Friday, December 13, 2013

Waterman v. IBM: Majority of SCC Dismisses Appeal

This is a long-awaited decision from the Supreme Court of Canada.  I posted about the case after the SCC agreed to hear it, and a year after the hearing, the SCC has finally dismissed the appeal.

You may recall that Mr. Waterman was a long-service employee (putting it mildly) who was dismissed in his mid 60s after an economic downturn.  At that point, however, he had a fully-vested defined benefit pension, which he started receiving after his dismissal.

In a nutshell, the issue was this:  Where a termination triggers the payout of a defined benefit pension, do the pension payments count as "mitigation earnings", reducing the employer's liabilities for pay in lieu of notice?

The majority of the Supreme Court says "No."

In my earlier post, I pointed out that IBM actually had a fairly compelling position on the first principles of the law of damages, for reasons concisely explained by the SCC at paragraph 2:
The general rule is that contract damages should place the plaintiff in the economic position that he or she would have been in had the defendant performed the contract. IBM’s obligation was to give Mr. Waterman reasonable notice of dismissal or pay in lieu of it. Had it given him reasonable working notice, he would have received only his regular salary and benefits during the period of notice. As it is, he in effect has received both his regular salary and his pension for that period. It therefore seems clear, under the general rule of contract damages, that the pension benefits should be deducted. Otherwise, Mr. Waterman is in a better economic position than he would have been in had there been no breach of contract.
However, the majority goes on to note that this case "in fact raises one of the most difficult topics in the law of damages, namely when a 'collateral benefit' or a 'compensating advantage' received by the plaintiff should reduce the damages otherwise payable by a defendant."  The majority concludes that pension payments, being a form of "deferred compensation for the employee's service", are not intended to be an indemnity for wage loss upon dismissal.  "The parties could not have intended that the employee's retirement savings would be used to subsidize his or her wrongful dismissal."

Collateral Benefit

The Supreme Court defines a "collateral benefit" as "a gain or advantage that flows to the plaintiff and is connected to the defendant's breach."  The issue arises in situations where there's some sort of third party compensation arising in connection to the breach of contract.  The court notes the example of EI benefits - not a great example anymore, because it's dealt with by statute, but this has not always been the case.

There are better examples:  After losing my job, my spouse starts covering my car payments.  She never would have done that if I'd still had my job.  So if I get pay in lieu of notice, too, isn't that a windfall to me?

It would clearly be absurd to suggest that assistance I get from my family, or friends, or charities, etc., because of the hardship imposed on me by the termination without notice, should be accounted for in calculating the employer's liabilities.

The majority also notes that there are a number of exceptions to the compensation principle...but the language it uses invokes notions of 'disgorgement' - measuring damages by the defendant's profits through its breach, which is available in certain scenarios - which would be wholly inappropriate in most wrongful dismissal situations.  Nonetheless, I do not take issue with the core premise here:  There are circumstances in which, for reasons of "justice, reasonableness and public policy", a compensating advantage should not be deducted from damages.

In evaluating these principles, the court looks at a couple of scenarios:  In the case of charitable gifts, if one were to account for them, the calculations would often be impractical, and "the springs of private charity would be found to be largely, if not entirely, dried up":  Allowing such a deduction would be poor public policy, because it would modify the behaviour of others in an undesirable way.  Makes sense.

Private insurance is the other common scenario, which the court notes is of limited practical importance because of "the widespread use of subrogation" - meaning that my insurer won't pay out on my insurance claim unless I sign over to them the right to pursue my damages.  (You steal and wreck my car, my insurer pays me the value of my would be really bizarre if I could then sue you for the value of the car, regardless, but in practice the terms of my insurance policy simply don't allow me to do so; rather, the insurer will sue you.)

The 'private insurance' exemption has arisen on a number of occasions in employment law, and there have been some problematic and inconsistent treatments of it.  In a couple of cases, including Sylvester, where the insurance was employer-purchased, for benefits intended to indemnify for "the type of loss" that resulted from the defendant's breach, the benefits have been deducted.  In a lot of other cases, the decision has gone the other way, distinguished on the basis of facts such as that the employee had "paid for [the benefits] through reduced wages".  (Frankly, I think that's a rather odd way of distinguishing these cases.  An employee's remuneration package is bought and paid for in its entirety - salary, non-cash benefits, insurance, etc. - by the employee through provision of labour.  That's what an employment relationship is all about.)

After a detailed summary of the case law, the majority notes the following about the private insurance exemption:
[76] From this review of the authorities, I reach these conclusions:
(a) There is no single marker to sort which benefits fall within the private insurance exception.
(b) One widely accepted factor relates to the nature and purpose of the benefit. The more closely the benefit is, in nature and purpose, an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. The converse is also true.
(c) Whether the plaintiff has contributed to the benefit remains a relevant consideration, although the basis for this is debatable.
(d) In general, a benefit will not be deducted if it is not an indemnity for the loss caused by the breach and the plaintiff has contributed in order to obtain entitlement to it.
(e) There is room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatment of those in similar situations, the possibility of providing incentives for socially desirable conduct, and the need for clear rules that are easy to apply.
On the basis of these factors, the majority concludes that Mr. Waterman's pension should not be deducted.

The Dissent

Justice McLachlin and Justice Rothstein dissented, and the dissent is somewhat compelling.

Because the pension, and the entitlements in respect of reasonable notice, flowed from the same contract of employment - and bearing in mind, of course, that this defined benefit pension did not vary at all for being required to draw upon it early - it makes little sense to permit double-recovery by the employee, on the one hand getting the pension benefits to which he was entitled by the contract, and on the other hand getting the salary to which the contract entitled him, when the contract did not contemplate him getting both at once.

As well, the dissent notes that the employer is ultimately responsible for actuarial deficiencies, and benefits from actuarial surpluses, in the pension fund.  To slightly oversimplify the point, I'd sum up the dissent's argument as being that money out of the pension fund is money indirectly out of the employer's pocket.  This is important, because it affects the public policy considerations:  The B.C. Court of Appeal, and the majority of the SCC, expressed concerns that allowing a deduction creates an unfavourable incentive for employers to dismiss pensionable employees, because they can use the pensions to satisfy part of their pay in lieu of notice obligations.  The dissent here answers that this would not be an effective strategy of saving money:  If you dismiss pensionable employees, you increase the liabilities of the pension fund, for which you are ultimately responsible.

The dissent also offers a fairly harsh critique of the majority, as trying to distinguish the Sylvester case, on the one hand, and trying to rely on it, on the other.  The dissent feels that a fair reading of Sylvester leads necessarily to the conclusion that the pension payments should be deducted.

My Thoughts

The lower courts have spent years and years distinguishing Sylvester on some fairly superficial and arbitrary bases, because it frequently yields a result that just looks wrong.  Now, the majority of the Supreme Court of Canada is following suit, in a case where the result wouldn't even look as wrong as Sylvester itself did!

The doctrine is muddy, and this muddies it up more.  What we need is to throw Sylvester completely out the window, and to send a clear bright-line message to employers that, if you want to receive the benefit of insurance benefits paid to the employee, you should contract for it.  Or perhaps a whole reboot of the doctrine entirely, and start regarding the notional reasonable notice period as not running until disability benefits cease (perhaps at the option of the employee?)

Because the truth is that in most of the Sylvester-type cases, it is immensely unfair to the employee to allow their insurance benefits to be deducted from their wrongful dismissal damages.  They are both income-replacement, yes, but they are income replacement benefits with ostensibly different purposes:  Pay in lieu of notice is supposed to keep you fed while you look for work; LTD benefits are supposed to keep you fed while you can't look for work.

So yes, one can imagine a windfall.  Suppose I'm on LTD, getting 60% my regular pay (and probably non-taxable!) for 12 months, and my employer terminates me around the start and I get a judgment for 12 months' pay in lieu of notice.  If I get a new job right at the end of my LTD, then in a one-year period I've made a boatload more money than I normally would have, and landed on my feet at the end.  But that's not the reality we should presume.  The more reasonable expectation is that, once I'm no longer disabled and no longer eligible for LTD, I'll start looking for a new job, and it will take me a 'reasonable' period of time to find one.  So, with a 12-month reasonable notice period, I might reasonably expected to be out of work for a year after LTD ends.  And if you've deducted my LTD benefits from my pay in lieu of notice, that means that I've had one year's pay to keep me going for two years.  So I don't see the 'private insurance exemption' as being an exemption to the compensation principle, necessarily, in this context; I see the contract damages and the insurance benefits as compensating for two potentially-discrete losses.

Whether or not the disability insurance premiums were paid out of my salary, or out of the employer's pocket as compensation for my labour on top of my salary, seems to me like it should be immaterial.  And it's the same with a pension.  Let's suppose that I maxed out my own RRSP every year, and suddenly after losing my job I get huge tax benefits drawing down that RRSP.  That's a pretty good case for a collateral benefit, no?  Is it different if my RRSP contributions were made directly by my employer instead, as part of my remuneration package?

In the Waterman case, though, there's a huge difference:  I don't see it exactly as being a 'one contract' issue, as Justice Rothstein describes it, but it's similar.  It's IBM's pension plan, and IBM promised Waterman a pension after he stopped working, and they provided that pension because - and only because - he was no longer drawing a salary.  They would have been better off, theoretically, putting him into an empty office and paying him his salary through the reasonable notice period.  (I mean, I could put together a compelling argument that this would be a constructive dismissal, but on the flip side the case law also presents a compelling case that for him to quit and sue in constructive dismissal would constitute a failure to mitigate.)

Consider this:  If I put my own money aside into a retirement plan, and bought an annuity after I was dismissed, then there's no way that that annuity income would be considered mitigation income.  I could have bought that annuity even before I was fired.  And that's the point:  While it's kind of like an annuity, and I see Waterman as having paid for it himself through his labour, the terms of the annuity said, in effect, "You don't get this money while you're still working for IBM."  And it's that contractual term that makes it inappropriate to give the annuity income together with lost income damages from IBM.

I'm not altogether alarmed about Mr. Waterman's windfall, though.  There's another feature of this case that he likely could have retired, started drawing his pension, and started working elsewhere.  The pension didn't necessarily exclude employment income; it excluded employment income with IBM.  Which is kind of a strange arrangement, and results in all sorts of absurdities - police officers retiring from one police service with a full pension and taking another job with another police service with a full salary.  So it's not the end of the world to see a double-recovery on a defined benefit pension.  But I just don't see any basis on which to exempt it from the application of the compensation principle.

Wider Implications

So, now that we know that, in a strong 7-2 majority decision, an employee can collect a defined benefit pension without deduction against his common law pay in lieu of notice, what does that mean for employers?

The answer is this:  Very little.

As interesting as the case is from an academic and legal perspective, and as interesting as it is to see the principles of collateral benefits further fleshed out, the truth is that this is such a rare fact pattern within this legal framework that it has narrow implications.  Defined benefit pensions are relatively rare, and increasingly so, in non-union environments.  So for an employee seeking common law wrongful dismissal damages to receive benefits from a defined benefit almost unheard of.  Certain very large and public sector employers will have to take note of this decision.  But for everyone else, this is a decision of relatively narrow import.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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