On April 5, 2012, the Supreme Court of Canada said it would hear IBM’s appeal from the B.C. Court of Appeal decision in Waterman v. IBM Canada Ltd. (PDF). This  important case will likely allow the Supreme Court to re-examine damages principles arising in a wrongful dismissal action. The case raises the question of what, if any, damages a terminated employee is entitled to if that person immediately starts receiving benefits from a fully funded pension or disability plan. 

In the case under appeal, the court was asked to decide whether Mr. Waterman was entitled to claim both lost wages and his full pension from an employer-funded defined benefit plan, in respect of the period when he should have received reasonable notice of termination.

The appeal court decided that Mr. Waterman was entitled to both amounts. IBM had argued that this amounted to “double recovery” and was inconsistent with damages principles arising from a breach of contract. Rather than putting the employee in the monetary position in which he would have been had he worked the notice period, Mr. Waterman ended up with both full pay and full pension payments during the notice period, i.e. a “double recovery”.

In 1997, the Supreme Court of Canada, in Sylvester v. British Columbia (PDF), decided that disability benefits, coming from an employer-funded LTD plan, should be taken into account to reduce damages for lost wages during the notice period.  The principles set out by the B.C. Court of Appeal in Waterman appear to fly in the face of the Sylvester principles. 

When the dismissal is without cause, the analysis of damages is premised on an employee being provided reasonable notice of termination. During that reasonable notice, the employee would be at work and entitled to normal wages and benefits. Of course, the employee would not also be entitled to start receiving his/her pension. That is permissible only when employment has ceased. Since the majority of employers do not actually provide reasonable working notice, but rather severance in lieu of notice, the courts are often tasked with determining damages which would “mirror” that which the employee would have earned had he/she worked the reasonable notice period. An award of full severance without deduction for pension payments received from an employer-funded plan, puts the ex-employee in a better financial position than working the notice period would have produced.

In Waterman v. IBM, the Court placed some significance on the fact that the entitlement to pension payments was triggered by IBM terminating Mr. Waterman without cause or proper notice and thereby “effectively forcing him into early retirement”. While the Court of Appeal acknowledges that the full scope of the employment relationship should be examined when assessing damages, the Court appears to drift into the “multiple contracts” theory of damages, which was rejected in Sylvester. While not expressly stated, it seems the B.C. Court of Appeal analyzed the situation, not on a pure contract loss replacement basis but, at least in part, on a tort or fault basis. More particularly, the Court, in commenting on the employment relationship, appears to express certain “moral” concerns about the actions of IBM (which actions were no different than virtually all employers when terminating without cause and without working notice), rather than focusing on the contractual loss of Mr. Waterman. 

While no reasons are issued by the Supreme Court of Canada when agreeing to hear an appeal, it is a positive sign for employers that the highest Court will examine these fundamental principles associated with wrongful dismissal damages. Any guidance by the Supreme Court of Canada about such governing principles and the scope of damages is always welcome. This should be no exception.