Legal Alert: SCC Clarifies What Benefits are Deductible from Pay In Lieu of Reasonable Notice – and Pension Benefits Are Not One

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Legal Alert: SCC Clarifies What Benefits are Deductible from Pay In Lieu of Reasonable Notice – and Pension Benefits Are Not One

: December 17, 2013

On December 13, 2013 the Supreme Court of Canada decided pension benefits, regardless of the type of pension plan, are not deductible from damages for wrongful dismissal.

Mr. Waterman was almost 66 years old and had worked for IBM for 42 years. IBM terminated his employment without cause and gave him 2 months’ of working notice. Mr. Waterman was entitled to receive pension benefits and began to do so immediately. However, he had no intention of retiring so he sued IBM for wrongful dismissal. The majority of the SCC decided the pension benefits should not be deducted from the 18 months’ pay in lieu of reasonable notice (20 months total less the two months of working notice) the trial court awarded to Mr. Waterman:

Pension Benefits Not Deductible. Pension benefits are not intended to be an indemnity for wage loss due to unemployment and should not be used to subsidize an employee’s wrongful dismissal – and therefore should not be deducted from a court award for pay in lieu of notice.

No Double Recovery. The SCC rejected IBM’s argument that not deducting the pension benefits is contrary to the compensatory purpose of an award for wrongful dismissal, and would put Mr. Waterman in a better economic position than if IBM had not breached his employment agreement and given him reasonable notice of termination. When a party has received a benefit that provides him with excess recovery – a compensation advantage – a court should consider whether that benefit:

would not have accrued but for the employer’s breach of the employment agreement, or
was intended to indemnify the employee for the loss resulting from the breach (e.g., lost income).

If the answer to either is yes, there is a compensation advantage and the court should determine whether to deduct the benefits, taking into consideration:

the nature and purpose of the benefit;
whether the employee contributed to the benefit;
whether there is a right of subrogation; and
broader policy considerations.

The general purpose of pension benefits is to provide a form of retirement savings and not an indemnity for wage loss. Mr. Waterman may not have contributed money to the pension plan, but he “contribute[d]” by his 42 years of service and “earned” the pension benefits. Nothing in his employment agreement prohibited him from receiving pension benefits concurrent with salary from another employer, so the court could infer nothing prohibited him from receiving salary from IBM concurrent with his pension. The SCC decided this did not constitute double recovery.

Disability Benefits Distinguished. The SCC also rejected IBM’s argument that the Court had to follow its 1997 decision in Sylvester v. British Columbia, in which it decided that disability benefits are deductible from pay in lieu of reasonable notice. Pension benefits are different from disability benefits in nature and purpose: they are not an indemnity for wage loss, and are “earned” over time – disability benefits are not.

Broader Policy. The SCC commented that deduction of pension benefits would act as an incentive to employers to terminate older employees by permitting them to terminate their employment when they are entitled to pension benefits (effectively forcing them to retire) without the risk of paying wrongful dismissal damages. The law should not provide this incentive.

Click here to read the SCC’s decision in IBM Canada Limited v. Richard Waterman.

Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Labour and Employment Team to discuss this topic or any other legal issue.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2013. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Click here to request our consent.

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