Case Law Update – IBM v. Waterman

IBM Canada Limited v. Waterman, 2013 SCC 70

The Supreme Court of Canada recently ruled that pension benefits paid during the notice period do not reduce a plaintiff’s wrongful dismissal damages.

After 42 years of service with IBM, at the age of 65, Richard Waterman was dismissed without cause on two months’ notice. As a member of IBM’s defined benefit pension plan, Mr. Waterman was told by IBM that he would start drawing his pension on termination.

Mr. Waterman brought a wrongful dismissal claim against IBM, and the trial judge set the appropriate notice period at 20 months. In calculating Mr. Waterman’s damages, the trial judge declined to deduct the pension benefits he received during the notice period.

IBM appealed this decision all the way to the Supreme Court of Canada, where the issue before the nine justices was whether Mr. Waterman’s receipt of pension benefits should reduce the damages otherwise payable by IBM for wrongful dismissal. The Court ultimately determined that it should not, ruling in the plaintiff’s favour.

In reaching its decision, the Court considered a long-standing rule of contract law known as the “compensation principle” which stipulates that damages are to be measured by the plaintiff’s actual loss. In theory, under this principle, Mr. Waterman’s pension payments should have been deducted from his wrongful dismissal damages.

However, in this case, the Court invoked a private insurance exception to allow Mr. Waterman to receive both. Because Mr. Waterman’s pension benefits were not intended to indemnify him for lost wages and because he contributed to his pension through his years of service, the Court concluded that the compensation principle did not apply.

The Court also drew a distinction between disability benefits and pension benefits paid during the notice period. It reaffirmed its earlier decision in Sylvester v. British Columbia that disability benefits are deductible from a wrongful dismissal award, explaining that unlike disability benefits, pension benefits are not an indemnity for loss of salary due to the inability to work. The Court also highlighted the fact that the employment contract in Sylvester implied that the parties did not intend for Mr. Sylvester to receive both disability benefits and damages. There was no evidence that Mr. Waterman had made a similar agreement with IBM regarding his pension benefits.

Implications for Employers

This case is significant for employers offering defined benefit pension plans to their employees. When entering into employment contracts, consider the possibility of limiting your employees’ severance entitlements to reflect any pension benefits payable on termination. Employers are encouraged to always seek the assistance of an employment lawyer when drafting any contractual terms, particularly those involving termination and employee compensation.

IBM v. Waterman (Click here to read the full case)

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