Peet v. Babcock & Wilcox Industries Ltd. [Indexed as: Peet v. Babcock & Wilcox Industries Ltd.]
53 O.R. (3d) 321
[2001] O.J. No. 1129
Docket No. C34631
Court of Appeal for Ontario
Finlayson, Carthy and Austin JJ.A.
April 2, 2001
Employment--Wrongful dismissal--Damages--Pension loss--Court should take pension benefits received during notice period into account when assessing difference in value of pension between actual date of termination and date on which employment could have been terminated after proper notice--Trial judge erred in ignoring expert evidence that by electing to accept commencement of his pension benefits on date of termination employee had increased present value of his pension over value attributable to same pension if he had accepted it at end of notice period.
Employment--Wrongful dismissal--Mitigation--Fifty-three-year- old long-term employee did not fail to mitigate his damages by refusing employer's offer of move to Ohio to join another division of company--Employee's establishment of new consulting business did not constitute unreasonable attempt at mitigation merely because business did not initially live up to his monetary expectations.
The plaintiff, a mechanical engineer, was employed by the defendant between April 1966 and January 1997, when his employment was terminated without cause. In the plaintiff's successful wrongful dismissal action, the trial judge found that the reasonable notice period was 18 months. No appeal was taken from that determination. When the plaintiff's employment was terminated, he was entitled to apply for early retirement benefits under the defendant's pension plan. He did so. At trial, he claimed, inter alia, damages for loss of pension benefits over the notice period. He submitted that he should receive as damages the difference between the pension benefits he elected to accept effective the date of his termination and the benefits that he would have received had he waited until the end of the notice period to which he was entitled by law. The defendant led expert evidence that the immediate commencement of the lower pension resulted in a higher present value than any of the pensions that would have been paid out following the notice period. The trial judge accepted the plaintiff's submission and decided to award a grossed-up present value of the pension loss in the amount of $49,293.97. The defendant appealed on that issue. The defendant also appealed the trial judge's finding that the plaintiff had not failed to mitigate his salary loss during the notice period.
Held, the appeal should be allowed in part.
Having regard to the plaintiff's age and his long association with the city where he was employed, his refusal to move to Ohio to join another division of the defendant corporation was reasonable and did not amount to a failure to mitigate his damages. The same was true of his establishment of a new consulting business. The fact that the early years of the plaintiff's self-employment did not live up to his monetary expectations did not mean that this was an unreasonable attempt at mitigation.
When assessing the difference in the value of a pension between the actual date of termination and the date on which the employment could have been terminated after proper notice, a court must take into account pension benefits received during the notice period. Such payments influence whether a pension loss has occurred in the first place. If, based on the early commencement of pension benefits, an employee's overall pension package is better off than it would have been had the employee completed a longer term of employment, awarding damages under the guise of pension loss would serve to put the employee in a more favourable position under the employment contract than had he not been terminated. In this case, the trial judge erred in ignoring the expert evidence to the effect that by electing to accept the commencement of his pension benefits on the date of his termination, the plaintiff had increased the present value of his pension over the value attributable to the same pension if he had accepted it 18 months later. Accordingly, the plaintiff suffered no pension loss.
APPEAL by a defendant from reasons for judgment in a wrongful dismissal action.
Emery v. Royal Oak Mines Inc. (1995), 1995 7074 (ON SC), 24 O.R. (3d) 302, 11 C.C.E.L. (2d) 149 (Gen. Div.), supp. reasons (1995), 1995 7223 (ON SC), 26 O.R. (3d) 216, 15 C.C.E.L. (2d) 49 (Gen. Div.), distd Cases referred to King v. Gulf Canada Ltd., [1989] O.J. No. 130 (Dist. Ct.), affd. (1992), 60 O.A.C. 139, 45 C.C.E.L. 238 (C.A.) [Leave to appeal to S.C.C. refused 64 O.A.C. 320n, 157 N.R. 397n, [1993] S.C.C.A. No. 70]; Michaels v. Red Deer College (1975), 1975 15 (SCC), [1976] 2 S.C.R. 324, [1975] 5 W.W.R. 575, 5 N.R. 99, 75 C.L.L.C. 14,280, 57 D.L.R. (3d) 386; Sylvester v. British Columbia, 1997 353 (SCC), [1997] 2 S.C.R. 315, 34 B.C.L.R. (3d) 1, 146 D.L.R. (4th) 207, 212 N.R. 51, [1997] 6 W.W.R. 625, 29 C.C.E.L. (2d) 1, 97 C.L.L.C. 210-012; Wilson v. Martinello (1995), 1995 303 (ON CA), 23 O.R. (3d) 417, 125 D.L.R. (4th) 240, 37 C.P.C. (3d) 325 (C.A.) Statutes referred to Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, s. 3(b) Rules and regulations referred to Income Tax Regulations, C.R.C., c. 945 (1978), regulation 8503
Gordon S. McSevney, for respondent. Douglas K. Gray, Stephen F. Gleave and Lisa J. Mills, for appellant.
The judgment of the court was delivered by
FINLAYSON J.A.:--
Background
[1] This is an appeal by Babcock & Wilcox from the judgment of the Honourable Mr. Justice Sills in respect of an action by the respondent William Jeffrey Peet for wrongful dismissal.
[2] The respondent, who is a mechanical engineer, commenced employment with the appellant on April 25, 1966. His employment was terminated effective January 31, 1997, at which time he was employed as a Technical Consultant in the appellant's international fossil fuel (non-nuclear) power generation group in Cambridge, Ontario.
[3] The respondent's annual salary at the time of termination was $83,472. He was 53 years of age at that time.
[4] There is no issue as to whether there existed cause for the respondent's dismissal. It is accepted that the respondent's employment was terminated as a result of the relocation of the fossil fuel power generation group to the appellant's United States operations in Barberton, Ohio. The respondent was one of approximately 200 employees who had their employment terminated as a result of the relocation of the fossil fuel operations.
Issues
Did the trial judge err in holding that the respondent employee properly mitigated his salary loss during the notice period set at 18 months?
Did the trial judge err in holding that the respondent suffered a pension loss in the amount of $49,293.97?
Analysis
i. Mitigation of salary loss
[5] Although the length of notice to which the respondent was entitled was an issue at trial, the determination by the trial judge that 18 months would have been reasonable under the circumstances is not under appeal. However, the appellant does take issue with the trial judge's finding that the respondent had attempted to mitigate his lost salary and that his efforts were adequate.
[6] The burden of proving that the respondent had either failed to mitigate, or had insufficiently mitigated his salary loss, rested with the appellant. That is, the onus at trial was on the appellant to show that the respondent did not minimize his salary loss by a reasonable course of action designed to avoid the unreasonable accumulation of the loss.
[7] Having regard to the respondent's age and his long association with the city of Cambridge, Ontario, I accept the trial judge's finding that the respondent's refusal to move to Ohio to join another division of the appellant corporation was reasonable. The same can be said of the respondent's decision to start his own business as a consultant.
[8] The respondent's establishment of a new consulting business was clearly a means of mitigation. The fact that the early years of the respondent's self-employment did not live up to his monetary expectations does not mean that this was an unreasonable attempt at mitigation. An employee who has been terminated is entitled to consider his or her own long-term interests when seeking another way of earning a living. The respondent's efforts at mitigation cannot be classified as unreasonable simply because his actions did not neglect all other interests while focusing exclusively on his short-term obligation to mitigate damages for the sake of his former employer.
[9] The trial judge considered all of the arguments that were made in this court on the subject of mitigation. The trial judge was in the best position to assess the evidence, its relevance, and the weight to be attributed to it. I can find no reason to disagree with his findings on this matter.
[10] Accordingly, I would not give effect to the appellant's argument on the first issue.
ii. Calculation of pension loss
[11] The second issue, which revolves around the award of damages with respect to pension loss, raises an interesting point that to my knowledge has not yet been dealt with by this court.
[12] The respondent's employment was terminated effective January 31, 1997. As a consequence of his age and years of service, he was entitled to apply for early retirement benefits under the appellant's pension plan. He obtained an estimate from the appellant as to the expected amount of his pension under various options.
[13] After considering his choices, the respondent accepted what was presented to him as option 6 under the Salaried Employees Retirement Plan: "Joint and Survivorship Pension Reducing to Sixty Percent". This meant that he was entitled to receive pension benefits of $2,579.01 commencing on March 1, 1997 and continuing for his lifetime. In the event that the respondent predeceased his wife, she would thereafter receive 60 per cent of the respondent's pension amount for the duration of her lifetime. It should be noted that the appellant's corporate pension plan is a non-contributory defined benefit plan.
[14] On July 6, 1998, the appellant notified the respondent that as a consequence of the March 1, 1997 partial plan wind- up, the monthly pension benefits to which the respondent was entitled had been increased to $2,666.50 per month, to be effective August 1, 1998, but adjusted retroactively to March 1, 1997. The same survivorship benefits would apply.
[15] At trial, the respondent claimed, inter alia, damages for loss of salary and pension benefits based on a 24-month notice period. In respect of the pension loss, he claimed that because of his termination of employment on January 31, 1997, his monthly pension payments were $170 less than what they would have been had he accrued 24 additional months of pensionable service. The respondent filed a prescribed annuity quote from an insurer which quoted that he needed an annuity of $33,357 to replace this loss.
[16] The appellant led evidence through Thomas Kidd of Wright Mogg and Associates, the actuary retained by the Babcock & Wilcox Retirement Pension Plan, that had the respondent worked for an additional period of 18 months, his pension benefits beginning on July 1, 1998 would have been $2,776.70 per month, representing a monthly difference of $110.20 from what he was receiving. According to Kidd, had the respondent worked an additional 24 months, his pension would have been $2,836.29 per month, representing a monthly difference of $169.79. However, it was Kidd's evidence that the immediate commencement of the lower pension resulted in a higher present value than any of the pensions that would have been paid out following the extra notice periods. For example, Kidd concluded that if the appropriate notice period was 18 months, by accepting the early commencement of pension benefits, the respondent had increased the present value of his pension by $25,294.
[17] As noted earlier, the trial judge held that the respondent was entitled to 18 months notice. The trial judge then asked for written submissions on the issue of how the pension loss and other items such as vacation pay and bonus should be calculated.
[18] In written submissions tendered following the end of the trial, the respondent argued that had he worked until the end of the 18-month notice period, he would have been entitled to a monthly pension of $2,789.38 effective July 1, 1998. Accordingly, since the respondent was receiving $2,666.50 monthly, it was submitted that the respondent had suffered a loss of $122.88 per month over the full term of his retirement.
[19] The report filed by the respondent further claimed that the present value of the respondent's total pension loss amounted to $24,504.03. In addition, the respondent argued that the trial judge should order a "gross-up" on the loss based on the respondent's highest combined federal and provincial marginal tax rate of 50.29 per cent, for a total pension loss of $49,293.97.
[20] In its post-trial written submissions, the appellant maintained that if the [respondent] had worked an additional 18 months, his pension payment would have been only $110.20 more per month than the amount he was currently receiving. However, the appellant reiterated its contention that the respondent was better off by receiving the lower pension amount of $2,666.50 commencing on March 1, 1997, than he would have been had he waited the 18 months to receive a monthly pension of $2,776.70.
[21] While the appellant did comply with the trial judge's request for written submissions, counsel for the appellant had first objected on the basis that the concept of grossing-up for income taxes was improperly introduced into the case for the first time by the respondent's post-trial written report. The appellant had taken exception to the respondent's written submissions, alleging that they introduced a new claim and new evidence, and had requested an opportunity to make oral submissions and cross-examine the respondent on the report. Despite the appellant's protestations, the trial judge reached his decision on pension loss without hearing additional oral submissions on the matter.
[22] I agree that the trial judge's treatment of the respondent's post-trial written submissions was unfortunate. However, in light of my proposed disposition of this issue, I do not feel it is necessary at this point to make any additional comments on the process followed by the trial judge.
[23] In his supplementary reasons dated June 15, 2000, the trial judge accepted the respondent's submission that he should receive as damages the difference between the pension benefits he elected to accept effective the date of his termination and the benefits that he would have received had he waited until the end of the notice period to which he was entitled by law. The trial judge relied on the respondent's calculations and accepted that $24,504.03 represented the present value of an annuity that would fund the additional payment of $122.88 per month with a 60 per cent survivor benefit. The trial judge, using a marginal income tax rate of 50.29 per cent, then decided to award a grossed-up present value of the pension loss in the amount of $49,293.97.
[24] There are a number of fundamental problems inherent in the approach taken by the trial judge. Most importantly, it fails to credit against the pension loss claim the monthly pension payments actually received by the respondent during the 18-month notice period. That is, this approach does not take into account the evidence of the appellant's expert, Kidd, that the respondent received a greater amount by commencing his pension at the earlier date, than he would have received had he continued to work and delayed retirement. Even though the respondent's current monthly pension amount is lower than what it would have been had he chosen to work an additional 18 months, his immediate receipt of this lower amount resulted in an overall higher pension value than that which he would have received had he worked until the end of the notice period.
[25] Without going through the complex actuarial calculations in detail, it is important to review some of the figures documented by Kidd. It should be noted that the respondent, who did not call an expert at trial, does not endorse all of the appellant's figures and calculations. According to Kidd, had the respondent been employed to June 12, 1998 (18 months after the notice of termination on December 12, 1996), his monthly pension would have amounted to $2,776.70. He also indicated that as of March 1, 1997, the total value of the pension or annuity necessary to generate the higher payments was $362,739.
[26] In contrast, Kidd compared the value of the pension actually received by the respondent. He recognized that the respondent started receipt of his pension on March 1, 1997 in the monthly amount of $2,666.50, and that during the period of March 1997 to June 1998, the respondent received 16 monthly payments, totalling $42,664. According to Kidd, due to the immediate commencement of the lower pension in this notice period, the total value of the pension or annuity actually received by the respondent as of March 1, 1997 was $388,033.
[27] Based on the above figures, Kidd concluded that the respondent was better off by receiving the lower pension payments commencing on March 1, 1997 and his pension had actually increased by $25,294 as a result of his termination of employment on January 31, 1997. Furthermore, to obtain a present value of the difference, interest would have to be added to this figure, increasing the value of the pension received by the respondent as of March 1, 1997. Accordingly, the respondent appears to have suffered no loss in this area of the claim.
[28] In supporting his position that the trial judge did not err by finding a pension loss in the face of Kidd's expert evidence, the respondent submitted that paid pension benefits are 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. In my opinion, the respondent has confused the authorities that make clear that the employer is not entitled to set-off pension benefits against salary loss in a wrongful dismissal case with the assessment within the pension analysis as to whether a pension loss has occurred at all.
[29] The formula for calculating pension loss that has been recognized by authority is the commuted value methodology. This method determines the present value of the difference between the value of the pension at the time of termination and the value at the time when the employee could have been lawfully terminated: King v. Gulf Canada Ltd. (unreported), [1989] O.J. No. 130 (Dist. Ct.), affd by Court of Appeal at (1992), 60 O.A.C. 139, 45 C.C.E.L. 238, application for leave to appeal to Supreme Court of Canada dismissed at [1993] S.C.C.A. No. 70., 64 O.A.C. 320n.
[30] Accordingly, the first step in employing this methodology requires a determination of the commuted value of the pension at the time of termination and at the end of the reasonable notice period. The present value of the difference between these two figures represents the pension loss suffered. Once the pension loss has been calculated using this methodology, it would be inappropriate to then deduct pension payments from lost salary by taking into account pension payments received during the notice period. However, this does not lead to the conclusion that pension payments made during the notice period should not initially be taken into account when determining the commuted value of the pension at the time of termination.
[31] In cases such as the one at bar, where there is actuarial evidence that pension payments made during the notice period enhance the overall value of the pension fund, such evidence must factor into the calculation of whether a pension loss has occurred at all. That is, when making use of the commuted value methodology to calculate the difference between the value of the pension at the time of termination and at the end of the notice period, it would be wrong to disregard pension payments made during the notice period that may serve to alter the net difference. This is especially true if the earlier commencement of pension payments serves to put the employee in an overall better position than had the pension commenced after the notice period, effectively eliminating any pension loss.
[32] The cases cited by the respondent, such as Emery v. Royal Oak Mines Inc. (1995), 1995 7074 (ON SC), 24 O.R. (3d) 302, 11 C.C.E.L. (2d) 149 (Gen. Div.), additional reasons at (1995), 1995 7223 (ON SC), 26 O.R. (3d) 216, 15 C.C.E.L. (2d) 49 (Gen. Div.), do not shed light on the specific pension loss valuation issue under appeal in the case at bar. While such cases hold that pension benefits received by an employee during the notice period are not deductible from the employee's claim for lost salary over the notice period, they do not address the initial calculation of pension loss in circumstances where the employee may actually have benefited from the early commencement of lower pension payments. Taking into account notice period pension payments when calculating whether a pension loss has occurred is not the same as considering such payments as having been received in mitigation of salary loss. Accordingly, the cases referred to by the respondent on this issue cannot be relied upon to uphold the calculation of pension loss sancti oned by the trial judge.
[33] Therefore, I conclude that when assessing the difference in the value of the pension between the actual date of termination and the date on which the employment could have been terminated after proper notice, a court must take into account pension payments received during the notice period. Such payments influence whether a pension loss has occurred in the first place and must be given proper consideration. If, based on the early commencement of pension benefits, an employee's overall pension package is better off than it would have been had the employee completed a longer term of employment, awarding damages under the guise of pension loss would serve to put the employee in a more favourable position under the employment contract than had he not been terminated. To award damages in such a case would undermine the fundamental principle of compensation recognized in wrongful dismissal cases, that a wronged employee is only entitled to be put in as good a position as he would have been in if there had been proper notice: Michaels v. Red Deer College (1975), 1975 15 (SCC), [1976] 2 S.C.R. 324, 57 D.L.R. (3d) 386 at pp. 330-31 S.C.R., p. 390 D.L.R.
[34] In addition to failing to credit against the pension loss claim the pension payments received during the notice period, the trial judge also does not appear to have given adequate consideration to the agreement between the parties. As noted earlier, the basic principle of compensation in wrongful dismissal cases is that the plaintiff is entitled to be put, so far as money can do it, in the position he or she would have occupied if the wrongful termination had not been done. However, in assessing these damages, the parties' entire contract of employment governs whether the parties intended the employee to recover specific measures of damages: Sylvester v. British Columbia, 1997 353 (SCC), [1997] 2 S.C.R. 315, 146 D.L.R. (4th) 207 at pp. 320-21 S.C.R., p. 211 D.L.R.
[35] In this case, the trial judge ignored the language of Article 5.4 of the appellant's pension plan that expressly prohibits simultaneous accumulation of pensionable service and payment of pension income. Furthermore, Regulation 8503 of the Income Tax Regulations, C.R.C., c. 945 (as amended), under the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (as amended), s. 3(b), prohibits benefit accruals after pension commencement. Article 1.7 of the pension plan states that the plan is to be read in compliance with the Regulations.
[36] Accordingly, the simultaneous payment of pension benefits and accrual of pension benefits are inconsistent with the parties' employment contract. The parties did not intend that the respondent be able to receive pension payments and continue to accrue benefits, as would be the case if the notice period pension payments were not taken into account in assessing whether the respondent suffered any pension loss.
[37] A final concern that I have with respect to the findings of the trial judge relates to the decision of the trial judge to order a gross-up on the damage award. This means that had there been a loss arising out of the lower pension entitlement (as the trial judge incorrectly found there was), the respondent would not only have been entitled to the value of an annuity sufficient to make up the shortfall, but would also have been entitled to gross-up that amount to account for the fact that the annuity purchase would be in after-tax dollars.
[38] The function of the court is simply to determine the commuted value of the pension loss and then to award a corresponding lump sum in damages. If the respondent wants to use the damages award to purchase an annuity, he is entitled to do so. However, the court is not entitled, for tax purposes, to treat a pension loss award any differently from an award for loss of salary. The court was not referred to any authority for grossing-up a pension loss award and counsel offered no principled reason why it would be appropriate. The amounts received under the proposed annuity should be taxable in the hands of the annuitant, as would be the amounts received under the pension plan which it is intended to supplement. For a discussion on the meaning of gross-up, see Wilson v. Martinello (1995), 1995 303 (ON CA), 23 O.R. (3d) 417, 125 D.L.R. (4th) 240 (C.A.) at p. 422.
[41] Accordingly, I would allow the appeal as it pertains to the valuation of pension loss, and vary the judgment below to delete the award for $49,293.97.
Costs
[42] Counsel at the hearing advised this court that if we varied the judgment below, cost consequences to the parties might arise. Accordingly, I would invite counsel to make submissions in writing as to the treatment of costs both in this court and below.
Appeal allowed in part.