Employers can still minimize exposure to pension benefits, The Law Times (March 10, 2014, p.7)

Employers can still minimize exposure to pension benefits, The Law Times (March 10, 2014, p.7)

By Nikolay Y. Chsherbinin

Pension is a negotiated benefit that forms an integral part of an employee’s total compensation package and in this regard there’s a close relationship and dialectical tension between salaries, pensions, and damages. The recent case of IBM Canada Ltd v. Waterman starkly exemplifies this tension.

In Waterman, the Supreme Court of Canada grappled with the vexing question of whether payment of pension benefits during the reasonable notice period should reduce wrongful dismissal damages. In a 7:2 decision, the court resolved it should not. In arriving at its decision, it delved deeply into the most difficult topics in the law of damages and confirmed that pension benefits aren’t an indemnity for loss of income but rather are a type of retirement savings to which employees earn an absolute entitlement over the years of employment.

In Waterman, after 42 years of employment, IBM dismissed a 65-year old employee without cause on two months notice. At the time of his dismissal, Richard Waterman had a vested interest in IBM’s defined-benefit pension plan and was entitled to a full pension. IBM told Waterman it would treat him as a retiree and he must begin receiving monthly pension payments following his dismissal. While collecting his full pension, Waterman sued for wrongful dismissal damages.

At summary trial, the Supreme Court of British Columbia found the appropriate period of notice was 20 months. Relying on the general rule of contract law, IBM argued Waterman’s pension benefits should be deducted from the salary payable during the notice; otherwise, he would be in a better economic position than he would have been had there been no breach of contract. The trial judge rejected its argument. IBM appealed.

Writing on behalf of a unanimous British Columbia Court of Appeal, Justice Jo-Ann Prowse found there was no express provision in Waterman’s contract or IBM’s defined-benefit plan prohibiting concurrent reception of salary and pension benefits. Consequently, she concluded that, although there was no evidence regarding the parties’ intention, had they considered the issue they wouldn’t have intended for Waterman’s pension benefits to be deducted from wrongful dismissal damages.

On its further appeal to the Supreme Court of Canada, IBM advanced two arguments. First, it noted that had it given Waterman adequate working notice of dismissal, he would have received only his salary and not his pension. Second, it pointed out that in Sylvester v. British Columbia, the Supreme Court of Canada held that these sorts of benefits are part of an integrated employment relationship and, unless deducted, the employee collecting them would receive greater compensation than someone lawfully dismissed with working notice. In response, Waterman urged the court to conclude that pensions are the property of employees that they earned through years of employment and consist of a benefit that’s part of their remuneration package. It’s a benefit, he argued, that employers couldn’t take advantage of to offset the damages awarded. The top court sided with Waterman.

In rejecting IBM’s first argument, the majority, under the pen of Justice Thomas Cromwell, pondered whether the court should strictly apply the general principle of compensation, which is designed to compensate a plaintiff only for actual loss, in this case. He determined it should not because the pension benefits fall within the controversial exception whereby benefits received by a plaintiff through private insurance aren’t deductible from a damage award. Having acknowledged that one area of controversy relates to the sort of benefits that fall within the exception, the majority found the pension benefits aren’t an indemnity for lost wages and, therefore, aren’t deductible from wrongful dismissal damages.

While there’s no single marker to sort which benefits fall within the private insurance exception, Waterman teaches that:
• A benefit wouldn’t be deductible if it’s not intended to be indemnity for the sort of loss caused by the breach.
• The benefit wouldn’t be deductible if the plaintiff has contributed to an indemnity.
• The benefit would be deductible when it’s not intended to be indemnity for the sort of loss caused by the breach and a plaintiff hasn’t contributed in order to obtain entitlement to it.
• The more closely the benefit is, in nature and purpose, to an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. The converse is also true.
• There’s room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatment for those in similar situations.

In rejecting IBM’s second argument, Cromwell distinguished Sylvester, which instructs that, where a cause of action and a benefit arise under the contract of employment, we must look first to that contract to determine whether an employment benefit at issue should be deducted from wrongful dismissal damages. Unlike the disability benefits in Sylvester, pensions weren’t an indemnity for loss of salary due to Waterman’s inability to work. Instead, they’re akin to property rights that accrue over time for employees’ benefit. In addition, other income or benefits generally don’t reduce pension payments or entitlements. In this regard, Cromwell noted Waterman could have retired, drawn his full pension, and concurrently drawn a full salary from another employer.

Waterman confirmed that dismissed employees’ pension payments, including those from a defined-benefit plan, are a type of benefit that “should generally not reduce the damages otherwise payable for wrongful dismissal.” The adverb “generally” signals to prudent employers that they can expressly minimize their exposure to employees for pension benefits during the notice period by inserting carefully drafted provisions on the deductibility of benefits into their pension plans and employment contracts.

Although Waterman prohibits the deduction of pension payments from wrongful dismissal damages, it permits, in certain circumstances, the deduction of wage-loss indemnity payments such as disability insurance benefits. Curiously, relying on its earlier judgment in Jack Cewe Ltd. v. Jorgenson , the top court suggested that unemployment insurance benefits received under the employment contracts of non-unionized employees wouldn’t be deductible from wrongful dismissal damages if there’s proof of payment by the employee in some manner for the benefits.

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