Fired Employee Entitled to Both Damages and Full Pension Benefits

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

Insolvency and Underfunded Defined Benefit Pension Plans

The Supreme Court of Canada recently released a decision that many see as a victory for creditors of companies with underfunded defined benefit pension plans.  Indalex Limited ("Indalex") was the sponsor and administrator of two employee pension plans, one for salaried employees and the other for executive employees. It then became insolvent. Indalex sought protection from its creditors under the Companies' Creditors Arrangement Act ("CCAA") . Both plans had "wind-up deficiencies".

In a series of court-sanctioned steps, the company was authorized to enter into debtor in possession ("DIP") financing in order to allow it to continue to operate. The CCAA court granted the DIP lenders priority over the claims of all other creditors.

Ultimately, with the approval of the CCAA court, Indalex sold its business but the purchaser did not assume its pension liabilities. The proceeds of sale were not sufficient to pay back the DIP lenders so Indalex's parent company, the guarantor of the debt, paid the shortfall and stepped into the shoes of the DIP lenders in terms of priority. The CCAA court authorized payment in accordance with the priority but ordered that an amount be held in reserve so that the members of the pension plans could argue their rights to share in the proceeds of sale.

The plan members challenged the priority granted to the parent company and claimed that the pension plans had priority in the amount of the wind up deficiency by virtue of a statutory deemed trust under section 57(4) of the Pension Benefits Act (PBA), Ontario and also by reason of a constructive trust arising from Indalex's alleged breaches of fiduciary duty as an administrator of pension funds.

The motions judge dismissed the motions and held that the plan members were unsecured creditors. The Ontario Court of Appeal reversed the ruling and held that the wind up deficiencies were subject to deemed and constructive trusts which had priority over the DIP financing and other secured creditors.

The Supreme Court of Canada allowed the parent's appeals. A narrow 4 - 3 majority of the seven member court upheld the Court of Appeal's finding that the statutory deemed trust in section 57(4) of the PBA applies to the entire unfunded deficiency on the wind up a pension plan. However, all the judges agreed that under the doctrine of federal paramountcy, the CCAA court ordered priority had the same effect as a legislative provision and superseded the statutory deemed trust.

All member of the seven judge panel also agreed that where an employer is also the plan administrator, there is a conflict between the roles of the employer as an employer and its role as plan administrator in insolvency proceedings. The fiduciary duty of the administrator to the plan members requires at the very least notice of the insolvency proceedings so that the plan members can take steps to protect their interests.

Justice Deschamps wrote - In an insolvency, often large claims of ordinary creditors are left unpaid and the promise of defined benefits made to employees during their employment is put at risk. Although the employer in this case breached a fiduciary duty, the harm suffered by the members of the pension plan resulted from the employer's insolvency and not from the breach of the fiduciary duty.

To improve the prospect of pensioners receiving their full benefits after a pension plan is wound up, the Ontario Legislature has protected contributions to the pension fund that have accrued but are not yet due at the time of the wind up while providing for a deemed trust that supersedes all other provincial priorities over certain assets of the plan sponsor. The court held that the deemed trust extends to contributions the employer must make to ensure that the pension fund is sufficient to cover liabilities upon wind up. In this case however, the deemed trust was superseded by the security granted to the DIP creditors.

There are good reasons for giving special protection to members of a pension plan in insolvency proceedings. Parliament considered doing so before enacting the most recent amendments to the CCAA but chose not to. In an insolvency process a CCAA court must consider the employer's fiduciary obligations to plan members as their plan administrator. It must grant a remedy where appropriate. However, courts should not use equity to do what they wish parliament had done through legislation.

Justice Cromwell wrote - In an insolvency, pension plans and creditors may find themselves in a zero-sum game with not enough money to go around. Although all current contributions are up-to-date, the company's pension plan did not have sufficient assets to fulfill the pension promises made to its members. In this case, the deemed trust provisions of the Pension Benefits Act did not apply and even if it did, the superpriority would override it.  Justice Cromwell concluded that Indalex had failed in its duty to the plan beneficiaries as their administrator and that the beneficiaries ought to have been afforded more procedural protections in the CCAA proceedings. However, the Court of Appeal erred in using the equitable jurisdiction of a constructive trust to defeat the super-priority ordered by the CCAA judge.

Regards,

Blair

Retroactive Pension Legislation

Here is a reprint of a Pension Alert from my colleague Priscilla Healy:

Buried deep within the federal Omnibus Budget Implementation Bill is a provision
amending the Pension Benefit Standards Act, 1985 (PBSA). Section 483 of the
Bill gives retroactive effect to July 27, 2004 to two sections of the PBSA. Those
provisions have the effect of legitimizing regulations made under those sections
almost eight years ago.
Presumably there is some specific situation or situations that section 483 seeks
to address. What it/they might be, I have no idea. It was eight years ago. Section
483 may be, and probably is, totally innocuous.
Why does this apparently minor matter merit our attention? Because we should
all be concerned with legislation that has retroactive effect that is introduced without
clear or obvious explanations or justification given, and should be particularly
concerned when regulations are given retroactive effect in this indirect manner.
First, retroactive legislation can obviously be simply unfair to those who relied on
the former legislation. Secondly, the reasons for retroactive legislation should be
transparent. Thirdly, legitimizing existing regulations by way of amendments to
empowering statutes having retroactive effect leads to confusion. If regulations
have retroactive effect, they are expected to state so clearly within the regulation
itself.
Section 483 is a bad legislative precedent. Law should not be made in this way.
PENSION ALERT
Priscilla H. Healy
phealy@foglers.com
416.941.8828
Priscilla

Freedom 67

My colleague Priscilla Healy, pension law expert, offers the following observations about a universal concern - will I have enough money to retire when I want to retire?


We need to change our mind-set. We are going to have to work longer. Everyone who retires either voluntarily or involuntarily from the workforce and who still needs an income cannot set up in business for themselves. Jobs (paying) for those over age 60 or 65 need to be available.
Accordingly, our personal, social and workplace perspectives as to older workers are going to have to become much more positive.

Only a government with a majority and then only in the early years of its mandate could dare to
touch social benefits to seniors. That said, raising the age of eligibility for the Old Age Pension to
age 67 as proposed – or floated – may be inevitable. Clearly there will need to be a long phasing-in period, and a discussion as to the appropriate level for claw-backs. There also needs, of course, to be a discussion about Government spending priorities.

At $540.12 per month for two years, gently indexed for inflation, some or all of which may be clawedback, the loss may not seem like much to middle income earners. No problem, as long as we get enough notice. We will simply work longer, save more and/or make do with less income from our savings if we have to draw on them earlier.

We are indeed healthier and living longer. But is everyone, or at least almost everyone, really able to work longer than age 65? Forget about whether we want to. Could we even find a job? What about older, white collar workers who have lost their jobs through downsizing? Finding a comparable job in their field can be very difficult for older, white collar workers who are laid off. What about workers, both men and women, who are not physically able to work at their jobs much longer? What about people with physical and mental health issues that are not serious enough to receive disability benefits but which are impediments to employment?

There is currently a very long stretch already between involuntarily retirement, which could happen any time after age 55 or even 50, and age 65. Many Canadians do not have workplace pensions, and fewer have pensions that are not substantially reduced if they commence before age 65. The maximum CPP payment in 2012 is $986.67 per month, again gently indexed. CPP payments cannot be taken before age 60, and they are reduced by over 6% a year if taken before age 65. $540 a month can make a considerable difference if the only other income is a reduced CPP.

Financial planning? But how many people are able to save adequately for a retirement that
unexpectedly starts too early? What are older people who do still need an income and cannot get jobs to do? Set up a consulting business? Make a business out of a hobby or skill? Fine, if they have the energy and skills and can invest in start up costs. Work as a Walmart greeter or as a crossing guard? Perhaps. Drastically downsize lifestyle. Yes. Abandon recreational plans for retirement? Yes. Apply for income supplements through Gains or GIS? May or may not qualify. Apply for welfare? Probably won't qualify. Depend on adult children? An unfair generational cost shift.

The problems of the aging population were not created by the current government. Everyone needs to save for retirement. Everyone needs to recognize and provide for the possibility that they may not be able to work as long as they plan. Everyone needs to take care of their health. Depending on government programmes in the long run is risky.

There is however, good news. The boomers are beginning to retire. It will be interesting to see how society, and government programmes, adjust.

Pension Reform in the Ontario Budget

My pension law partner, Priscilla Healy reports:

The Ontario budget promises some welcome flexibility for both pension plan members and employers, although at the expense of benefit security on retirement.
Pension plan members who have transferred their pension monies into LIFs or LRIFs will be able to immediately withdraw 50 % of their locked-in monies from these accounts, an increase from 25%., effective January 1, 2010. There will also be a temporary waiver of fees for unlocking those accounts on the grounds of financial hardship, effective for applications made on or after April 1, 2009. However, without amendments to the tax rules, once monies are withdrawn, there will be no ability to replenish those accounts on a tax deferred basis.
Employers will welcome the ability to extend solvency payments over ten years instead of the current five year requirement, starting with valuation reports on or after September 30, 2008. The new ability to consolidate existing solvency payment schedules and to defer new going concern and solvency special payments for one year will also help temporarily cash-strapped employers.
The ten year extension of solvency payments may be illusory for any but jointly governed plans, because it will not be available if more than one-third of the aggregate of plan members object. It is not clear why retirees or deferred vested plan members would not object to a reduction in the security of their pensions. Employers may have to depend upon the inertia of retirees and deferred vested plan members preventing a flood of objections, or upon the concern of retirees or those close to retirement as to the possible insolvency of the employer which could leave them with no retiree medical benefits.
On the flip side, to protect member security the budget proposes restrictions on employer contribution holidays for fiscal years ending in 2010 to 2012.
There are a number of other budget proposals arising from the November, 2008 Report of the Expert Commission on Pensions, and there is reference to the passage of Bill 133 that simplifies pension splitting on marriage breakdown. The intent is also expressed to adopt a new multi-jurisdictional agreement that will simplify the administration of registered pension plans with members in more than one jurisdiction.
This is the first time since the abortive Bill 198 in 2002 that an Ontario government has attempted significant reforms of the Pension Benefits Act.

Regards,

Blair