December 26th, 2013
There is a somewhat peculiar fact pattern in the case of IBM Canada Limited v Waterman, 2013 SCC 70. It led to an unusual outcome, to the benefit of the respondent-plaintiff, in which the Court expanded the boundaries of flexible damage awards. The decision also enunciates important principles regarding pension entitlements and age discrimination.
The plaintiff, Mr. Waterman, was a skilled software technician and a 42 year employee of IBM, the only employer for which he had ever worked. At the age of 65, he was wrongfully dismissed. By summary trial, he was awarded 22 months’ pay in lieu of notice. That part is uncontroversial and was not disputed on appeal. The interesting complication is that he was also eligible to draw a pension from IBM. The company argued that Waterman’s damage award should be reduced by the amount of his pension income. IBM’s argument was unanimously rejected by the BC Court of Appeal, and by a 5-2 majority at the Supreme Court of Canada (SCC).
The Analogy from Private Insurance
The majority decision of the Court was delivered by Justice Cromwell, and it is a good example of the subtle and perspicacious reasoning for which he is noted. The opening gambit sums up the aim of the decision very neatly:
The rule that damages are measured by the plaintiff’s actual loss does not cover all cases. The law has long recognized that applying the general rule of damages — the compensation principle — strictly and inflexibly sometimes leads to unsatisfactory results. (Headnote, para 1)
IBM breached the implicit contract that required it to provide reasonable notice. Ordinarily, damages are only supposed to make the innocent party as well off as if the contract had been fulfilled. However, one of the well established principles of the law of damages is that the damage award is not reduced on account of insurance benefits that the injured party receives. This is more relevant in torts than in contract damages, but the principle carries over. For example, if a person has private income replacement insurance, the portion of his damage award from a tort that represents income replacement is not reduced on account of it.
The tortfeasor is the proximate cause of the victim receiving the insurance benefits, and the victim would not have received that money but for the injury. However, the tortfeasor receives no credit for “causing” this payment to flow to the injured party. The justice of this is clear. The tortfeasor is not entitled to a windfall from the fact that the plaintiff had the foresight to buy insurance. Therefore, a person with supplementary insurance is allowed to end up better off financially as a result of being injured.
The situation of Waterman is analogous. If he had continued to be employed by IBM, the company’s pension policy would not have allowed him to both draw a salary and receive his pension at age 65. Thus, at least for the 22 month period covered by his unjust dismissal award, he is financially better off than if he had continued working. The majority at the SCC was quite aware that the award made him better off, but they felt that it was appropriate to use the analogy of private insurance.
Pensions are Deferred Compensation, not a Gift from the Employer
IBM argued against the validity of analogizing from this principle. Waterman was receiving a defined benefits pension that had been funded by IBM, and thus they argued it was not analogous to the case of private insurance. The Court rejected this distinction as immaterial, because a person who receives a pension has earned it over the many years that he worked:
Pension benefits are a form of deferred compensation for the employee’s service and constitute a type of retirement savings. They are not intended to be an indemnity for wage loss due to unemployment. The parties could not have intended that the employee’s retirement savings would be used to subsidize his or her wrongful dismissal. (para 4)
Mr. Waterman urges us to reject IBM’s position. He submits that the pension is the property of the employee that is earned through work and consists of a benefit that is part of the employee’s remuneration package. (para 12)
Justice Cromwell adopted a rather homespun analogy that emphasizes the significance of the pension as a form of savings for the future by the employee:
Suppose an employer fires an employee without justification, breaching a contract of employment, and the employee turns to his or her savings account for living expenses. No one would argue that the employee’s recovery against the employer should be diminished by the employee’s withdrawals from savings. The savings account is a collateral source. To the extent that another collateral source resembles a savings account, the plaintiff should be able to recover damages without a deduction for the amount received from the collateral source. (para 85)
The Decision Reflects a Stance Against Age Discrimination
If the deferred compensation principle was not enough, Justice Cromwell was able to supply a specific policy argument for not reducing Waterman’s damage award:
Deducting the benefits only in the case of employees in Mr. Waterman’s situation would constitute unequal treatment of pensionable employees. Moreover, deductibility seems to me to provide an incentive for employers to dismiss pensionable employees rather than other employees because it will be cheaper to do so. This is not an incentive the law should provide. While this is a broader policy consideration, it is directly related to the benefit in question and has a reasonable basis in fact. (para 93)
It is remarkable that IBM would pursue the case to the Supreme Court, given the modest sum involved, unless it had plans to deal similarly with many other employees. Mr. Waterman’s pension entitlement was only about $25,000 per year. This contrasted with his previous employment earnings of about $75,000 per year. Even with his pension, his dismissal represented a substantial financial loss for him. The decision at first instance reports that he took a position in insurance sales following his dismissal, Waterman v IBM Canada Limited, 2010 BCSC 376. As per the usual principle of mitigation, his damage award was reduced by the modest amount he earned from his new job.
The Court noted that the law no longer permits employers to impose mandatory retirement. Provincial human rights codes prohibit age discrimination. If IBM had been allowed to reduce the damage award on account of Waterman’s pension eligibility, it would in effect have allowed the employer to evade the law against age discrimination. Therefore, any other decision would have been quite unsatisfactory from the viewpoint of justice in the workplace.