In a significant decision handed down on 11 December 2024, the High Court of Australia restored $1.44 million in damages previously awarded to an employee for breach of contract for psychiatric injury. This affirmed an earlier judgment by the Supreme Court of Victoria, in which it was found that the employer “botched” its own disciplinary procedures by dismissing an employee following a disciplinary hearing which the primary judge described as a “sham”.
In a substantial departure from the longstanding legal position in Australia, the case (Elisha v Vision Australia Limited [2024] HCA 50), establishes that employers can now be held liable for psychiatric injury caused by breaches of the employment contract arising from disciplinary actions and dismissals.
The case also raised the issue of whether employers have an expanded duty of care to ensure that employees do not suffer psychiatric injury when ending their employment (that is, by providing them with a safe system in relation to investigation and decision-making relating to these matters). However, the majority judgment of the High Court decided that it was not necessary to rule on this point in relation to this case.
Facts
In March 2015, an incident occurred involving Mr Elisha while he was staying at a hotel during a work trip. The specifics of the incident were disputed, and Mr Elisha was subsequently reported to his manager for alleged misconduct.
Mr Elisha was issued a “stand down letter” on 19 May 2015, requiring his attendance at a meeting to discuss the allegations. The allegations were confined to the hotel incident. He denied the allegations, but his employment was terminated on 29 May 2015.
Following his termination, Mr Elisha was diagnosed with a major depressive disorder and commenced legal proceedings in August 2020, seeking damages for psychiatric injury.
Findings
The primary judge labelled the disciplinary process by Vision Australia as “a sham and a disgrace”, ruling it breached the employer’s disciplinary procedure, which the Court found was incorporated into Mr Elisha’s employment contract. The Court found that Mr Elisha was not provided all the allegations made against him, or given an opportunity to respond to them, including an allegation as to a pattern of aggressive behaviour that was significant in the decision to terminate his employment.
Vision Australia appealed this decision, and its appeal was upheld by the Victorian Court of Appeal, which ruled that damages for psychiatric injury were unavailable for a breach of contract unless the psychiatric injury resulted from physical injury.
The High Court has now overturned that appeal decision (affirming the primary judgment), and ruled psychiatric injury to be a class of personal injury recoverable for breach of contract.
In relation to the incorporation of the employer’s disciplinary policy, the majority High Court judgment recognised that while some of the wording of the disciplinary procedure was “aspirational” in nature, the procedure also included “very specific assurances and promises” regarding the process that would be adopted by the employer.
Key legal findings
The High Court’s majority judgment addressed several key points:
- Contractual Incorporation of disciplinary policies: The employer’s disciplinary procedures were found, in this case, to have been incorporated into the employment contract.
- Scope of contractual duty: Liability for psychiatric injury caused by a breach of these contractual terms is within the scope of the employer’s duty concerning the manner of dismissal.
- Remoteness of damage: The psychiatric injury suffered by Mr Elisha was not deemed too remote a consequence of the breach, with the Court finding it within the reasonable contemplation of the parties at the time of forming the employment contract that there was a “serious possibility” that Mr Elisha would suffer a serious psychiatric injury if Mr Elisha was dismissed due to the employer’s failure to adhere to its disciplinary procedures.
Takeaways for employers
The High Court’s decision makes it clear that:
- Employers must ensure compliance with disciplinary procedures, where these are incorporated into employment contracts.
- There is a potential for significant damages if an employer’s breach of contract, particularly in disciplinary and dismissal processes, causes psychiatric injury.
- The foreseeability of psychiatric injury must be considered even in the absence of specific knowledge about an employee’s mental health.
Conclusion
Employers should exercise particular care about ensuring that their employment contracts and policies/procedures (and in particular those relating to discipline and termination) are drafted in a manner that will best avoid an argument of contractual incorporation of policies into the employment contract. For example, policies and procedures should avoid reference to any language that may be interpreted as making binding promises about what processes will apply when dealing with these matters.
Where employers do have contractually binding policies and procedures relating to discipline and termination, they should also ensure that their own internal processes comply with them, and that these processes appropriately consider any reasonably foreseeable risk of psychological injury arising from a discipline/termination process.
For further information or to discuss how this major decision may impact your organisation, please do not hesitate to contact us.
