Receipt of Pension Benefits does not Reduce Damages for Wrongful Dismissal

On Friday December 13, 2013, the Supreme Court of Canada released its decision in IBM Canada Limited v. Waterman, relating to whether damages awarded to an employee for wrongful dismissal should be reduced if the employee receives pension benefits as a result of the dismissal. The majority of the Court decided that pension benefits should not be deducted from wrongful dismissal awards.

This matter came before the courts after Richard Waterman, a 42-year employee, was terminated by IBM Canada without cause, with two months’ working notice. Shortly after his termination, Mr. Waterman obtained part-time alternative employment. At the time of dismissal, Mr. Waterman was 65 years old and eligible for pension benefits.

Mr. Waterman sued IBM Canada for wrongful dismissal, on the basis that he was entitled to a longer reasonable notice period upon termination. The Supreme Court of British Columbia determined that IBM breached Mr. Waterman’s employment contract by failing to provide him with reasonable notice and that he was entitled to an additional eighteen months of notice. As such, Mr. Waterman was awarded the income and benefits that he would have earned during the eighteen month notice period, less the income that he earned in his alternate employment during the notice period. However, the Court did not deduct the pension benefits paid to Mr. Waterman during the notice period from his damage award.

IBM appealed this decision to the British Columbia Court of Appeal on the single issue of the deductibility of pension benefits. The Court of Appeal dismissed the appeal, concluding that pension benefits are not a form of salary replacement, which could be deductible from a damage award, but are instead earned and belong to the employee. IBM again appealed this decision to the Supreme Court of Canada on the same issue. IBM argued that under the law, damage awards should place the plaintiff in the economic position that he or she would have been in had there been no breach of contract, and not in a better position (the “compensation principle”). As such Mr. Waterman’s damages should be reduced by his pension, because otherwise he would be receiving both his regular salary and pension for the same period, and would therefore be placed in a better position than he would have been if the contract was fulfilled. The Majority of the Court determined that pension benefits fall into an exception to the compensation principle and dismissed the appeal, affirming that pension benefits are not deducted from damage awards for wrongful dismissal.

It is also noteworthy that the Majority of the Court spent some effort distinguishing this decision from one of its previous decisions, Sylvester v. British Columbia, which determined that disability benefits were to be deducted from damages awarded for wrongful dismissal. The Court’s decision in Sylvester had previously led to some uncertainty in the law around the deductibility of pensions from damage awards. The Majority highlighted that in Sylvester the disability payments were entirely funded by the employer and the benefits were intended to be an income replacement. Conversely, in the current decision, the employee earned the benefits, had ownership in the benefits and they were not an indemnity for lost earnings.

Though this decision will certainly provide welcomed clarity and will lead to more certainty around the deductibility of pension benefits from damage awards, it is important to recognize that it is limited to unmodified pension benefits. That is, the Majority did not address situations where an employer offers an employee an enhanced pension to compensate the employee for early retirement upon termination. However, the jurisprudence from lower courts does suggest that damage awards can be reduced by the amount of the enhanced portion of the benefit. The reasoning of the Supreme Court in the current decision, while not addressing this issue, does not appear inconsistent with this conclusion.