Background

As we reported in May in Deductibility of Pension Benefits: Waterman v. IBM going to Supreme Court, the facts of IBM Canada Limited v. Richard Waterman, 2013 SCC 70, are straightforward. Waterman was an employee of IBM for over 40 years when he was terminated at age 65 as a result of downsizing. IBM provided two months’ salary in lieu of notice. At the time of his termination, Waterman was entitled to a full defined benefit pension under IBM’s pension plan, but could not do so while he was still an IBM employee. Had Waterman still been employed with IBM at age 71, he would have been required to begin drawing on his pension notwithstanding the fact that he still earned a salary. As it happened, Waterman opted to begin receiving defined benefit payments once he was terminated.

At trial, the British Columbia Supreme Court awarded Waterman 20 months’ of pay in lieu of notice. However, the trial judge refused to deduct Waterman’s pension payments from the severance. The British Columbia Court of Appeal upheld the trial judge’s decision, and the issue was appealed to the Supreme Court of Canada.

Supreme Court’s Decision

The Supreme Court dismissed the appeal finding that pension benefits are not an indemnity for lost salary due to unemployment or inability to work past a certain age. Rather, they are a form of deferred compensation and should be characterized as a property right that does not result from the employee’s termination.

Even beyond pensions, the majority provided a general summary of when benefits will and will not be deducted from wrongful dismissal awards at paragraph 56:

  • Benefits have not been deducted if (a) they are not intended to be an indemnity for the sort of loss caused by the breach and (b) the plaintiff has contributed to the entitlement to the benefit;
  • Benefits have not been deducted where the plaintiff has contributed to an indemnity benefit;
  • Benefits have been deducted when they are intended to be an indemnity for the sort of loss caused by the breach but the plaintiff has not contributed in order to obtain entitlement to the benefit.

Since pension benefits are not intended to replace lost salary and because he contributed to the plan, Waterman’s defined pension benefits fell into the first category, and would not be deductible. While IBM had made all the monetary contributions to fund the pension, Waterman earned the benefits through his years of service.

To arrive at its conclusion, the majority distinguished its earlier decision in Sylvester v. British Columbia, [1997] 2 SCR 315. In that case, the employee was wrongfully dismissed while he was off work and receiving disability payments. The Supreme Court held that the disability payments should be deducted from the wrongful dismissal award. Even though the disability payments were not caused by the wrongful dismissal, the disability payments (like pay in lieu of notice) were intended to be a replacement for the employee’s ordinary salary. This is contrasted with pension benefits, which are intended to be income once the employee is retired, not to replace salary while the employee is still in the workforce.

The majority also likened payments from a defined contribution pension plan to private unemployment insurance benefits. As thoroughly explained in the Supreme Court’s reasons, private unemployment insurance payments are not ordinarily deducted from wrongful dismissal awards, because they arise from a contract between employee and insurer, not the breach of the employment contract.

What This Means for You

The Supreme Court’s reasons may be criticized for permitting the employee to essentially double-dip during the reasonable notice period by receiving both salary and pension benefits. Unfortunately for employers, this decision confirms that pay in lieu of notice will not be deducted by the amount of benefits the employee receives under a defined benefit pension, even where the employment contract is clear that the employee would not have otherwise been able to receive salary and pension benefits at the same time. The decision also limits when an employer may deduct other income replacement benefits.

The majority hinted that the same is likely true for defined contribution benefits, and the dissent is explicit that wrongful dismissal awards should not be deducted on the basis of receiving defined contribution pension benefits.