into the future, given that Canada’s workforce is aging and there-fore
more and more terminated employees will start collecting
pension benefits following the termination of their employment.
THE FACTS IN WATERMAN
Mr. Waterman was a long-term IBM employee. He worked at IBM
for more than 42 years and IBM terminated him without cause with
only two months’ notice of termination. At the time IBM terminat-ed
his employment, Mr. Waterman was 65 years old. Mr. Waterman
retained legal counsel and commenced a wrongful dismissal lawsuit
against IBM, seeking damages for lost salary and benefits. It must
also be understood that after his wrongful dismissal by IBM, Mr.
Waterman also started to receive his pension benefits from his IBM
pension plan.
The fact that Mr. Waterman collected pension benefits from
IBM following the termination of his employment became the
focal point of IBM’s defense. In a nutshell, IBM argued that any
pension income that Mr. Waterman received following his termi-nation
from IBM should be deducted in the same way that new
employment income is normally set off against or deducted from
wrongful dismissal damages. The trial judge determined that the
appropriate notice period for Mr. Waterman was 20 months.
Critically, the trial judge rejected IBM’s defense that the $2,124
per month received by Mr. Waterman in pension benefits should
be deducted from the 20 months’ damages. IBM appealed the tri-al
decision to the British Columbia Court of Appeal. IBM’s appeal
was dismissed.
THE SUPREME COURT OF CANADA’S
DECISION IN WATERMAN
IBM ultimately appealed to the Supreme Court of Canada, who
also rejected IBM’s set off or mitigation of damages for pension
benefits received argument. Mr. Justice Cromwell, speaking for the
Supreme Court, explained the Supreme Court’s reason for reject-ing
IBM’s argument as follows:
In my view, employee pension payments, including pay-ments
from a defined benefits plan as in this case, are a
type of benefit that should generally not reduce the dam-ages
otherwise payable for wrongful dismissal. Both the
nature of the benefit and the intention of the parties
support this conclusion. Pension benefits are a form of
deferred compensation for the employee’s service and con-stitute
a type of retirement savings. They are not intended
to be an indemnity for wage loss due to unemployment.
The parties could not have intended that the employee’s
retirement savings would be used to subsidize his or her
wrongful dismissal. There is no decision of this Court in
which a non-indemnity benefit to which the plaintiff has
contributed, such as the pension benefits in issue here, has
ever been deducted from a damages award.
So even though Mr. Waterman received the benefit of both
wrongful dismissal damages and pension benefits income, which
arguably puts him in a better place than he would have been had
he been provided with reasonable notice of his termination by
IBM, the Supreme Court decided to draw a clear distinction in
the case of pension benefits intended to provide income for an
employee’s retirement. In this case, the pension benefits were treat-ed
as deferred compensation that is earned during employment.
Pension benefits are therefore not the same as alternate employ-ment
income.
WATERMAN’S IMPLICATIONS FOR EMPLOYERS
Employers cannot rely on an employee’s entitlement to receive
pension benefits following termination as a basis to reduce its
common law legal obligation to provide severance pay in lieu of
reasonable notice. Practically, employers will have less leverage
in negotiating a reduced severance package because the employ-ee
is also entitled to start collecting pension benefits. Before
Waterman, some employers may have acted under the misappre-hension
that pension benefits could be set off against severance
and attempted to use this as leverage to negotiate for a reduced
severance package. Waterman removes any doubt that may have
existed in the law and plaintiff ’s legal counsel will be well po-sitioned
to reject employer severance offers that have been
discounted due to pension benefits entitlement. Accordingly, in
view of Canada’s aging workforce, severance costs will likely be
higher for employers and it is clear that there will be no reduc-tion
in these costs where the terminated employee is in receipt of
employer pension benefits. ■
Mark Fletcher and Jeff Hopkins are partners with the boutique
employment law firm Grosman, Grosman & Gale LLP, Toronto, Ont.
legal words
EMPLOYERS CANNOT RELY ON AN EMPLOYEE’S ENTITLEMENT TO RECEIVE PENSION
BENEFITS FOLLOWING TERMINATION AS A BASIS TO REDUCE ITS COMMON LAW
LEGAL OBLIGATION TO PROVIDE SEVERANCE PAY IN LIEU OF REASONABLE NOTICE.
Photo by Sergey Mironov / Shutterstock
18 ❚ MAY/JUNE 2014 ❚ HR PROFESSIONAL