On December 13, 2013, the Supreme Court of Canada (SCC) issued its decision in IBM Canada Limited v. Waterman, confirming that employers may not deduct earned pension benefits from wrongful dismissal damages.
In 2009, IBM terminated Richard Waterman’s employment without cause at the age of 65 with two months’ notice. Waterman had been a long-time member of IBM’s defined benefit pension plan (the Plan) and had a fully vested interest in the Plan. Upon termination, Waterman was entitled to a full pension; however, both his employment contract and the Plan were silent on employee rights and entitlements in the event of termination without cause.
Waterman sued for wrongful dismissal. The trial judge awarded him with 20 months’ payment in lieu of notice and declined to deduct the pension benefit paid to Waterman during the notice period in calculating his damages. The British Columbia Court of Appeal (BCCA) dismissed IBM’s appeal.
The Supreme Court of Canada Decision
The SCC considered whether Waterman’s receipt of pension benefits during the notice period should reduce the damages payable by IBM for wrongful dismissal.
In a 7-2 split, the majority of the SCC dismissed the appeal from the BCCA and found that Waterman’s pension benefits were not deductible.
The following are the highlights of the majority’s analysis and reasoning.
1. The General Rule of Contract Damages (the "Compensation Principle")
The Compensation Principle provides that damages should put the plaintiff in the economic position that he or she would have been in had the defendant performed the contract. Under a strict interpretation of the Compensation Principle, if IBM had performed the contract (i.e., given reasonable notice) then Waterman would have received only regular salary and benefits during the notice period, and would not have been entitled to also receive his pension benefits. In this case, the majority decided not to strictly apply the Compensation Principle because the facts fell within the Private Insurance Exception.
2. The Private Insurance Exception
The Private Insurance Exception provides that payments from private insurance are not typically deductible from damage awards. In relying on the fact that Waterman had earned the pension benefits through his years of service, and also that pension benefits are not an indemnity for lost wages, the majority found that the Private Insurance Exception applied. According to the majority, the pension benefits in question were akin to property rights, and as such, Waterman had enforceable rights over the benefits.
3. Policy Considerations
In reaching its decision, the majority also considered broader policy objectives. In particular, the majority was concerned that allowing the deduction would create an economic incentive for employers to dismiss their pensionable employees before other employees.
In dissent, McLachlin C.J. and Rothstein J. found that Waterman’s pension benefits should be deducted from the damages otherwise payable because he should only be entitled to an amount equal to his salary during the notice period, and defined benefits thereafter for the remainder of his life. The dissent adopted a strict application of the Compensation Principle, arguing that disallowing the deduction of Waterman’s pension benefits would have the effect of giving him a windfall, and Waterman would get more than he bargained for and would charge IBM more than it agreed to pay. The dissent also rejected the majority’s assertion that the Private Insurance Exception applied because employer-provided benefits (such as a defined benefit pension plan) cannot be separated from the employment contract. They are to be conceived as a "single contract" and accordingly, Waterman’s entitlements turned on the ordinary governing principle that he should be put in the position he would have been in had the contract been performed.
This decision confirmed that pension benefits are deferred compensation and are a form of retirement savings. Accordingly, pension payments should not typically be deducted from wrongful dismissal damages. This bright-line rule is to the advantage of pension-eligible employees. It seems as though the SCC left open the possibility for employers to expressly stipulate in the employment agreement, or in the pension plan, that wrongful dismissal damages and pension benefits will not be paid simultaneously. How a court would interpret such a clause in the future remains to be seen.
1 IBM Canada Limited v. Waterman, 2013 SCC 70. (IBM v. Waterman).
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