Pension benefits not deductible from wrongful dismissal damages

Pension benefits not deductible from wrongful dismissal damages
The Supreme Court of Canada’s decision in IBM Canada Ltd. v. Waterman has confirmed pension benefits generally are not deductible from damages for wrongful dismissal. However, Waterman suggests the result could have been different if the express terms of the applicable employment contract provided for such a deduction.

Waterman was a software technician with IBM Canada for 42 years. He was terminated without cause at 65, on two months’ notice. Upon termination, he was eligible to draw a defined benefit pension from IBM.

At summary trial, Waterman was awarded 20 months of notice. On appeal, IBM argued the wrongful dismissal damages should be reduced by the amount of defined benefits pension payments Waterman received. This argument was unanimously rejected by the British Columbia Court of Appeal. A majority of the SCC also rejected it.

Writing for the SCC majority, Justice Thomas Cromwell decided to not strictly apply the “compensation principle,” which provides that damages should put the plaintiff in the same position he or she would have been in had the defendant performed the contract.

In this case, if IBM had given reasonable notice of termination, Waterman would only have collected his salary and benefits, and would not have received pension benefits. The majority rejected a strict application of the compensation principle, finding this case fell within the “private insurance exception.”

The private insurance exception provides that payments from private insurance coverage are not generally deductible from a damage award. While this principle is generally applied in tort cases, Cromwell reasoned it was equally applicable to pension benefits.

The majority found pension benefits are a form of deferred compensation, and constitute a type of retirement savings. Further, the majority stated pension benefits are not intended to be an indemnity for wage loss due to unemployment.

The majority decision also considered the public policy implications if pension benefits were deductible from wrongful dismissal damages. The majority was concerned if this deduction was allowed, it would create an incentive for employers to terminate older employees who would be entitled to draw pension benefits.

As noted, the SCC has left open the question of whether an employer and employee can agree in an employment contract that pension payments can be deducted from amounts owing to the employee upon termination of employment.

Of course, in some cases the mutual intention of the parties will be to not provide for such a deduction in the terms of an employment contract, in which case the Waterman decision will not allow for a later argument that the parties implicitly intended such a result. However, if an employer intends that pension benefits be set off against pay in lieu of reasonable notice of termination, it should take care to draft express contractual language to provide for that.

Further, even when such language is drafted, it is likely the issue of deductibility of pension benefits from termination payments will not arise until many years later. Because of that, employers must also be careful to ensure the application of the “changed substratum” doctrine does not take away what was agreed to in an employment contract upon an employee’s hire as that same employee is promoted through the ranks in later years.

As employees assume new positions over time, with accompanying changes to their terms of employment, care should be taken to validly renew old covenants, including any that may provide for deductibility of pension benefits from termination payments.

Kevin MacNeill is a partner with Emond Harnden LLP. Samantha Seabrook is an associate with Hicks Morley Hamilton Stewart Storie LLP.

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