SCC Holds Pension Benefits Not Deductible from Wrongful Dismissal Damages

January 28, 2014

In Waterman v. IBM the Supreme Court of Canada considered the deductibility of monthly pension benefits from damages for wrongful dismissal.

The Plaintiff employee worked for over 40 years for IBM when he was dismissed without cause in 2009 at the age of 65.  During his employment he participated in IBM’s defined benefit pension plan, and at the time of his dismissal he was eligible for an immediate pension and was forced to start his monthly benefits.

The Plaintiff sued IBM for wrongful dismissal.  At trial, the judge awarded the employee damages in lieu of reasonable notice of 20 months. As a result of receiving his monthly pension over the same 20 month period following his dismissal, IBM took the position that under the general rule of contract damages, the pension benefits should be deducted from the salary and benefits otherwise payable during this period. The trial judge rejected IBM’s theory, and IBM’s appeal to the BC Court of Appeal was likewise disallowed.

The Supreme Court framed the issue as whether a ‘collateral benefit’ or ‘compensating advantage’ received by an employee should reduce the damages otherwise payable by an employer. Otherwise stated, the Court asked whether this case falls within an exception to the compensation principle that a party should recover his or her economic loss but not more.

Emphasizing the underlying nature of a pension – a form of deferred compensation and property right – a seven-member majority of the Supreme Court of Canada held that such payments do not relieve an employer of its obligation to pay damages in lieu of notice for wrongful dismissal over the same period, and that this does not offend the ‘compensation principle’ aimed at placing the party in the economic position he or she would be in if the contract was performed.  Simply put, pension benefits are not an indemnity for loss of income due to inability to work.  Further, the Court noted the broader policy consideration that non-deduction of pension benefits in this case promotes equal treatment of employees on termination, and does not create an incentive for employers to dismiss older, pension eligible workers.

The Court also dealt with IBM’s arguments that the prior Supreme Court of Canada decision in Sylvester v. British Columbia [1997] S.C.J. No. 58 mandated the same result in this case.  In Sylvester, the Court considered whether disability benefits should be deducted from damages for wrongful dismissal where the employee had not contributed to the benefit plan. After analyzing the nature of the benefit, the intentions of the parties, and some broader policy arguments, the Court held that the disability payments were intended to be a substitute for earned wages due to illness or injury, and were linked to other benefits and not freestanding entitlements.  The majority reasons noted the different nature of pension benefits and disability benefits, highlighting that the disability payments in Sylvester were intended to be a substitute for salary, and the contract of employment impliedly prohibited the receipt of both wages and disability benefits.

Chief Justice McLachlin and Justice Rothstein dissented.   In the dissenting Justices’ view, the non-deduction of the pension benefits from the employee’s damages for wrongful dismissal gave the employee a windfall, and no private insurance exception to the compensation principle arose.

IBM Canada Limited v. Waterman, 2013 SCC 70 (CanLII)

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