The Supreme Court recently decided this issue in Waterman v. IBM, 2013 SCC 70, finding that pension benefits received during the notice period (notice of termination in civil law) were not deductible from damages paid to an employee for dismissal without cause.
The Law as it Stood Previously
In Sylvester v. British Columbia,  2 S.C.R. 315, the Supreme Court had to decide whether an employee’s disability benefits could be deducted from the employee’s severance in connection to a dismissal without cause.
The Court decided that the disability benefits were an integral part of the employment contract and, therefore, that the question of their deductibility turned on the terms of this contract and the intention of the parties. This analysis led to the Court’s finding that the contract terms did not permit an employee to receive both salary and disability payments and that such payments were to be deducted from the notice of termination provided.
A decision to the contrary, observed the Court, would effectively provide more favourable treatment to an employee dismissed while on disability leave compared to an employee present at work when terminated.
Mr. Waterman had been working for IBM for 42 years when he was dismissed without cause. The employer provided him with two months’ notice. Mr. Waterman was 65 years old and eligible to receive pension benefits. In fact, following his dismissal, he received monthly pension payments of $2,124.25.
Mr. Waterman sued his former employer for wrongful dismissal. The trial judge held that he was entitled, under the circumstances, to a 20-month period of notice. However, the judge did not deduct the pension benefits paid to the employee from the damages awarded.
On the basis notably of the decision in Sylvester v. British Columbia, IBM appealed the judgment arguing that an amount equivalent to the employee’s pension benefits should have been deducted from the damages awarded. The Court of Appeal did not accept this argument and determined instead that absent any specific provision in the employment contract, pension benefits were not deductible from damages awarded in connection with a dismissal. The Court of Appeal also determined that disability benefits and pension benefits were of entirely different natures.
Decision of the Supreme Court of Canada
In a decision that included a dissenting opinion by the Chief Justice, the Supreme Court of Canada dismissed IBM’s appeal, finding that pension benefits are a form of benefit that should generally not be deducted from damages otherwise payable for wrongful dismissal. In fact, Justice Cromwell, for the majority, stated that pension benefits are not intended to be an indemnity for wage loss due to unemployment.
The Court drew several conclusions from its review of the caselaw dealing with the issue of whether or not collateral benefits are deductible. First, there is no single marker to sort which benefits fall within the private insurance exception – a well-established situation in which compensating advantages are not deducted.
This said, one widely accepted factor relates to the nature and purpose of the benefit. The more closely the benefit is an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction, with the converse also being true. On the other hand, a benefit will not be deducted if it is not an indemnity for the loss caused by the defendant and the plaintiff has contributed to the indemnifying plan in order to obtain entitlement to it. The Court added that there is room in this analysis for broader policy considerations such as the desirability of equal treatment of those in similar situations and the need for clear rules.
In the case before the Court, it held that Mr. Waterman’s pension benefits did not represent an indemnity for loss of income but rather constituted a type of retirement savings. Indeed, in the Court’s view, the payment of the pension benefits, although the plan was entirely funded by the employer, was in consideration of the employee’s service.
The Court distinguished, among others, Sylvester, stating that the pension benefits were clearly not an indemnity benefit for loss of salary due to inability to work. In Sylvester, the purpose of the disability insurance plan was to provide a substitute for salary, and the plan provided that the benefits were to be reduced by other income received by the employee. The benefits were therefore linked to, and defined by, the extent of actual income loss. In the present case however, the Court viewed pension benefits as an entitlement akin to a property right, a form of deferred compensation. The right to damages for unjust dismissal and the right to pension benefits are thus based on incompatible assumptions.
Finally, the Court concluded that the law should not provide employers with an economic incentive to dismiss pensionable employees rather than other employees.