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Supreme Court of Canada Holds that Pension Benefits Should Not Diminish Damages for Wrongful Dismissal

By Shafik Bhalloo (posts) and Devin Lucas (posts)

 

by Devin Lucas and Shafik Bhalloo

In IBM Canada Limited v. Richard Waterman[1], Richard Waterman (“Waterman”) was employed by IBM Canada Ltd. (“IBM”) for approximately 42 years before he was dismissed on March 23, 2009 without cause.  Waterman, aged 65, was given two months’ notice.  Prior to his dismissal, Waterman had been a long-standing member of IBM’s defined benefit pension plan (the “Plan”).  According to the terms of the Plan, IBM contributed a portion of Waterman’s salary to the Plan on his behalf.  The Plan guaranteed certain benefits upon Waterman’s retirement.  Upon termination, Waterman was eligible for a full pension; however, both his employment contract and the Plan did not address whether Waterman could receive his salary and pension concurrently.  Waterman refused to accept the severance package offered by IBM and filed suit, claiming damages for wrongful dismissal.

 

Trial Decision

One of the primary issues before the British Columbia Supreme Court was whether the pension benefits paid to Waterman should be deducted from an award for damages for wrongful dismissal.   After a summary trial hearing, the Trial Court awarded Waterman 20 months’ notice and refused to deduct the pension benefits paid to Waterman during the notice period in determining his damages.  With respect to the issue of the deductibility of pension benefits, the Trial Court held that it was bound by the British Columbia Court of Appeal decision in Girling v. Crown Cork & Seal Canada Inc. [2]  In Girling, the Court of Appeal had expressly rejected the argument that retirement benefits must be deducted from an award of damages.  The Trial Court cited Girling, at paragraph 46, as follows:

It was argued on behalf of the employer that the governing principle in awarding damages for wrongful dismissal is prima facie the amount the employee would have earned had the employment continued, in this case, until the end of the notice period.  It was submitted that this employee would not have been entitled to receive a retirement pension while still working and receiving pay. In short, an employee is not entitled to pension and pay at the same time and without deduction one from the other.  I do not accept this.

I am in accord with the resolution of this conundrum by the Chambers judge who determined that the pension benefits of the employment contract are collateral benefits of the employment contract which should not be considered income and should not be deducted from damages which are income in lieu of notice. The damages (pay in lieu of notice) flow from breach of the employment contract and the collateral pension benefits are payable pursuant to the contractual arrangements therefor. They are not to be modified by the appearance of duplication.

In the Trial Court’s opinion it was bound by Girling and noted that until a higher court holds to the contrary, pension benefits are not deductible from an award of damages for wrongful dismissal.

The British Columbia Court of Appeal Dismisses Appeal

IBM appealed the decision to the British Columbia Court of Appeal and asked for an order that pension benefits paid to Waterman during the applicable notice period be deducted from the award of damages against IBM.   Madam Justice Prowse, writing for a unanimous court, dismissed IBM’s appeal.  In so holding, Madam Justice Prowse found that the pension benefits paid to Waterman were not a substitute for salary, nor were they payments made in lieu of salary.

According to Madam Justice Prowse, whether or not a dismissed employee would be entitled to both salary and payment of his or her pension benefits during the notice period turns on the interpretation of the contractual relationship between the employer and the employee.  As noted above, there was nothing in the Plan or the employment contract that prohibited Waterman from receiving pension benefits and salary simultaneously.

Madam Justice Prowse went on to hold that it is not inherently contradictory for an employee to receive both a salary and pension benefits and, in fact, there are many examples of that occurring in today’s workforce, including employees receiving statutory pension benefits, private pension benefits from employment, and payments from an employer where the employee has earned a pension, retires, and is subsequently hired back.

In obiter, Madam Justice Prowse briefly considered broader policy arguments and stated at para. 64:

[64]   I would add that I do not take the position that Mr. Waterman is entitled to his pension benefits because it would be “wrong” for IBM to receive a set-off of these benefits against salary.  In other words, my decision is not predicated in any way on the concept of punishing a wrongdoer.  I do not think that notions of “right” and “wrong” are useful in dealing with what is essentially a contract analysis.  I note as a practical matter, however, that if pension benefits could be deducted from salary in circumstances such as these, the result could be viewed as an invitation to employers facing economic hardship to terminate senior employees with many years of service who have vested pension rights and entitlement to a significant pension, rather than more junior employees without vested rights, since laying off the former would result in a significant offset of pension against salary in estimating damages for wrongful dismissal.  A policy argument could be mounted for arguing that the employment contract should be interpreted in such a way to avoid such a result, but no such policy argument was advanced in this case.

 

The Supreme Court of Canada Decision

On Appeal by IBM, the Supreme Court of Canada considered the issue of whether Waterman’s pension benefits should be deducted from the wrongful dismissal damages payable by IBM.  In a 7-2 divide, the majority of the Supreme Court of Canada dismissed IBM’s appeal and ruled that Waterman’s pension benefits were not deductible.

Justice Cromwell, writing for the majority, held that employee pension payments, including payments from a defined benefits plan, should normally not reduce the damages otherwise payable for wrongful dismissal.  Justice Cromwell found that pension benefits are a type of deferred compensation for the employee’s service and can be likened to a form of retirement savings.  Justice Cromwell rejected the proposition that pension benefits are intended to protect an employee from wage loss due to unemployment.  According to Justice Cromwell, two factors weighed heavily in favour of not deducting Waterman’s pension benefits from his damages award.  Firstly, Waterman had contributed to the Plan from his salary.   Secondly, as noted above, pension benefits are not intended to indemnify an employee for lost wages.  On this basis, Justice Cromwell concluded that Waterman’s interest in the pension benefits had similar hallmarks to property rights and, accordingly, Waterman had enforceable rights over the benefits.

Justice Cromwell briefly touched upon certain policy concerns.  Specifically, Justice Cromwell expressed unease regarding possible incentives for employers to terminate employees possessing pensions rather than non-pensionable employees and stated at para. 93:

[93]   These factors are also relevant here, although, in this case, they support not deducting rather than deducting the benefits. Unlike in Sylvester, non-deduction in this case promotes equal treatment of employees. If deduction is permitted, an employee who is eligible to receive his or her pension but has not reached 71 years of age can, by means of wrongful dismissal, be forced to retire and draw on his or her pension benefits. By contrast, an employee who is not entitled to his or her pension receives either a deferred pension or the commuted value of it plus full damages for wrongful dismissal and an employee over the age of 71 receives both pension and employment income.  Deducting the benefits only in the case of employees in Mr. Waterman’s situation would constitute unequal treatment of pensionable employees. Moreover, deductibility seems to me to provide an incentive for employers to dismiss pensionable employees rather than other employees because it will be cheaper to do so. This is not an incentive the law should provide. While this is a broader policy consideration, it is directly related to the benefit in question and has a reasonable basis in fact.

In a strong dissent, Chief Justice McLachlin and Justice Rothstein found that Waterman’s pension benefits should be deducted from the calculation of his damages award for wrongful dismissal.  The dissent focused on the governing principle of damages in the case of breach of contract, which is to put the non-breaching party in the position he or she would have been in had the contract been performed.  By declining to deduct Waterman’s pension benefits, the dissent ruled that Waterman was receiving a windfall, and that Waterman would get more than he bargained for and would charge IBM more than it agreed to pay.  In contrast to the majority’s approach, the dissent found that employer-provided benefits could not be separated from an employment contract.  In the dissent’s view, they are to be considered as one “single contract” and, as such, Waterman’s entitlements largely depend on the ordinary rule of contract damages.

The Effect of the Supreme Court of Canada’s Ruling

This leading decision of the Supreme Court of Canada is noteworthy as it affirms the view that pension benefits should not ordinarily be deducted from wrongful dismissal damages.  This ruling favours pension-eligible employees and provides some much-needed certainty to this area of law.  Nevertheless, given the strong dissent advanced by Chief Justice McLachlin and Justice Rothstein, there is still some possibility of debate in future cases on the deductibility of pension benefits from wrongful dismissal damages.  Moreover, it is unclear how a Court would rule in the face of an employment contract or pension plan that contained a clause holding that wrongful dismissal damages and pension benefits are not to be paid concurrently.


[1] 2013 SCC 70

[2] (1995), 9 B.C.L.R. (3d) 1

 

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