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Labour & Employment Law Bulletin: Pension benefits will not be deducted from damages for wrongful dismissal
By Nicole Skuggedal with assistance from Michael Gerstein
On December 13, 2013, the Supreme Court of Canada released its decision in IBM Canada Limited v. Waterman, 2013 SCC 70. The decision clarifies that pension benefits paid to an employee during a reasonable notice period should not be deducted from damages for wrongful dismissal.
Mr. Waterman was dismissed from IBM at age sixty-five with only two months’ salary in lieu of notice. Mr. Waterman successfully sued IBM for wrongful dismissal, and the B.C. Supreme Court awarded Mr. Waterman 20 months’ pay in lieu of reasonable notice. Through working for IBM for forty-two years, Mr. Waterman became entitled to a fully vested defined benefit pension. Immediately following his dismissal, Mr. Waterman started to receive his pension benefits. Had Mr. Waterman not been dismissed, his pension benefits would not have started until he turned age seventy-one or retired.
The issue in this case became whether Mr. Waterman’s damages for wrongful dismissal should be reduced by the amount of pension benefits he would receive during his notice period.
The Decision at the Supreme Court of Canada
Mr. Justice Cromwell, writing for the majority, held that pension benefits should not be deducted from wrongful dismissal damages. Justice Cromwell agreed with IBM that the general rule is that an employee should not be put in a better financial position than he or she could have expected had there been no wrongful dismissal. However, he went on to find that pension benefits are an exception to this general rule for three reasons.
Justice Cromwell first explained that pension benefits are different in nature from the types of benefits that should be deducted—such as disability benefits—since they are not meant to be salary replacement. Instead, pension benefits are a type of deferred compensation. Given the special nature of pension benefits, Justice Cromwell found that they should not be deducted.
Second, Justice Cromwell noted that unlike disability benefits, Mr. Waterman could receive both his regular salary and pension benefits at the same time. Mr. Waterman could retire, begin working again, and then continue to receive his pension and also earn new employment income. Accordingly, a strict interpretation of Mr. Waterman’s contract did not lead to the conclusion that pension benefits must be deducted.
And lastly, Justice Cromwell supported his decision with policy. Allowing pension benefits to be deducted would mean that an employer could save money by dismissing an employee who was entitled to a pension as opposed to an employee with no pension entitlement. Finding this outcome undesirable, Justice Cromwell reiterated that pension benefits should not be deducted from Mr. Waterman’s wrongful dismissal damages.
Employers should be aware that the courts will not deduct pension benefits from wrongful dismissal awards. However, as decided in Sylvester v. British Columbia,  2 SCR 315, employers are still allowed to deduct disability benefits paid to an employee from an employer-funded disability plan since these benefits are meant to replace lost salary income.
It is noteworthy however that the Court left open the possibility that an employer and employee may contractually agree to have pension benefits deducted from damages for wrongful dismissal. Currently, few, if any, employers have this type of contractual arrangement in place; however, this is a strategy that some employers may want to consider moving forward.