The Supreme Court of Canada (SCC) released its judgment in IBM Canada Limited v. Waterman on December 13, 2013. In its decision, the majority of the SCC (the Majority) held that pension payments received by an employee after his termination were not deductible from damages awarded to him for wrongful dismissal.

The SCC's decision confirms that:

  • Employee pension payments should not generally reduce the damages payable by an employer for wrongful dismissal: pension benefits are deferred compensation based on employees' service and are a type of retirement savings; they are not typically intended to provide income replacement in the event of termination.
  • The form of a pension plan, whether it is a defined benefit (DB) or defined contribution (DC) plan, does not change the essential nature of pension benefits, insofar as they are generally a form of retirement savings and therefore not deductible from damages payable for wrongful dismissal.

This decision confirms the established line of cases in Canada and other common law jurisdictions which have treated pension payments as not being deductible from wrongful dismissal damages, without overturning prior decisions (including a decision of the SCC) relating to the deductibility of other forms of income replacement, such as disability benefits.

BACKGROUND

Richard Waterman (Waterman) was employed for 42 years by IBM Canada Limited (IBM). During his employment, Waterman participated in a defined benefit pension plan of IBM, a registered pension plan fully funded by the employer (the DB Plan). In 2009, IBM made the decision to dismiss Waterman's employment without cause due to a depressed economic climate and offered him a severance package. Waterman rejected IBM's severance package and brought an action for wrongful dismissal. As he was 65 years of age, Waterman was required to and began receiving pension payments in accordance with the terms of the DB Plan.

Waterman succeeded in his claim for wrongful dismissal at trial. However, IBM alleged that the pension payments received by Waterman ought to have been deducted from his wrongful dismissal damages because he would have never received such payments had he actually worked throughout his notice period. As it was agreed that Waterman had by the time of his dismissal reached his maximum years of pensionable service under the DB Plan, his wrongful dismissal damages did not include any lost pension accruals during the notice period. The British Columbia Supreme Court held that the pension payments were not deductible from Waterman's wrongful dismissal damages, a decision which was upheld by the British Columbia Court of Appeal.

DECISION OF THE SUPREME COURT OF CANADA

The Majority held that Waterman's pension payments werenotdeductible from his wrongful dismissal damages.

In coming to this conclusion, a key issue considered by the Majority was whether the 1997 decision of the SCC in Sylvester v. British Columbia applied to the payments Waterman was receiving under the DB Plan. In Sylvester, the SCC ruled that an employee's long-term disability benefits, paid from a disability benefits plan funded entirely by an employer, were deductible from his wrongful dismissal damages. The Majority held that unlike Sylvester, the pension benefits Waterman received were not intended to provide a wage replacement benefit due to his inability to work (as the disability benefits in Sylvester were). The Majority confirmed that the pension benefits received by Waterman were of an entirely different nature than disability benefits as they were essentially retirement savings to which Waterman became entitled as a result of his years of service. In this regard, the Majority observed that vested pension benefits were akin to property, over which an individual has specific and enforceable rights, rather than a form of indemnity against loss of income.

The Majority further held that policy considerations supported not deducting pension benefits from wrongful dismissal damages, noting that to allow so would economically incentivize employers to terminate employees eligible to receive pensions.

Notwithstanding the general principles articulated regarding the deductibility of pension payments from wrongful dismissal damages, the Majority noted that employers concerned about double recovery from a dismissed employee could potentially address those concerns by amending their pension plan texts to expressly permit such deductions.

KEY TAKEAWAYS

This SCC decision highlights the essential nature of pension benefits as a form of deferred compensation that is akin to retirement savings. Accordingly, employers ought to be aware that:

  • Pension benefits, whether from a DB or DC plan, will generally not be deductible from an employee's damages for wrongful dismissal.
  • There is a possibility that an employer may expressly contract for the reduction of wrongful dismissal damages by the value of pension payments made during an employee's reasonable notice period, either by amending registered or supplemental pension plan texts or by providing for this in the offer letter or employment contract. While the SCC did not give any guidance as to how such a provision might be drafted, employers interested in exploring this alternative are encouraged to consult legal counsel before amending plans or employment documents to provide for this.
  • Existing law regarding the deductibility of payments from other wage loss indemnity programs (such as disability insurance) remains valid and unaffected by this decision. However, an employer's ability to make such deductions is a matter of contractual interpretation and employers ought to consult legal counsel before taking such action.

By establishing a bright-line rule prohibiting deduction of pension payments from wrongful dismissal damages, the Majority has avoided potential unfairness to pension plan members who are required, by the terms of their plan, to commence a pension on termination relative to members who are permitted to defer commencement of pension benefits or transfer their accrued benefit from the plan to another retirement savings vehicle, and who would therefore not be required (or be unable) to receive pension payments during the notice period. In rejecting the analysis put forth by two dissenting justices which distinguished DB benefits from DC benefits (and argued it would be proper to deduct DB benefits, but not DC benefits, from wrongful dismissal damages), the Majority also opted in favour of a uniform rule that would apply to all forms of registered pension plans, regardless of the type of benefit offered or whether the plan is contributory or non-contributory.