension benefits do not constitute an indemnity for wage
loss due to unemployment.
The Court concluded that several factors clearly supported not
deducting the pension benefits from the wrongful dismissal damages
in this case:
(a) Waterman's pension was not an indemnity for wage loss,
but a form of retirement savings;
(b) Although IBM made all the contributions to fund the plan,
Waterman's entitlement to the benefit arose through his years
of service; and
(c) Waterman's contract of employment did not contain any
general bar against receiving full pension entitlement and
The Court also considered that broader policy concerns did not
support allowing pension benefits to be deducted from wrongful
dismissal damages, as it would provide an economic incentive to
dismiss pensionable employees rather than other employees.
Justice Rothstein and Chief Justice McLachlin dissented from the
majority judgement, finding that not deducting the pension benefits
would result in Waterman receiving more than he bargained for, as
Waterman could not have received both his salary and his pension
benefits had Waterman continued to work for IBM through the
reasonable notice period.
The dissent places the focus on the distinction between a
defined benefit plan and a defined contribution plan. Justice
Rothstein and Chief Justice McLachlin noted that while deducting
benefits received under a defined contribution plan would leave the
employee in a worse position than if the contract had been
performed, deducting benefits received under a defined benefit plan
simply places the employee in the position he or she would have
been in had the contract been performed.
Impact of the Waterman v IBM Canada Ltd. Decision
The decision in Waterman v IBM Canada Ltd. is highly
significant in that it confirms that pension benefits cannot be
deducted from an award of damages for wrongful dismissal. However,
although there is now a degree of certainty on this issue as a
result of the Supreme Court's decision, the strong dissent to
the majority judgement appears to leave room for future debate on
the deductibility of pension benefits from wrongful dismissal
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