Richard Waterman had
worked for IBM for 42 years when the company fired him without cause. IBM provided him
with 2 months notice of the termination of his employment. He was 65 years
old. Waterman sued IBM to enforce his contractual right to be given reasonable notice of termination. The trial judge set the appropriate period of notice at 20
months. When he was fired, Waterman had a vested interest in IBM's defined
benefit pension plan. Under the terms of the plan, IBM had contributed a percentage
of Waterman's salary to the plan on his behalf. Upon termination, Waterman was
entitled to a full pension and his termination had no effect on the amount of
his pension benefits. The trial judge declined to deduct the pension benefits
paid to Waterman during the notice period in calculating his damages. IBM's
appeal was dismissed by the British Columbia Court of
Appeal.
The Supreme Court of
Canada, Justice Cromwell writing for the majority, dismissed IBM's further
appeal. Chief Justice McLachlin and Justice Rothstein
dissented.
Justice Cromwell
held that the rule that damages are measured by the plaintiff's actual loss does
not cover all cases. He ruled that pension benefits are a form of deferred compensation for
an employee's service and constitute a type of retirement savings. They are not
intended to be an indemnity for wage loss due to
unemployment.
In this case, it was
clear to the court that a "compensating advantage" had arisen: Waterman received both his full
pension benefits and the salary he would have earned had he worked during the
period of reasonable notice. Had IBM given him working notice, he would have
received only his salary during that period. A compensating advantage arises if
a source other than the damages payable by the defendant ameliorates the loss
suffered by the plaintiff as a result of the defendant's breach of a legal duty.
A problem only arises with a compensating advantage when the advantage is one
that: (a) would not
have accrued to the plaintiff but for the breach; or
(b) was intended
to indemnify the plaintiff for the sort of loss that resulted from the
breach.
Justice Cromwell saw
this case as akin to the "private insurance exception" - in general a benefit
will not be deducted if it is not an indemnity for the loss caused by the breach
and if the plaintiff has contributed in order to obtain entitlement to it. In
addition, the deduction issue was subject to broader policy considerations.
Justice Cromwell
held that in this case the factors clearly supported not deducting Waterman's
retirement pension benefits from his wrongful dismissal damages. Waterman's
contract of employment was silent on the issue but it did not have any general
bar against receiving full pension entitlement and employment income.
Waterman's retirement pension was not an indemnity for wage loss, but rather a
form of retirement savings. While IBM had made all of the contributions to fund
the plan, Waterman had earned his entitlement to benefits through his years of
service. Therefore, as in the private insurance exemption, the pension benefits
were not an indemnity and Waterman had contributed to the
benefits.
Finally, the broader
policy concerns in this case supported not deducting the pension benefits.
Justice Cromwell held that the law should not provide an economic incentive
to dismiss pensionable employees rather than other
employees.
In his
dissenting opinion, Justice Rothstein wrote that the private insurance exception has no
application to this case. The case required an assessment of Waterman's loss
under the terms of a single contract which gave rise to both the right to
reasonable notice and a right to pension benefits. Waterman's entitlement
therefore turned on the ordinary governing principle that he should be put in a
position that he would have been in had the contract been performed. If his
pension benefits were not deducted, he would have been given more than he
bargained for and IBM would have been charged more than it had agreed to pay.
Justice Rothstein wrote that employer-provided
benefits are an integral component of the employment contract so deductibility
of such benefits turns on the terms of the employment contract and the intention
of the parties. Under the terms of Waterman's employment contract he would have
been eligible to receive pension benefits only upon being terminated or
retiring. Therefore, his contractual right to wrongful dismissal damages and
his contractual right to his pension benefits were based on opposite assumptions
about his availability to work. Damages could not be paid on the assumption
that he could have earned both.
Unlike a defined
contribution plan, a defined benefit plan guarantees the employee fixed
predetermined payments upon retirement for life. Deducting the benefits would
provide the wrongfully terminated employee with exactly what he would have
received had the employment contract been performed: an amount equal to his salary during
the reasonable notice period and thereafter defined benefits for the rest of his
life.
In this case,
Waterman's wrongful dismissal had no impact on his pension entitlement and he
could not have received both his salary and his pension benefits had he
continued to work for IBM through the reasonable notice
period.
Regards,
Blair
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