November 4, 2011
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An issue that frequently arises in wrongful dismissal cases is the deductibility of payments received by a dismissed employee during their notice period from wrongful dismissal damages. In Waterman v. IBM Canada Ltd. [2011] B.C.J. No. 1453, the B.C. Court of Appeal addressed the deductibility of pension benefits from an award of damages for wrongful dismissal.

Mr. Waterman was employed by IBM for nearly 42 years. His employment was terminated on a without cause basis. At the time, he was 65 years of age and working as an Advisory Software Services Specialist. He also participated in IBM's defined benefit pension plan. While he was not looking to retire, given his age and length of service, Mr. Waterman was eligible and entitled to retire on full pension. Following his termination, Mr. Waterman began receiving pension benefits of $2,124.25 per month pursuant to the provisions of his pension plan which was entirely funded by IBM.

IBM offered Mr. Waterman a severance package. He rejected it and sued for wrongful dismissal. Following a summary trial, Mr. Waterman was awarded damages in the amount of $93,305.32, based on a reasonable notice period of 20 months.

At trial, IBM took the position that the pension benefits had to be deducted from the wrongful dismissal damages. The trial judge disagreed and found that pension benefits paid to Mr. Waterman were not deductible from wrongful dismissal damages. In doing so, the trial judge rejected IBM's submission that Supreme Court of Canada's analytical framework in Sylvester v. British Columbia, [1997] S.C.J. No. 58, lead to the result that the pension benefits paid to Mr. Waterman should be deducted, although Sylvester involved the deductibility of disability benefits rather than pension benefits.

In essence, IBM submitted that pension payments are a substitute or replacement for salary and should be treated the same as the disability payments in terms of deductibility from wrongful dismissal damages.

The Court of Appeal in a thorough decision reviewed the case law and Sylvester. Applying the analysis in Sylvester, the court found that deductibility depends on the provisions of the employment contract and the intention of the parties to the employment contract. The court reviewed the terms of the pension plan and found no express provision stating that an employee could not receive both salary and a pension in the circumstances.

In the absence of an express provision, the court stated that question arises whether it can be inferred from the provisions of the contract if the parties intended that Mr. Waterman be entitled toreceive both salary and pension benefits in the circumstance. The court rejected there was any intention to deduct pension benefits and stated: “I am satisfied, however, that Mr. Waterman never would have intended that his fully earned pension benefits could be utilized to reduce the amount of damages IBM would be required to pay him during the notice period if he were wrongfully dismissed. This would have been viewed by him as adding insult to injury. How could IBM force him into retirement, on the one hand, and then effectively claw back the very pension payments they had triggered in so doing, on the other?"

The court found that the provisions in the pension plan supported the view that the benefits were earned by and belonged to Mr. Waterman. Consequently, while pension benefits provide an income stream when paid, they are not a substitute for salary.

Unlike disability payments, pension payments are not in lieu of salary but instead are a form of collateral benefit. In addition, the Court of Appeal pointed out that if IBM were correct in its interpretation, it would be a license to dismiss older employees without compensation.

While the court focused on Sylvester in reaching its conclusion, there have been a number of appellate level decisions post Sylvester that have narrowed the scope of that decision when dealing with deductibility of disability benefits (see for example Sills v. Children's Aid Society of the City of Belleville, [2001] O.J. No. 1577 and Contreras v. Canac Kitchens, a Division of Kohler Canada Co. [2010] O.J. No. 528. In other words, the deductibility of disability benefits cannot be presumed and will very much depend on the terms of the employment contract in question, including whether the employee paid the premiums.

Parties who want to avoid any uncertainty regarding the deductibility of benefits against notice period damages will need to ensure that deductibility is expressly provided for in their employment contracts.

Steve Levitt practises employment law with Nelligan O’Brien Payne LLP, a full service law firm in Ottawa.

[This article is reprinted with permission and first appeared in the November 2011 issue of The Lawyers Weekly.]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law