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 employees.

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 notice.

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 following principles:

  • 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 deduction.
  • 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.