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In a recent decision, IBM Canada Limited v. Waterman, the Supreme Court of Canada (“SCC”) addressed whether pension benefits are a ‘compensating advantage’ that should be deducted in calculating damages otherwise payable by an employer for wrongful dismissal.

IBM dismissed 65 year old, long-term employee Richard Waterman without cause and with two months of working notice in 2009. At the time of Mr. Waterman’s termination he was entitled to a full pension, and began receiving monthly pension payments as of the date of his termination.

Mr. Waterman sued IBM for wrongful dismissal, and the trial judge set the appropriate notice period at 20 months, reflecting an additional 18 months of notice on top of the two months of working notice he had already received, without a deduction for his pension benefits. This meant that he received both his salary and pension payments during the notice period. The Court of Appeal for British Columbia (“BCCA”) affirmed the trial judge’s decision, and the Supreme Court also dismissed the appeal.

The Supreme Court’s reasons were provided by Justice Cromwell, and considered three main questions: whether there was a collateral benefit problem in this case, whether the compensation principle answered the problem, and finally, whether the Court’s earlier decision in Sylvester v. British Columbia supported the deduction of pension benefits. In answering those questions, Justice Cromwell concluded that pension payments are a type of benefit that should not reduce the damages otherwise payable for wrongful dismissal. Pension benefits are a form a deferred compensation and are not intended to be an indemnity for wage loss due to unemployment; therefore, the majority of the Court concluded that they should not be deducted from a wrongful dismissal award.

1. The Collateral Benefit Problem and the Private Insurance Exception

In considering whether or not the pension benefits should be deducted from Mr. Waterman’s damages, the Court looked to the “compensation principle”, which is the general rule of damages that a defendant should only compensate a plaintiff for their actual loss. According to the Court, a ‘collateral benefit’ or ‘compensating advantage’ occurs when a plaintiff receives a benefit that results in compensating them beyond their loss, and either (a) would not have received the benefit “but for” the defendant’s breach, or (b) the benefit is intended to be an indemnity for the sort of loss resulting from the defendant’s breach. Not all benefits received by a plaintiff create a collateral benefit problem, however if either of these conditions exist, the question then becomes whether or not a collateral benefit should be deducted from the damages payable by the defendant. The Court found that there was a collateral benefit issue in this case as Mr. Waterman received excess compensation that he would not have received “but for” IBM’s breach of his employment contract.

The Court also found however, that the compensation principle did not apply in all cases, and should be applied flexibly in order avoid unsatisfactory results. Several factors outlined in Sylvester v. British Columbia affect the way the compensation principle is applied, and should be considered in determining whether a benefit should be deducted. There are also well-established exceptions to the compensation principle, the most important of which is the “private insurance exception”, which allows a plaintiff to receive benefits without deduction from damages awards. This is because private insurance benefits result from the plaintiff’s contract of insurance, and not from the defendant’s wrongful act.

This exception has also been applied to other types of benefits, and there are two factors that the Court found were particularly important in considering whether benefits fall within the private insurance exception. In general, benefits will not be deducted if “(a) they are not intended to be an indemnity for the sort of loss caused by the breach and (b) the plaintiff has contributed to the entitlement to the benefit.” The more closely a benefit is in nature to an indemnity against the type of loss caused by the defendant’s breach, the more likely it will be deducted. Direct or indirect employee contributions, such as through payments or years of service, also will generally support not deducting benefits.

The Court concluded that Mr. Waterman’s pension benefits fell within the private insurance exception, and should not be deducted from his damages for a number of reasons. First, the Court considered the pension plan to be a form of retirement savings, providing regular payments to eligible employees, and not as an indemnity for wage loss. The court found that the fact that the pension was a defined benefit plan (“DB”) did not change its nature as a “non-indemnity" benefit. Second, while IBM made all of the payments to fund the plan, Mr. Waterman had contributed to it through his years of service.

2. The Sylvester Decision

The Court then considered whether its previous decision in Sylvester, in which disability benefits from an employer funded plan were deducted from the plaintiff’s damages, would support the deduction of benefits in this case. It found Sylvester to be distinguishable, although in support of the conclusion the Mr. Waterman’s pension benefits should not be deducted.

In terms of the nature of the benefits at issue, Sylvester, which involved disability benefits, was an example of a case where the benefit and contractual breach were clearly connected. The Court also found the contractual intention of the parties in relation to the issue of benefits deduction to be much more uncertain in this case than in Sylvester. While Mr. Waterman’s contract did not contain an explicit provision on the deduction of pension benefits from wrongful dismissal damages, there was no general bar against him receiving both employment income and pension benefits. Finally, the Court also considered broader policy issues addressed in Sylvester, and found that in this case, they also supported not deducting pension benefits. The decision not to deduct pension benefits promoted the equal treatment of pensionable and non-pensionable employees by taking away any economic incentive to dismiss pensionable employees.

The interesting dissent in this case, written by Justice Rothstein and supported by Chief Justice McLachlin is also worth noting. It placed considerable emphasis on assessing Mr. Waterman’s loss under the terms of a single contract of employment, which included provisions in relation to both wrongful dismissal and pension benefits, as well as the nature of the pension as a defined benefit plan. The dissent concluded that defined benefit plans were materially different than defined contribution (“DC”) plans. Unlike DC plans, which provide an employee with a finite lump sum of retirement benefits and are more analogous to a savings account, a DB plan guarantees an employee regular payments upon retirement for life.


This decision represents a positive development for Mr. Waterman as well as Canada’s aging workforce. While neither set of reasons mentioned this point, the reasons by the dissent would have provided a license to Canadian employers to dismiss employees who were eligible for retirement, knowing that any claim for wrongful dismissal would be offset by the employee’s pension benefits. This would have forced employees into a difficult choice: sue for wrongful dismissal (with significantly reduced damages) or file a human rights complaint and try to prove that their dismissal was a result of their age. 

While the majority decision of the Court was careful to distinguish instead of overrule Sylvester, the majority noted that in Sylvester, the employee did not contribute to the cost of the disability benefits “either directly or indirectly.” Courts may take this as tacit support for the position taken by the Ontario Court of Appeal in McNamara v. Alexander Centre Industries Ltd. (or other similar cases by other levels of court) that disability benefits should not be deducted when they are akin to private insurance schemes, and there is evidence that the employee provided some consideration (either paying the premiums directly, or taking less salary) for those benefits.

Even without those two points being mentioned explicitly, and even reading the majority’s decision narrowly, this is still a positive step towards recognizing the rights of employees upon their dismissal.


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This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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