Mitigation Issues

Impact of Pension Payments

Justice Chapnick of the Ontario Supreme Court reviewed this issue in the June 1995 in Emery v Royal Oak. The plaintiff had received pension income for the last 12 months of the agreed severance period of 30 months. The employer had argued such sum should offset the severance claim. The deduction was not allowed. The court relied upon the concept of the non-deductibility of collateral benefits as in the tort cases and also enlisted public policy:

In my view, the present law in Ontario on this matter is both clear and unequivocal: paid pension benefits are, quite simply, not deductible from an employee’s claim for lost salary over the notice period, whether or not the pension plan was fully funded by the employer. Recently, the principle against non-deductibility of collateral benefits has been confirmed by the Supreme Court of Canada in Cunningham v. Wheeler, 1994 CanLII 120 (SCC), [1994] 1 S.C.R. 359, [1994] 4 W.W.R. 153. In Chandler, Kent J. viewed the pension payments as being “akin to a registered retirement savings plan, other savings, or investments”. In doing so, he adopted the rationale of Salbany J. in Horodynski v. Electrohome Ltd., October 24, 1990, Ontario Court (General Division), that allowing such a deduction would “in effect, reward the employer for its breach of an implied term of the employment agreement”.

[27]     The prevailing view appears to be that dismissed employees who are eligible to take pension benefits should be free to do so without being penalized by having them deducted from damages for wrongful dismissal; in my respectful view, this theory is consistent with the principles enunciated in Parry v. Cleaver, [1969] 1 All E.R. 555, [1970] A.C. 1 (H.L.); Ratych v. Bloomer, 1990 CanLII 97 (SCC), [1990] 1 S.C.R. 940, 69 D.L.R. (4th) 25; Guy v. Trizec, supra; and Laakso v. Canada reflex, (1986), 15 C.C.E.L. 139, 5 F.T.R. 87. As a matter of policy, if this deduction were made, the defendant would benefit from withholding the appropriate termination allowance in breach of a specific term in Mr. Emery’s employment contract. The triggering of the pension only occurred due to the halting of salary payments at the end of July 1990 arbitrarily and without justification. To allow the deduction of these moneys from the plaintiff’s salary entitlement would, in my view, be contrary to public policy.

[28]     Aside from policy considerations, the facts underlying the payment in this case make the company’s contention even more untenable. The correspondence, memoranda, board of directors’ minutes, and other company documents clearly confirm the importance of this aspect of Mr. Emery’s contractual package. The retirement pension benefit plan constituted a known feature of his employment agreement. The pension moneys did not represent a gratuitous payment made to him, but rather, one earned by him over the years, in effect, a reward for past services.

The British Columbia Court of Appeal considered this issue in Girling v Crown Cork & Seal Canada, a decision released in August of 1995.

The plaintiff, on termination, was 54 years of age and had worked for the defendant for 34 years, and was last employed in a lower management status. In April of 1990, he was offered a severance package of 12 months as of June 1, 1990 with an offset for new employment or alternatively an unreduced early pension under the company paid plan to commence on the same date. Under either option, the pension would be paid from age 65.

The plaintiff chose neither option. Under the terms of the pension plan, he was entitled to receive an immediate unreduced pension at his stated age and service record, provided that he was “on lay-off due to permanent plant shut down”.

The employer argued that the above provision applied only to a “lay-off” which, it was argued, meant a right of recall, which was not appropriate here as there had been a final termination.

The court on first instance had decided this issue in the employee’s favour, which was upheld at the appellate level.

The issue then arose as to whether the damage claim for the notice period set at 18 months should be reduced by the pension income to which he was hence entitled for the severance period.

The employer argued that, failing immediate termination, had the employer provided working notice, the employee would not have been eligible for pension payments while employed.

The Court of Appeal agreed with the chambers judge who had used the analogy of collateral benefits and refused to deduct the pension sums received.

Of some interest is the strong policy approach taken by the majority in the Court of Appeal:

  In the absence of specific evidence, I take judicial notice of the pervasive and widespread occurrence which in recent times has permeated and devastated the security and assurance of long-term career employment in both the public and private sectors, particularly in the industrial and financial centres of Canada.  This phenomenon goes under the rubric of "downsizing" and the resulting severance of the employment is generally referred to as "lay-off".  The Federal government in particular has assured generous terms of "lay-off" to soften the blow to long-term career employees who, unlike the senior echelon in both government and industry, do not have the protection of generous employment contracts.  Both "downsizing" and "lay-off" have, in my view, obvious application to this case.  The expanded incidence of termination ("lay-off") of long-term career employees due to "downsizing" has given rise to a perceptible mutation enhancing benefits and offering retraining and re-employment assistance to such employees.  No claim for such enhanced benefits has been made in these cases and the employees are not seeking re-employment, but I consider they are entitled to the maximum benefits available in their forced early retirement.

The Ontario Court of Appeal considered a similar issue in Peet v Babcock & Wilcox, a decision released in April of 2001.

The plaintiff was terminated as of January 31, 1997. He was then entitled to apply for an early retirement benefit under the terms of the employer’s non-contributory defined benefit pension plan. He chose a joint and survivor option which allowed for a pension benefit of $2,579 a month as of March 1, 1997 for life and in the event of his death prior to his spouse, she was to receive a survivor payment of 60% of this sum for her life.

The plaintiff asserted at trial, that had he received working notice, asserted to be 24 months, his pension income at the end of such notice period, would have been higher by $170 per month, the present capital value of which was assessed at $33,357. This is reflective of the traditional determination of a pension loss by determining the actuarial value of the higher capital value of the pension entitlement, given reasonable notice. This analysis, however, does not account for the receipt of an immediate pension income received during the notice period.

The employer argued, in turn, that due to the fact that the plaintiff was able to commence a pension income at termination date, even though the ultimate pension upon the expiry of a notice period would certainly have been higher, the net consequences to the plaintiff was not an actuarial loss, but actually a gain of $25,294.

The court agreed with the submission that in determining the value of the pension loss, as was asserted, it was fair to consider the pension sums received immediately on termination and through the notice period. Given that the text of the plan, like many, stated that one cannot accrue pension service while receiving a pension benefit, it would not be possible to sue for the loss of accrued service, the essential vehicle for the enhanced pension claim, and take an immediate pension.

The end result was that no pension loss was awarded. The company did not argue for a  reduction to the overall damage claim based on the argument of a net positive pension benefit.

An argument similar, but not identical, to that of Peet was advanced in March of 2010 by the employer in Waterman v IBM. IBM’s plea was that the pension sum received should reduce the severance claim dollar for dollar for the awarded notice period of 20 months.

On termination, the plaintiff had been employed with IBM for 42 years and was 65 years of age. He then received full pension benefits of $2,124 per month from the IBM deferred benefit pension plan, under the terms of which an IBM employee was not entitled to pension benefits and employment income concurrently unless he had reached the age of 71. As noted later by the Court of Appeal, at age 71, the converse would be true. In addition, at age 65, he could no longer accrue pension credits.

The judge at first instance found himself bound by the Court of Appeal decision in Girling and declined the invitation of IBM to deduct the pension sum from the severance award. One unsuccessful argument advanced by the employer was that the British Columbia Court of Appeal decision in Sylvester in the Supreme Court of Canada, which had allowed the deduction of disability benefits from the severance claim, had distinguished Girling.

The Court of Appeal upheld the trial judge but determined that in view of the decision in Sylvester, did so for different reasons and distinguished the application of Sylvester in the process. This court found the pension benefits more akin to the benefits of a private insurance policy as in tort claims by which the plaintiff can sue civilly for a lost income claim and concurrently receive disability insurance benefits without offset.

The Supreme Court upheld the above decisions and determined that the pension benefit should not offset the claim. In doing so the SCC examined the question of “collateral benefit”. At first blush, the pension payment would indeed be such a sum and hence would be offset:

In general terms, there is a collateral benefit when a source other than the damages payable by the defendant ameliorates the loss suffered by the plaintiffs as a result of the defendant’s breach of legal duty: J. Cassels and E. Adjin-Tettey, Remedies: The Law of Damages (2nd ed. 2008), at p. 416. For example, if an employee is wrongfully dismissed, but receives employment insurance benefits, those benefits are a collateral benefit. The problem is whether they should be deducted from the damages the defendant will pay for wrongful dismissal.

[21]                          If we simply apply the compensation principle — that the plaintiff should recover his or her actual economic loss but not more — the answer is straightforward. If we do not deduct the collateral benefit, the plaintiff will be in a better position than he or she would have been in had the employment contract been performed. To apply the compensation principle, we should consider not only the plaintiff’s losses but also any gains that flow from the defendant’s breach. The collateral benefit problem asks whether we should apply the compensation principle and deduct or depart from it and not deduct.

As noted by the majority decision, this question is akin to a mitigation principle:

There is considerable overlap between the collateral benefit problem and the questions of mitigation.  The main distinction is this: mitigation is concerned with whether the plaintiff acted reasonably after the defendant’s breach in order to reduce losses.  The collateral benefit question, in contrast, is concerned with whether some compensating advantage that was in fact received by the plaintiff, most often as a result of arrangements made before the breach, should be taken into account in assessing the plaintiff’s damages:  see A. I. Ogus, The Law of Damages (1973), at pp. 87-88.

The Court concluded that the following summarizes the issues important to the interpretation of the respective rights of the parties:

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.

The Court determined that the pension plan was not a wage indemnity and hence more akin to the insurance exception, referring to the refusal to offset insurance benefits when the premiums were paid by the plaintiff. The pension payments were not offset:

(3)     Application to This Case

[77]                          Where would these factors lead us in this case?  In my view, they clearly support not deducting the retirement pension benefits from wrongful dismissal damages.  The retirement pension is not an indemnity for wage loss, but rather a form of retirement savings. While the employer made all of the contributions to fund the plan, Mr. Waterman earned his entitlement to benefits through his years of service. As the plan states, its primary purpose is “to provide periodic pension payments to eligible employees . . . after retirement . . .  in respect of their service as employees”: art. 1.01, A.R., at p. 117. Thus, it seems to me that this case falls into the category of cases in which the insurance exception has always been applied: the benefit is not an indemnity and the employee contributed to the benefit. This result is consistent with the dominant view in the case law and among legal scholars: Guy; Gill; Chandler; Emery; Parry; Ogus, at p. 223.

[78]                          To conclude, the compensation principle should not be applied strictly in this case because the pension benefits fall within the private insurance exception and should not be deducted from the wrongful dismissal damages.