The Supreme Court of Canada has released its highly anticipated decision in Waterman v IBM Canada Ltd., dismissing IBM Canada Ltd. (“IBM”)’s appeal. This decision clarifies the law regarding whether an employer can deduct pension benefits from damages for wrongful dismissal.

Background of Waterman v IBM Canada Ltd.

Richard Waterman (“Waterman”) worked for IBM for approximately 42 years prior to his dismissal without cause at the age of 65. Immediately following his dismissal, Waterman began receiving pension benefits pursuant to IBM’s Defined Benefit Pension Plan (the “Defined Benefit Plan”), a non-contributory pension plan.

Waterman sued IBM for wrongful dismissal. One of the issues to be determined at trial was whether the pension benefits paid to Waterman should be deducted from an award for wrongful dismissal damages.

The Supreme Court of British Columbia Determines Pension Payments Not Deductible

IBM argued that the Supreme Court of Canada’s reasoning in Sylvester v British Columbia, where the Court held that disability benefits received by an employee during the notice period could be deducted from an award of damages, should be applied to the pension benefits received by Waterman. However, the trial judge determined that he was bound by earlier case law which established that pension payments were not deductible.

The British Columbia Court of Appeal Upholds Trial Decision

The British Columbia Court of Appeal agreed with the trial judge in the result, finding that the pension benefits paid to Waterman were in addition to his salary, not a payment of salary or in lieu of salary, such as disability payments.

The Court stressed that whether or not a former employee will be entitled to both salary and payment of his or her pension benefits during the notice period will turn on the construction of the contractual arrangement between the parties. There was no express provision in either the Defined Benefit Plan or the accompanying Interpretation Document which stated that an employee could not receive both salary and a pension. Although usually an employee would not receive both salary and pension benefits at the same time, the Court noted that this was not the “usual” situation; in this case, IBM had breached its employment contract with Waterman by dismissing him without cause and proper notice, thus triggering the pension payments.

The Supreme Court of Canada Dismisses IBM’s Appeal

The Supreme Court of Canada dismissed IBM’s appeal, finding that pension benefits are a form of deferred compensation for an employee’s service, similar to a form of retirement savings, and thus pension benefits do not constitute an indemnity for wage loss due to unemployment.

The Court concluded that several factors clearly supported not deducting the pension benefits from the wrongful dismissal damages in this case:

  1. Waterman’s pension was not an indemnity for wage loss, but a form of retirement savings;
  2. Although IBM made all the contributions to fund the plan, Waterman’s entitlement to the benefit arose through his years of service; and
  3. Waterman’s contract of employment did not contain any general bar against receiving full pension entitlement and employment income.

The Court also considered that broader policy concerns did not support allowing pension benefits to be deducted from wrongful dismissal damages, as it would provide an economic incentive to dismiss pensionable employees rather than other employees.

Justice Rothstein and Chief Justice McLachlin dissented from the majority judgement, finding that not deducting the pension benefits would result in Waterman receiving more than he bargained for, as Waterman could not have received both his salary and his pension benefits had Waterman continued to work for IBM through the reasonable notice period.

The dissent places the focus on the distinction between a defined benefit plan and a defined contribution plan. Justice Rothstein and Chief Justice McLachlin noted that while deducting benefits received under a defined contribution plan would leave the employee in a worse position than if the contract had been performed, deducting benefits received under a defined benefit plan simply places the employee in the position he or she would have been in had the contract been performed.

Impact of the Waterman v IBM Canada Ltd. Decision

The decision in Waterman v IBM Canada Ltd. is highly significant in that it confirms that pension benefits cannot be deducted from an award of damages for wrongful dismissal. However, although there is now a degree of certainty on this issue as a result of the Supreme Court’s decision, the strong dissent to the majority judgement appears to leave room for future debate on the deductibility of pension benefits from wrongful dismissal damages.