The decision of the Supreme Court of Canada in IBM Canada Limited v Richard Waterman, [2013] 3 S.C.R. 985, considered whether employees’ pension benefits should be deducted from damages for wrongful dismissal. The majority concluded, on the facts of this case, that no such deduction should occur.

The company dismissed a 65-year-old employee without cause after 42 years of service. The employee sued for wrongful dismissal. The trial judge awarded damages in lieu of 20 months’ notice. The employee had been receiving pension benefits following his dismissal, in the amount of approximately $2,124 per month. Accordingly, the company argued that the employee’s pension benefits should be deducted from the damages for wrongful dismissal, because the employee would not have been entitled to claim his pension during the working notice period. Both the trial judge and the British Columbia Court of Appeal rejected the company’s position. These decisions were appealed to the Supreme Court of Canada (SCC).

In affirming the lower courts’ decisions, the SCC held that an employee’s pension benefits are a type of deferred compensation that will generally not be deducted from wrongful dismissal damages.   Unlike sick leave or disability benefits, which the SCC had previously held were deductable from wrongful dismissal damages in some circumstances (see Sylvester v. British Columbia, [1997] 2 S.C.R. 315), the SCC found in Waterman that pension benefits should not be considered an indemnity for the employee’s loss arising out of the wrongful dismissal. The SCC noted that the employee had contributed to the pension benefits through his years of service.  In this respect the pension benefit is not an indemnity for lost work, but rather an earned entitlement similar to a property right.  On this reasoning, the SCC concluded that no windfall would be received by earning both the earned entitlement of the pension and the wrongful dismissal damages.

Interestingly, the SCC found there to be policy reasons to not deduct pension benefit entitlements from wrongful dismissal damages, as that could be seen as incentivizing the termination of retirement age employees.

Two dissenting Justices concluded that the employee’s receipt of his pension benefits, in addition to damages, put him in a better position than he would have been in had he been given adequate notice and therefore should be offset from each other.  The minority applied Sylvester as directly applicable authority that an employee cannot, under a single contract of employment, barring contractual provisions to the contrary, receive salary as if he is working and pension benefits as if he is retired at the same time.  The minority’s view did not win the day.

The majority’s reasoning means that employers cannot presume that eligibility for pension benefits will offset reasonable notice entitlements for terminated employees. Generally, an employee will be entitled to claim for the full extent of a reasonable notice period (subject to the terms and conditions of the employment contract) regardless of whether he or she is in receipt of pension benefits. Wrongful dismissal damages will be awarded in addition to pension benefits received for the same time period, where those pension benefits are considered an earned right rather than an indemnity for lost work.

Moreover, the reasoning of the majority suggests the SCC is astute to the policy ramifications of an aging workforce and were quick to take care to ensure that aging workers are not disadvantaged by characteristics such as pension eligibility. This coincides with other recent decisions grappling with the effect of an aging workforce on employment law entitlements at termination.

If pension benefits are intended to be deducted from wrongful dismissal damages, employers will need to be careful to include clear language in the drafting of employment and pension contracts and policies. For accrued benefits, it may be impossible to make such changes once benefits have been earned though it may be possible to introduce on a going forward basis. Based on the reasoning of the SCC, barring such clear intention, the presumption will be that pensions are earned benefits not subject to offset from reasonable dismissal damages.