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By R. Mark Fletcher and Jeff C. Hopkins

When the Supreme Court of Canada speaks, the entire country listens. Although employment law cases rarely reach Canada’s highest Court, every few years or so, an employment law case will reach the Supreme Court and the case will have national implications for decades to come.

This was true in the 1990s, with landmark employment law cases such as Machtinger v. HOJ Industries Ltd. (1992) and Wallace v. United Grain Growers Ltd (1997) and in the 2000s with cases such as the 2008 decision of Honda Canada Inc. v. Keays and, most recently, in IBM Canada Limited v. Waterman (“Waterman”) which was released by the Court on December 14, 2013. 

In particular, this article will address what happened in Waterman and describe how a majority of the Supreme Court determined that pension benefits received by employees following the termination of employment do not constitute alternate employment income that can be deducted from an employers’ liability to pay wrongful dismissal damages.

There are some practical implications that Waterman will have on employers both now and into the future, given that Canada’s workforce is aging and therefore 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, on a without cause basis with only two months’ notice of termination. At the time IBM terminated his employment, Mr. Waterman was 65 years old. Not surprisingly, 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 made the compelling argument that any pension income that Mr. Waterman received following his termination 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 trial 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 rejecting IBM’s argument as follows:

In my view, employee pension payments, including payments from a defined benefits plan as in this case, are a type of benefit that should generally not reduce the damages 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 constitute 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 treated as deferred compensation that is earned during employment. Pension benefits are therefore not the same as alternate employment 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 employee is also entitled to start collecting pension benefits. Before Waterman, some employers may have acted under the misapprehension 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 positioned 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 reduction 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.

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