Pension Plans and Wrongful Dismissals

On December 13, 2013, in the matter of IBM v. Waterman1, the Supreme Court of Canada rendered a judgment that illustrates the importance of pension-plan related issues following a dismissal.

The facts

After 42 years of service with IBM, Mr. Richard Waterman (hereinafter “Waterman”) was dismissed without cause upon two months’ prior notice. At the time of his dismissal, Waterman was 65 years old and eligible for the maximum pension available under IBM’s defined-benefit pension plan. His dismissal had no impact on the amount of his pension benefits.

The issue in dispute and the lower-court decisions

Because Waterman was obliged to start receiving his pension when he was dismissed, this case raised the issue of whether pension benefits should be taken into account in calculating the amount of damages that an employer must pay for dismissing an employee without cause.

In light of the law applicable in British Columbia, the trial judge concluded that Waterman’s employer should have given him 20 months’ prior notice. The judge awarded him damages accordingly, and then considered what impact his pension benefits should have on the calculation of those damages.

Contrary to the position taken by IBM, in calculating the damages the judge did not deduct the amount of the pension benefits paid to Waterman during the prior-notice period. The British Columbia Court of Appeal confirmed the trial judge’s decision in this regard.

The judgment of the Supreme Court of Canada

The Supreme Court confirmed the decisions of both courts below. Writing on behalf of the majority, Justice Cromwell stated that pension benefits paid to an employee following wrongful dismissal should generally not be deducted from the amount of damages payable to the employee, even though at first blush that appears illogical.  

On a preliminary basis, it is essential to understand that the deduction issue will not arise in all cases. Justice Cromwell pointed out that it would not arise where (a) the benefits constitute a form of excessive recovery for the plaintiff’s loss, and (b) the benefits are sufficiently connected to the defendant’s breach of legal duty.

Justice Cromwell considered the impact of pension benefits on the basic principle that a plaintiff should be compensated only for his or her actual loss. He opined that the benefits under a pension plan to which the employee had contributed were not intended to be an indemnity for the type of loss suffered as a result of breach of an employment contract through wrongful dismissal. The Court accordingly concluded that the pension benefits should not be deducted from the damages payable to Waterman.

Finally, Justice Cromwell examined the intention of the parties to the employment contract, asking the following question: did the parties intend that the employee’s retirement savings would be used to subsidize the employee’s wrongful dismissal? The Court decided that in the absence of an express provision in the employment contract addressing that question, as was the case here, the employment contract should be examined in order to determine the parties’ intention regarding the payment of pension benefits and the awarding of damages for wrongful dismissal.

The Court went on to conclude that the parties to Waterman’s employment contract had not agreed that his pension benefits should be deducted from an award of damages for wrongful dismissal. However, the Court appeared to leave the door open to arriving at a different conclusion in a situation where the parties have expressly dealt with the issue of pension benefits versus damages in the employment contract.

This case thus illustrates the impact that pension issues can have in wrongful dismissal situations. It also serves as a reminder of the importance of pension plan considerations in the interpretation of employment contracts and in determining the parties’ obligations towards each other.

The Quebec standpoint

In Quebec law, the major principles of contractual interpretation are set out in the Civil Code of Québec (the “Civil Code”), primarily in articles 1425 and 1426. In addition, the Civil Code provides (see articles 2091 and 2092) that a dismissed employee is entitled to receive a notice of termination within a reasonable time beforehand, or compensation for any injury the employee suffers where insufficient notice of termination is given.

Finally, it is worth noting that Quebec’s Act Respecting Labour Standards2 prohibits employers from dismissing or retiring an employee or practicing discrimination or taking reprisals against the latter on the grounds that the employee has reached the age or number of years of service when he or she should retire pursuant, for example, to any special legislative provision applicable to the employee, or to his or her pension plan. Moreover, Quebec’s Charter of Human Rights and Freedoms3 (the “Charter”) provides additional protection against discrimination based on age.

Consequently, had this case arisen in Quebec, the courts would no doubt have applied each of the Civil Code, the Act Respecting Labour Standards and the Charter.

In light of this decision of the Supreme Court, the question also arises as to what extent the courts in Quebec will have to adjust the criteria applicable to assessing how damages should be mitigated.

1 IBM Canada Limited v. Waterman, 2013 SCC 70
2 R.S.Q., c. N-1.1., sections 122 and 122.1
3 R.S.Q., c. C-12, section 10