Property Rights in Pension Benefits Plans

At age 65, Richard Waterman was terminated without cause by IBM Canada Ltd. after 42 years of service. IBM provided him with two months’ notice of the termination. During his employment, Waterman participated in IBM’s pension plan, which entitled him to a full pension. His entitlement was not affected by the termination, and Waterman began to draw from his pension benefits.

Waterman filed a claim for wrongful dismissal with the British Columbia Superior Court, which was unsuccessfully opposed by IBM. IBM argued that it was liable only for the difference between the pension benefits Waterman had been receiving since his termination, and the amount of reasonable notice he ought to have received on termination. Waterman’s position was that the pension benefits, to which he had made contributions throughout his career, were not affected by the manner of termination and could not be factored into the amount payable by IBM as damages for wrongful dismissal.

At trial, the Superior Court determined that the appropriate notice was twenty (20) months, and declined to deduct the pension benefits paid to Waterman during the notice period in calculating the damage award.

On appeal, the Court of Appeal concurred with this determination and, in a ruling released late last year, the Supreme Court of Canada also found in Waterman’s favour.

The issue before the Supreme Court was whether an amount owed to an employee as damages for wrongful termination (pay in lieu of notice) should be reduced by the pension benefit received by the employee during the notice period.

Ordinarily, when an employee receives other income during the notice period, an employer is only liable to pay the employee the difference between the other income and the amount the employee would have received, had he or she been paid adequate notice. This deduction is consistent with the duty to mitigate, which requires an employee to make all reasonable efforts to find alternative employment in order to limit his or her damages after a termination. IBM relied upon this general principle of compensation to support its position that the pension benefits constituted income received during the notice period and, as such, should also be deducted from any reasonable notice damages owed by IBM.

The Supreme Court rejected IBM’s position on the basis that the pension benefits are deferred compensation and retirement savings. As such, the retirement savings had not been intended or designed to compensate an employee should he find himself wrongfully terminated.

The Supreme Court distinguished this case from another one of its earlier decisions, Sylvester v. British Columbia, in which it held that disability benefits should be deducted from reasonable notice damages when the employer has contributed to the disability plan. This earlier decision remains the law with respect to the deductibility of disability benefits. However, the same conclusion was not reached in the case of pension benefits because, as the Court explained, disability benefits are distinguishable as wage replacement benefits. Further, disability benefits are not free-standing entitlements; rather, they are typically off-set by other income to which the claimant has access under other wage replacement schemes. Finally, the employment contract in this case implicitly stated that it was not the parties’ intention that employees receive disability benefits and wages at the same time.

The Court thus concluded that pension benefits constitute a retirement savings to which the employee has an absolute and free-standing entitlement. Therefore, regardless of the fact that it appears the employee may be unduly enriched, the principle of compensation does not apply.

This decision confirms that an employee who is in receipt of pension benefits is still entitled to reasonable notice of termination (or pay in lieu of notice) if he or she is terminated without cause, unless the employment contract limits the obligation to a lesser amount or to the minimum standards as set by the provincial legislation.