IBM Canada Limited v. Waterman (“Waterman”) the Supreme Court of Canada decided that an employee was entitled to keep his pension benefits as well as the full damages awarded to him for wrongful dismissal over the same period of time.
After 42 years of service, and at the age of 65, Richard Waterman (“Mr. Waterman”) was terminated by IBM Canada Limited (“IBM”). He was only provided with 2 months notice. At the time of termination Mr. Waterman was entitled to a full pension pursuant to IBM’s defined benefit pension plan. Over the course of his employment, IBM made all of the contributions to fund the pension plan on Mr. Waterman’s behalf as part of Mr. Waterman’s annual compensation package. Mr. Waterman began receiving his monthly pension following his termination, but commenced legal proceedings against IBM seeking damages for wrongful dismissal.
Court History and Decision
At Trial, the Judge determined that Mr. Waterman was entitled to a total of 20 months notice from IBM. IBM argued that Mr. Waterman’s pension payments over the notice period should be deducted as otherwise Mr. Waterman would be placed in a greater economic position than he would have been in had he not been terminated. IBM stated this would be contrary to the general rule of contract damages, being the compensation principle. The Trial Judge disagreed and IBM appealed the decision to the British Columbia Court of Appeal. The Court of Appeal dismissed the appeal and IBM appealed again to the Supreme Court of Canada
The Supreme Court of Canada analyzed the situation and determined that although the pension was a “collateral benefit” or “compensating advantage”, being a gain or advantage flowing to Mr. Waterman that was connected to IBM’s breach of contract, there are well established exceptions to the general rule of damages where collateral benefits are not deducted from damages awarded and the plaintiff is entitled to both the damages and the collateral benefits. The majority of the Supreme Court of Canada ruled that the pension benefits received by Mr. Waterman fell into the exception carved out for private insurance and similar benefits.
In determining whether to deduct the pension benefits from the notice award, the Court went through an extensive analysis and considered the following:
- whether the collateral benefit was sufficiently connected to the defendant’s breach;
- whether the collateral benefit would not have accrued to the plaintiff “but for” the defendant’s breach;
- whether the collateral benefit was intended to indemnify the plaintiff for the loss resulting from the defendant’s breach; and,
- whether the plaintiff had contributed, directly or indirectly, to the collateral benefit.
The Court established the following general principles based on the case law:
- collateral benefits are not deducted if (a) they are not intended to be an indemnity for the loss caused by the breach and (b) the plaintiff has contributed to the collateral benefits;
- collateral benefits are not deducted where the plaintiff has contributed to the indemnity collateral benefits;
- collateral benefits are deducted when they are intended to be an indemnity for the loss caused by the breach and the plaintiff has not contributed to obtain entitlement to the collateral benefits.
The majority of the Court determined that the pension benefits were not intended by the parties to be an indemnity for lost wages and Mr. Waterman had contributed to the acquisition of the pension through his years of service. The majority acknowledged that pension benefits are different from wages and are not meant to be compensation for the loss of wages, stating that wages are a reward for contemporaneous work but pension benefits are a form of deferred compensation for the employee’s service and are a form of savings plan. The majority noted that in other scenarios pension benefits are not deducted from wrongful dismissal damages or income earned from another employer. For example an employee who is terminated prior to being eligible for retirement is entitled to damages for wrongful dismissal plus all entitlements under the pension plan, including the loss of any pension entitlements during the notice period. Similarly, a retired employee is entitled to receive full pension benefits as well as any employment income earned from new employment without any deduction of the pension benefits. Accordingly, the majority of the Court determined that pension benefits should be viewed as analogous to private insurance benefits and should not be deducted from damages for wrongful dismissal.
Lessons for Employers
The Waterman decision demonstrates that although an employee may be receiving their pension post termination, this does not alleviate or even reduce the employer’s obligation to provide the employee with proper notice over the same period of time. Pension entitlements are separate from notice entitlements and are earned by the employee during the course of employment through hard work even if there is no direct financial contribution to the pension plan by the employee.
Lessons for Employees
Long term employees who are eligible to receive their pension post termination should be aware that they are also entitled to receive reasonable notice following termination even if there is overlap between the notice payments and the pension. Employees who have been terminated should consult with experienced Employment Law counsel to ensure that the termination package provides reasonable compensation prior to accepting the termination package.
Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. Whether you are an employer or employee, we can help. Contact us to see how.
See also our article published in Canadian Employment Law Today, February 19, 2014: “Don’t deduct pension benefits from wrongful dismissal damages: Supreme Court”.
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