Canada: Pension Benefits In Canada: To Deduct Or Not Deduct Them From Wrongful Dismissal Damages

On December 13, 2013, the Supreme Court of Canada issued a majority decision in IBM Canada Limited v Waterman,1 ruling that the respondent's pension benefits must not be deducted from the damages awarded for wrongful dismissal.

Facts

IBM Canada Limited (IBM) dismissed Richard Waterman (Mr. Waterman) on two months' prior notice when he was 65 years old and had 42 years of service. When he was terminated, Mr. Waterman was entitled to a full pension under a defined benefit pension plan to which only IBM made contributions.  Mr. Waterman sued to enforce his contractual right to reasonable notice. The trial judge set the appropriate notice period at 20 months and declined to deduct the pension benefits paid to Mr. Waterman during the notice period in calculating damages. The Court of Appeal upheld the trial judge's ruling on the basis that, barring a specific contrary provision in the contract of employment, the pension benefits did not have to be deducted from the award of wrongful dismissal damages.

Arguments of the parties

IBM reasoned that the result reached by the British Columbia courts was at odds with the goal of compensating the victim for his or her actual loss because it placed Mr. Waterman in a better economic position than if IBM had given him sufficient notice. IBM drew largely on Sylvester,2 a Supreme Court of Canada decision handed down in 1997.

Mr. Waterman argued that pension benefits are a form of retirement savings, like an RRSP, that is the property of the employee and that IBM could not use such benefits to offset the award of damages.

Decision of the Supreme Court of Canada

In a ruling delivered by Cromwell J., with McLachlin C.J. and Rothstein J. dissenting, the Supreme Court of Canada dismissed IBM's arguments and appeal. It held that pension benefits should generally not reduce the damages for wrongful dismissal. They are a form of deferred compensation for the employee's service and not an indemnity for wage loss due to termination.

In reaching this conclusion, the Supreme Court looked at case law on collateral benefits or compensating advantages (i.e. a source of income other than the damages that reduces the loss suffered by the plaintiff) where the issue to be determined was whether such benefits or advantages should be deducted from damages.

It was in this context that the Supreme Court applied insurance principles—specifically, the private insurance exception, according to which private insurance benefits are usually not deducted from damages. While there was no single marker to sort which benefits fell within this exception, the Supreme Court observed that the nature and purpose of the benefit were factors clearly recognized as such by the courts. The more akin the benefit is to an indemnity against the type of loss caused by the defendant's breach, the stronger the case for deduction. In other words, indemnity benefits should, in principle, be deducted from an award for wrongful dismissal damages. However, a benefit will generally not be deducted if it is not paid for the loss caused by the breach, i.e. if it is a non-indemnity benefit, and if the plaintiff contributed in order to obtain entitlement to it, although the Supreme Court found this second criterion to be debatable. 

The Supreme Court concluded that the private insurance exception applied in this case because the pension benefits were non-indemnity benefits and because, while IBM had made all the contributions to fund the pension plan, Mr. Waterman had contributed to the plan through his years of service. 

The Supreme Court continued its analysis by distinguishing the case at issue from Sylvester, the decision relied upon by IBM.  In Sylvester, the court had held that, barring contrary intent by the parties, the disability benefits received by a wrongfully dismissed employee must be deducted from the award of wrongful dismissal damages. The benefits in Sylvester were completely different in nature from those in the case at hand: disability benefits are clearly indemnity benefits for loss of salary; such is not the case for pension benefits, which, according to the Supreme Court, are an entitlement or deferred compensation and bear many of the hallmarks of a property right. Also, the Supreme Court held that, unlike in Sylvester, where it could be inferred from the employment contract that the employee could not receive both salary and disability benefits, there was nothing in the present case to suggest that a retired IBM employee could not obtain employment with another employer and keep his or her pension benefits. The Supreme Court found that Sylvester did not support IBM's position and, in fact, supported the conclusion that the pension benefits should not be deducted from the wrongful dismissal damages.

The Supreme Court concluded its analysis by stressing that broader concerns supported not deducting pension benefits, as the law should not provide an economic incentive to employers to dismiss pensionable employees rather than other employees.

Comments

While this decision does not altogether rule out the possibility for an employer of deducting pension benefits from an indemnity in lieu of notice, it does severely limit the employer's margin of manoeuvre. Although the terms used by the Supreme Court leave room for exceptions, this decision is a major roadblock for employers who wish to proceed with such a deduction. However, the reasons given by the Supreme Court suggest that the employment contract terms and the intent of the parties could be a basis for setting aside this principle.   

Footnotes

1 2013 CSC 70.

2 Sylvester v Colombie-Britannique, [1997] 2 SCC 315.

Norton Rose Fulbright Canada LLP

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