The Supreme Court of Canada recently released its long-awaited decision in IBM Canada Ltd. v. Waterman, addressing the deductibility of pension payments from an award of damages for wrongful dismissal. In a 7-2 decision, the Court held that pension payments are generally not deductible.

Mr. Waterman was employed by IBM Canada Ltd. for over 42 years, and was a participant in IBM’s defined benefit pension plan. Following the termination of his employment without cause and without reasonable notice, Mr. Waterman commenced a lawsuit for wrongful dismissal and began drawing from his pension.

IBM argued that the pension benefits paid to Mr. Waterman during the reasonable notice period should be deducted from any award of damages for wrongful dismissal. The company’s position was based on the general rule that damages for wrongful dismissal should place the dismissed employee in the economic position he or she would have been in had the employer not breached the employment contract. IBM said that failing to deduct pension benefits from the reasonable notice period would put Mr. Waterman in a better position than if his employment had not been terminated. In other words, a failure to deduct the pension payments would result in a windfall to Mr. Waterman because he would receive damages for wrongful dismissal and pension income during the notice period, even though he would not have been able to draw from his pension had IBM insisted that he continue in employment during that time.

The majority of the Court disagreed with IBM and declined to deduct the pension payments. The majority noted that Mr. Waterman’s pension income was a form of retirement savings, not an indemnity for wage loss. In summary, the Court concluded that “employee pension payments, including payments from a defined benefits plan as in this case, are a type of benefit that should generally not reduce the damages otherwise payable for wrongful dismissal.”

This is an important decision as it helps clarify a muddy area of law, particularly in British Columbia. Although the Supreme Court of Canada did not shut the door on the deductibility of pension payments in all cases, employers will likely face considerably more difficulty in successfully arguing that pension payments (and other similar payments) should be deducted from an award of damages for wrongful dismissal. That being said, deductibility will ultimately turn on the context of the facts and the terms of the contract in issue.

IBM Canada Limited v. Waterman, 2013 SCC 70