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  April 4, 2023

Wrongful Dismissal Damages and Pension Benefits

In IBM Canada v. Waterman, the Supreme Court of Canada (“SCC”) has considered the deductibility of pension benefits from wrongful dismissal damages in a decision that may also have implications for the deductibility of other types of payments.

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The case involved a 65-year-old employee with 42 years of service at IBM. IBM contributed to the company’s defined benefit pension plan on his behalf and, upon termination of his employment, the employee was entitled to receive a full pension. IBM terminated the employee without cause and provided two months’ salary in lieu of notice. The existing employment contract was silent on the issue of deductibility of pension benefits, and contained no general bar against receiving both pension benefits and employment income. The employee sued IBM claiming wrongful dismissal and seeking his common law notice rights. At trial the employee was awarded 20 months’ pay in lieu of notice with the judge finding that pension benefits paid during the notice period should not be deducted from the damages payable by IBM. IBM’s appeal of this decision was dismissed and IBM appealed to the SCC.

In a 7–2 majority decision, the SCC agreed that employee pension payments should generally not reduce the damages paid for wrongful dismissal. In support of its conclusion the SCC pointed to the nature of the benefit and the intention of the parties. The SCC said that as pension benefits are meant to be a form of deferred compensation and are a type of retirement savings they are not intended to protect against wage loss due to unemployment. The SCC reasoned that the parties could not have intended that the employee’s retirement savings would be used to subsidize his wrongful dismissal and, on this basis, should not be considered as mitigation of damages.

The SCC also distinguished its prior decision in Sylvester v. British Columbia where an employee was dismissed while he was off work and receiving disability payments. There, the SCC concluded that the disability payments should be deducted from the wrongful dismissal award because they were intended to be a replacement for the employee’s salary. In Waterman the SCC found that since pension benefits are not intended to replace lost salary and because the employee had contributed to the plan the benefits should not be deducted from his notice entitlements. The SCC came to the broad conclusion that a monetary benefit will not generally be deducted from wrongful dismissal damages if it is not aimed at protecting against wage loss caused by loss of employment, particularly where the employee has contributed to the benefit in question.

The implications of Waterman for the deductibility of payments from wrongful dismissal damages are still being determined, and employers should be cautious about assuming that employment-related benefits paid to or received by an employee during a reasonable notice period will be deductible. While the decision confirmed that pension benefits, whether from a defined benefit or defined contribution plan, should generally not be deducted from wrongful dismissal damages, it also suggested that an employer could potentially reduce wrongful dismissal damages by the amount of pension payments made during a reasonable notice period by including express language to this effect in pension plans, offer letters, and employment contracts.

A reprint courtesy of: Mathews Dinsdale & Clark LLP. The information provided in this article is necessarily of a general nature and must not be regarded as legal advice. For more information about Mathews Dinsdale & Clark LLP, please visit mathewsdinsdale.com.

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