Are defined benefit pension benefits deductible from wrongful dismissal damages? According to a majority of the Supreme Court of Canada, the answer is no, they are not.
In its decision in IBM Canada Limited v. Waterman, 2013 SCC 70 (CanLII) seven of this county’s nine Supreme Court Justices (LeBel, Fish, Abella, Cromwell, Moldaver, Karakatsanis and Wagner JJ.) agreed that pension benefits are not properly deductible from wrongful dismissal damages. Justice Rothstein and Chief Justice McLachlin disagreed.
As is set out in the headnote to the case:
IBM dismissed the plaintiff employee Richard Waterman without cause on two months’ notice. Waterman was 65 years old, had 42 years of service, and had a vested interest in IBM’s defined benefit pension plan. Under the plan, IBM contributed a percentage of Waterman’s salary to the plan on his behalf. Upon termination, Waterman was entitled to a full pension, and his termination had no impact on the amount of his pension benefits.
Waterman sued to enforce his contractual right to reasonable notice. The trial judge set the appropriate period of notice at 20 month and declined to deduct the pension benefits paid to Waterman during the notice period in calculating his damages. The British Columbia Court of Appeal dismissed the appeal.
Writing for the majority, Justice Thomas Cromwell decided:
Employee pension payments, including payments from a defined benefits plan, should generally not reduce the damages otherwise payable for wrongful dismissal. Pension benefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings. They are not intended to be an indemnity for wage loss due to unemployment.
In coming to that conclusion, Justice Cromwell relied on the “private insurance exception,” which essentially provides that where an employee purchases his own insurance, the proceeds of that insurance plan cannot be used as a deduction by a wrongdoer who does harm to that individual. Put another way, the private insurance exception does not allow a wrongdoer to benefit from the foresight of his or her ‘victim.’
For the minority, Justice Marshall Rothstein held:
Deducting the benefits would provide the wrongfully terminated employee with exactly what he would have received had the employment contract been performed: an amount equal to his salary during the reasonable notice period and thereafter defined benefits for the rest of his life. This is materially different from a defined contribution plan, which provides an employee with a finite total amount or lump sum of retirement benefits. Deducting benefits that a wrongfully terminated employee receives from a defined contribution plan would leave the employee in a worse position that he would have been in had his employment contract not been breached. In this case, Waterman’s wrongful dismissal had no impact on his pension entitlement, and he could not have received both his salary and his pension benefits had he continued to work for IBM through the reasonable notice period. Whether the benefit is non-indemnity or contributory does not answer the question of whether the plaintiff will be provided with the financial equivalent of performance or will receive excess recovery under the governing principle of contract damages.
Although this may surprise some readers given the implications of the decision, from a principled perspective I find myself signing on with the dissenting opinion in this case. Had I been asked, (clearly I wasn’t) I would have agreed with Justice Rothstein.
The issue for me is the double recovery and the fact that, had IBM provided Mr. Waterman with working notice he could not have obtained both his salary and his pension.
Given that it has always been my understanding that the purpose of “wrongful dismissal” damages is to provide the dismissed employee with the salary he would have otherwise earned had the employee been dismissed on proper (working) notice, and not to punish for the “wrongful” act, I fail to see why compensation paid in lieu of such wages should be treated differently.
Furthermore, I agree with Justice Rothstein that it should matter whether the benefits come from a defined benefits plan or a defined contribution plan. Where the benefits are provided from a DB plan rather than a DC plan, I fail to see why they should not be deducted during the reasonable notice period. Had the benefits been from a DC plan, then I would have agreed with Justice Cromwell’s approach of treating those benefits like private insurance.
Alas, I was not asked and the Supreme Court of Canada does have the final word on this issue, at least until it revisits this issue in the future. While I find myself agreeing with the minority in this case, it’s always nice to know that at least the Chief Justice of the nation shares your opinion.
Takeaways for Employees
The takeaway for employees would appear straightforward: if your employer attempts to deduct your pension benefits from your pay in lieu of notice of termination, then unless you contractually agreed to such an arrangement (which was not before the Court in this case,) such a deduction is likely wrongful. If you believe that you have been wrongfully dismissed, the professional, experienced and cost-effective employment lawyers for employees at Ottawa's Kelly Santini LLP would be happy to be of service to you. To reach the author of this blog, Sean Bawden, email email@example.com or call 613.238.6321 x260.
Takeaways for Employers
This case provides a very important lesson for employers: sometimes it will be exponentially cheaper to provide your employee with working notice rather than payment in lieu. The one thing the nine justices agreed on what that had IBM provided Mr. Waterman with working notice, it would not have been required to pay him both salary and his pension. Ouch.
If you are an employer and are considering terminating the employment of one of your employees, then it may be prudent to seek professional legal advice. The professional, experienced and cost-effective employment lawyers for employers at Ottawa's Kelly Santini LLP would be happy to be of service to your business or organization. To reach the author of this blog, Sean Bawden, email firstname.lastname@example.org or call 613.238.6321 x260.--
As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation and it is always prudent to seek professional legal advice before taking any decisions on one’s own case.
Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP, and part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice. He is a trustee of the County of Carleton Law Association.