On December 13, 2013, the Supreme Court of Canada released its
much anticipated decision in IBM Canada Limited v. Waterman 2013 SCC
70. The case confirms that employers may not deduct earned
pension benefits from damages owed to wrongfully dismissed
Mr. Waterman was an IBM employee with over 42 years of service.
During that time, he had participated in the company's defined
benefit pension plan. IBM terminated Mr. Waterman's employment
in 2009. He was 65 years old at the time and was eligible to
receive benefits under the plan. He was given two months
Mr. Waterman brought an action for wrongful dismissal. The trial
judge awarded a 20 month notice period and declined to deduct
pension benefits received by Mr. Waterman during that period. IBM
appealed. At the BC Court of Appeal and Supreme Court of Canada,
IBM argued that Mr. Waterman was not entitled to receive both
pension benefits and pay in lieu of notice. Otherwise, argued IBM,
Mr. Waterman would be put in a position better than if his
employment had not been terminated.
In a 7-2 split decision, the majority of the Supreme Court of
Canada recognized that a "compensating advantage" arose
on the facts of the case. That is, failure to deduct Mr.
Waterman's pension payments from pay in lieu of notice resulted
in a windfall for him. However, the majority applied the
"private insurance exception" on the basis that he had
contributed time and service to the plan and the benefits were not
intended to be an indemnity for the loss caused by the termination
of his employment. The majority therefore declined to deduct Mr.
Waterman's pension payments from his damage award.
In summarizing the law on this issue, the majority set out the
There is no single marker to sort out which benefits fall
within the private insurance exception.
The nature and purpose of the benefit are important
considerations. The more closely the benefit resembles an indemnity
against the loss caused by the breach, the stronger the case for
While the employee's contribution to the benefit remains
relevant, the basis for this is debateable.
In general, a benefit will not be deducted 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.
Takeaway for employers
Whether an employer can deduct pension (or other benefits) from
pay in lieu of reasonable notice will turn on the facts of each
particular case. However, in light of the Court's decision, it
will clearly be more difficult for employers to do. Of particular
importance in any such determination will be the nature and purpose
of the benefit. While the issue has yet to be tested, the Court
appears to have left open the possibility for employers to
expressly address deductibility of benefits in the employment
agreement. Miller Thomson's Labour and Employment group is
available to assist employers in navigating this still somewhat
murky area of the law.
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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