Canadian HR Reporter

CANADIAN HR REPORTER CANADIAN HR REPORTER May 19, 2014 May 19, 2014 16 FEATURES/NEWS FEATURES/NEWS PENSIONS Pension benefi ts and severance pay Recent IBM decision clarifi es deductions around wrongful dismissals By Ian Breneman A t the end of last year, the Supreme Court of Canada held that defi ned pension benefi ts could not be deducted from a wrongful dis- missal award in IBM Canada Limited v. Richard Waterman. Richard Waterman had been em- ployed with IBM for 42 years and was a member of its defi ned ben- efi t (DB) pension plan, which was fully paid by IBM. He reached age 65, at which point he could have retired with a full pension. Under his employment contract, he was not entitled to receive both pen- sion benefits and salary at the same time, so he could either keep working or retire and collect the pension. Waterman decided to continue working but, in 2009, IBM termi- nated his employment and began paying him retirement benefi ts of $2,124 per month. Waterman sued for wrongful dismissal. e trial court held the reasonable notice period was 20 months. IBM sought to reduce the amount of damages for wrongful dismissal by the amount of the monthly pension benefit, but the court disagreed. e British Columbia Court of Appeal also refused to deduct the pension benefi t, so IBM appealed to the Supreme Court. IBM's position IBM argued, and two dissent- ing judges of the Supreme Court agreed, that the general approach to damages for breach of contract should be followed. at approach seeks to place the wronged party in the same position it would have been had the contract been ful- fi lled. In a simple example where one party fails to deliver goods purchased for resale or manufac- turing, the wronged party could be awarded damages for the cost of more expensive replacement goods, extra shipping costs and lost profi ts, because these are the monetary losses that were actually incurred. IBM reasoned Waterman was not entitled to receive both his pension benefi ts and salary at age 65. During the notice period, he would only have been paid his sal- ary. erefore, his actual loss was the severance awarded by the trial court minus the pension benefi ts. Which benefi ts are deductible? e Supreme Court held that the general approach to damages is not a full answer in the case of determining which benefi ts are deductible from severance pay, and it noted two other exceptions. First, any charitable gift a plaintiff receives is not deductible from a damage award. Second, benefi ts from a plaintiff 's private insurance are not generally deductible from damages the defendant has to pay. In this example, the defendant would still have to pay for lost profi ts if the plaintiff had coverage under its own insurance policy for the same loss. e Supreme Court then went on to analyze when a benefi t can be likened to the pri- vate insurance exception. e fi rst factor is the nature and purpose of the benefi t. is examination focuses on whether the benefi t the plaintiff receives was intended to indemnify her for the same type of loss caused by the defendant's breach of contract. In the employee termination setting, the inquiry is whether the benefi t is intended to replace the wage or salary the employee is no longer earning as a result of a wrongful dismissal. e second factor is whether or not the plaintiff contributed to obtaining the benefi t, such as by way of insurance premiums or other contribution. e Supreme Court reviewed a number of its earlier decisions and summarized the trends based on these two factors. Where the benefi t is not intended as an in- demnity for the same type of loss caused by the defendant's breach of contract, and where the plain- tiff contributed to obtaining the benefi t, the benefi t received is not deductible. Even if the benefi t is intended as an indemnity for the type of loss caused by the defendant, but the plaintiff contributed to obtaining the benefi t, the benefi t received is not deductible. Such benefi ts are only deductible if the benefi t is in- tended to be an indemnity for the type of loss caused by the breach of contract and the plaintiff does not contribute to obtaining the benefi t. e Supreme Court also left room for broader policy consid- erations based on what behaviour may be encouraged or discour- aged as a result of deducting the benefi t from the damages award. However, examining policy con- siderations should only be neces- sary if those policy considerations are "directly related to the particu- lar benefi t in issue and when there is some reasonable basis in fact or experience to suppose that de- ducting or not deducting will ac- tually serve the policy objective." In the IBM case, the Supreme Court held that a pension ben- efi t is not intended to replace lost wages. Instead, it is intended to be a retirement plan providing pen- sion payments to employees after they retire. Although the plan was non-contributory, with IBM alone paying into it, Waterman was said to have contributed to obtaining the benefi t through his years of service with his employer. As a result, his pension benefi t could not be deducted. Implications for employers Termination is often a sensitive and sometimes a complicated issue, particularly when it involves employees at or near retirement age. The Waterman decision makes clear that payments from a DB pension plan cannot be used to reduce a terminated employee's severance pay. The same rationale will ap- ply to defi ned contribution (DC) plan payments. As noted by the dissenting judges, deducting DC plans would put the employee in an even worse situation due to the fi nite benefi ts an employee could receive under such a plan. Employers will also be precluded from deducting income replace- ment benefits if the employee contributed to obtaining such benefi ts. In the recent case of King v. 1416088 Ontario Ltd., the court followed the reasoning in Water- man. In the King case, a terminat- ed employee sought a lump sum payment of the minimum amount he would have received under an agreement with his employer for a DB pension, in addition to sever- ance pay. e court rejected that request as it would have been contrary to the terms of the pension agree- ment. is case highlights that the text of the pension plan or terms of the benefi t still play a key role in how that benefi t will be paid in the context of a severance. Ian J. Breneman is an associate in Stewart McKelvey's advocacy depart- ment and a member of the labour and employment group in Halifax. He can be reached at ibreneman@stewart- mckelvey.com. A pension benefi t is not intended to replace lost wages. It is intended to be a retirement plan providing pension payments to retired employees. Whether these pay-to-quit policies can be lawfully imported to Canada would really depend on how they're implemented and used, according to Craig Stehr, a lawyer at Nelligan O'Brien Payne in Ottawa. " ere certainly would be im- plications in terms of severance and in particular EI and employ- ment insurance but… Canadian employers should not view pay- to-quit programs as an alterna- tive to terminating employees," he said. " e decision really does have to remain with the employee in order for these payments to re- main lawful and not run counter to the obligation to provide rea- sonable notice or pay in lieu of that notice." Any employer looking to imple- ment such a program needs to be cautious, said Stehr. " e policy needs to be applied across the board in a uniform way," he said. "Failing to do that could lead to employees being unintentionally or perhaps in- tentionally targeted and result in a constructive dismissal claim by the employee… Employers would also likely want to ensure the em- ployee is providing full and fi nal release in respect of any potential claims against the employer." Organizational benefi ts But a pay-to-quit program could make sense during the training period because it can save an em- ployer money, said Steve Fanjoy, senior partner, consulting and training, at Fanjoy & Associates in Edmonton. "It's good for these people look- ing at jobs because then they may fi gure out… ' is really isn't the type of work I want'… and there's no pain for them because they get paid to go and they also don't get anything negative in terms of references. It's a little bit of self- awareness, understanding what it is they're looking for." A pay-to-quit program is also a good tool for intelligence-gather- ing, he said. " at gets into engagement, job satisfaction, the culture people are looking for," he said. "When you've got people who are happy — and this is where most organizations fail — you want to fi nd out 'Well, why are they staying, what is it they like about their job?' Because you want to repeat that, you want to build that sort of a performance culture, so it can be like a stay interview. "You're saving a lot of money because you're getting people who want to be part of the sys- tem and… if your employees are satisfi ed, they deal better with the customers or the clients and that makes you more money." It's also unlikely people would job-hop to take advantage of the program because it would come back to haunt them, said Fanjoy. And this approach ties into recruit- ing practices because it helps em- ployers fi gure out if they are doing the best job of fi nding people. e application of such a pro- gram would be fairly limited in Canada, said Stehr, but for the strategy to work eff ectively, an employer would need to have a desirable, high-commitment workplace with a strong corporate culture and positive brand. "And, of course, any employer implementing this type of policy would need to have an eff ective screening process at the time of the hire, otherwise it could be quite a costly policy of the em- ployer if it's not selecting the 'right' employee," he said. Pay-to-quit programs are a po- tential talent management tool and could be quite successful in the right workplace, said Stehr. "It can be quite empowering, if it's done correctly, for the employ- ee to have a mature assessment of what that employee sees as his or her future with the company, pro- vided there is not any true pres- sure coming from the company for that employee to depart." Zappos and Amazon appar- ently have fairly intensive devel- opment of employees at the out- set of employment, and those are essential components to this type of policy, said Stehr. "It sends out the message that the employer is so confi dent in its work culture and its positive treatment of its employees that it's prepared to let employees as- sess the value of that work moving forward. In the wrong corporate culture, this could be quite prob- lematic and quite an expensive policy decision." While it may not be viable to institute an identical program, there is value in understanding the more subtle mechanics, said Kapel. "Basically, what they're do- ing is getting employees to con- sciously choose to remain with the company and, in doing that, the organization is reinforcing its desirability as an employer, so it's strengthening its employer brand," she said. "You really do want employees to have that conscious sense of connection to the organization, to feel positive about their choice to remain employed there, so there's certainly a benefi t to fi nd- ing mechanisms, whatever they may be, to foster that…. in that moment where they say, 'Yes, I'm going to stay,' they sort of reaffi rm the commitment to the organiza- tion, which is a valuable exercise." Gives employees 'conscious sense of connection' Gives employees 'conscious sense of connection' "What they're doing is getting employees to consciously choose to remain with the company... the organization is reinforcing its desirability as an employer." PAY TO QUIT < pg. 1

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