Wednesday, January 08, 2014

Supreme Court of Canada Rules on Pension Income and Damages in Wrongful Dismissal

The Supreme Court of Canada's recent ruling in IBM Canada Ltd. v. Waterman provides a great deal of clarity on the issue of collateral benefits such as pensions in a wrongful dismissal action and whether such a benefit ought to be deducted from the amount owed by the employer on account of pay in lieu of notice.


On March 23, 2009, IBM Canada terminated Richard Waterman's employment, after forty-two years of service, on a without cause basis. At the time of his dismissal, Mr. Waterman was sixty-five years of age and was entitled to a full pension under IBM's defined benefit pension plan. Further, "IBM told Mr. Waterman that on termination, he would be treated as a retiree and that he must begin receiving monthly pension payments as of that date" (IBM v. Waterman, para 7).

Mr. Waterman sued for wrongful dismissal and was awarded 20 months pay in lieu of notice at trial. IBM appealed this decision arguing Mr. Waterman's benefits ought to be deducted from the salary and benefits payable during the notice period.

Issues Before the Court

On appeal to the Supreme Court of Canada, IBM argued two positions:

  1. Damages for wrongful dismissal are compensatory: The purpose of wrongful dismissal damages is to only indemnify an employee for the loss suffered as a result of the dismissal. However, in awarding Mr. Waterman damages for the full notice period without deduction of the pension benefits received during that period, Mr. Waterman is in a better economic position than he would have been in had IBM not breached the employment contract.
  2. Sylvester v. British Columbia: In this 1997 decision, the Supreme Court of Canada held that disability benefits and damages for wrongful dismissal are based on a contrary assumption about the ability of the employee to work. As a result of this decisiondisability benefits received during notice period were deducted from damages for wrongful dismissal. IBM argued that similar to disability benefits, pension benefits also ought to be deducted.
Pension Benefits

Rejecting both of IBM's arguments, the Supreme Court concluded that unlike disability benefits, pension benefits received during the notice cannot be deducted from wrongful dismissal damages.

The Court went on to describe pension benefits as a "collateral benefit" which is a source of income other than wrongful dismissal damages payable by an employer to ameliorate the loss suffered by an employee as a result of a wrongful dismissal. The precedent established in Sylvester does not imply that all benefits received by a plaintiff raise a collateral benefits problem. In order for there to be deduction, the following factors ought to be considered:

  • The benefit has to be be sufficiently connected to the defendant's breach - just because a benefit is loosely connected to the defendant's wrongful conduct, the defendant should not get the credit for having it deducted from wrongful dismissal damages;
  • The purpose of the benefit - if the benefit is specifically intended to indemnify the plaintiff for the loss resulting from the defendant's breach (such as employment insurance benefits), the benefit should be deducted from wrongful dismissal damages; 
  • Benefits received by a plaintiff through private insurance - whether its disability benefits, employment insurance or pension benefits, if provided by a private insurer, such benefits are not deductible from damage awards.
Where the Law Stands

Although this case is clearly a win for employees, surprisingly Sylvester remains good law.  As some leading professionals in the employment law community have noted, rather than distinguishing this case from Sylvester, the Supreme Court could have just as easily done away with the earlier precedent.

Considering mandatory retirement is no longer permitted and that Canadians face an impending pension crisis, it is conceivable that the Supreme Court foresaw the struggles pension-eligible employees would be facing in the coming years.

Last year, the Supreme Court dealt a blow to pensioners in Sun Indalex Finance, LLC v. United Steelworkersruling against the claims of workers and retirees wanting to place pension plans to rank ahead of creditors in corporate bankruptcies.With this ruling, the Court prevented the pendulum from swinging too far away from protection of wrongfully dismissed employees.

- Nitin Pardal, Toronto
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