IBM case provides guidance on terminating worker approaching retirement

Supreme Court of Canada rules pensions benefits can’t be deducted from entitlement to severance pay

Stuart Rudner

By Stuart Rudner

Last week, the Supreme Court of Canada rendered its decision in IBM v. Waterman, a case involving a 40 plus year employee of IBM (U.K.) Ltd. and then IBM Canada Ltd. dismissed with two months’ notice.

The issue that the court had to address was whether the pension benefits he received should be deducted from his entitlement to severance pay. Ultimately, the court concluded they should not. The case also references the issue of disability benefits, and what happens when a dismissed employee receives such payments during their notice period.

Claims for wrongful dismissal fall within the law governing breach of contract. It is a fundamental principle of the law that when one party breaches a contract, the other party is entitled to be compensated for the losses they suffer as a result of the breach. One issue that sometimes arises in relation to disability or pension benefits is what should happen when a plaintiff appears to have been "overcompensated" after a breach of contract. That was, essentially, the issue facing the court in the recent IBM case. It has been raised more often in relation to disability benefits.

Lawyers have argued in the past that if an individual receives disability benefits during the notice period, then those benefits should be deducted from any amounts that the employer is to pay as a result of the wrongful dismissal. While judicial treatment of this issue has been somewhat inconsistent over the years, some principles have developed.  The courts have attempted to balance principles of justice, fairness and reasonableness, along with the parties’ expectations. Since disability benefits are intended to provide income replacement when an individual is unable to work, there is a compelling argument for saying the individual should not receive both termination pay and disability benefits, since they would never have been in a situation where they could receive regular pay and disability benefits concurrently.

From a perspective of fairness, this is particularly compelling where it is the employer that funds the disability coverage. If so, it would seem to be unfair to expect them to pay both termination pay and to have the individual receive disability benefits funded by the same employer. Conversely, if the disability coverage is funded in whole or in part by the employee, then it would seem to be unfair to deprive them of that benefit, or to use that benefit in order to reduce their entitlement to termination pay. As a result, when a situation arises where an individual is entitled to both termination pay and disability benefits, one of the first questions to ask is: Who pays the premiums for the disability coverage? If the employee does, it is likely they will be entitled to receive the full amount of termination pay, without deduction relating to the disability benefits.

In the IBM case, the situation related to pension benefits. The individual in that case had a pension eligibility that was fully vested. As a result, when he was dismissed and unable to find new employment, he began receiving pension benefits. IBM argued the amounts received should be deducted from his entitlement to termination pay. The matter made its way through the courts, ultimately being addressed last week by the highest court in the land.

The court reviewed the fundamental principles relating to breach of contract and damages, and discussed the issue of disability benefits, including the leading case of Sylvester, which is often relied upon by employers in such circumstances. While finding that the principles in Sylvester would not result in a conclusion the plaintiff could not collect both pension benefits and termination pay, the court distinguished that case, finding that issues were not the same as those in the case before it since pension benefits are very different than disability benefits. One of the other reasons for making this decision was the fact disability benefits are intended to provide income replacement in cases where the individual is unable to work, unlike pension benefits, which are a form of deferred compensation directly related to the individual's length of service.

The court also commented that it would be unfair for an employer to benefit by dismissing an employee it knew had fully vested pension entitlements, thereby, reducing their obligation to provide termination pay.

Employers should be cautious before taking the position that any form of income received by a dismissed employee can be deducted from the amount to be paid for severance. At the same time, employees should be mindful of the law regarding mitigation, and remember that, as discussed in a previous post, termination pay is not an absolute right. If you obtain new employment, or receive employment insurance benefits or other income replacement, those amounts may be deducted from the amount that your former employer is required to pay.

Stuart Rudner is an HR lawyer and a founding partner of Rudner MacDonald LLP, a Toronto-based firm specializing in Canadian employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at [email protected]. You can also follow him on Twitter @CanadianHRLaw and join his Canadian HR Law Group on LinkedIn. 

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