Australia: Contractual damages for psychiatric injury – another risk in employee dismissals

The High Court of Australia in Elisha v Vision Australia Limited [2024] HCA 50 (Elisha) has found that an employer can be liable for a psychiatric injury sustained by an employee as a consequence of the employer breaching the employee’s employment contract during a disciplinary process. The High Court has upheld the damages awarded at first instance to Mr Elisha in this case – which were nearly $1.5 million.

The High Court’s decision in Elisha overturns a longstanding legal position regarding the unavailability of general damages for psychiatric injuries in employment contractual disputes (in other words, in claims outside the traditional workers compensation jurisdiction). Coupled with the increased focus on employees’ psychosocial health, this will likely result in increased breach of contract claims being made by employees, including employees becoming more creative in how they frame these claims, given the increased awards of compensation now available in this jurisdiction.

Key messages for employers following the High Court’s finding

• It is now more important than ever for employers to thoroughly review their template employment contracts and disciplinary policies/procedures to ensure that these policies allow for employer discretion and do not impose unintended mutually binding obligations.
• The employer’s liability in Elisha arose despite the parties having executed a narrowly drafted settlement and release agreement in response to the employee’s prior unfair dismissal claim. Employers should ensure that their settlement and release deeds and agreements are drafted broadly enough to capture further common law claims by the employee arising from their employment.

What happened in Elisha?

By way of background, in March 2015, Mr Elisha who was at the time an employee of Vision Australia Ltd (Vision Australia), was on a work-related trip. During his stay in a hotel it was alleged that he was aggressive and intimidating towards the owner of the hotel after he made several complaints about his accommodation. Vision Australia subsequently stood Mr Elisha down and conducted an investigation into this allegation. Mr Elisha was informed that the investigation would occur in line with Vision Australia’s disciplinary procedure and enterprise agreement, which both relevantly provided for a number of prescriptive due process and procedural fairness obligations that Vision Australia was required to follow.

While Mr Elisha was given an opportunity to respond to the allegation that had been made against him, Vision Australia formed the view that the evidence of the owner of the hotel was preferrable to his own evidence regarding the alleged incident. Vision Australia partly formed this view on the basis that Mr Elisha had allegedly displayed a "pattern of aggression" during his employment based on several previous alleged incidents. These incidents were however not put to Mr Elisha during the investigation or any show-cause process and he was not given an opportunity to respond to these separate allegations. Vision Australia subsequently summarily terminated his employment for serious misconduct.

Following his termination, Mr Elisha commenced unfair dismissal proceedings in the Fair Work Commission. This claim settled between the parties for $27,248.68 – which represented the maximum amount that Mr Elisha could have been awarded at the time by the Fair Work Commission as part of an unfair dismissal claim. A settlement deed was executed between the parties which provided for a release that applied to the “employment, proceedings and the termination” (emphasis added).

Around five years later, Mr Elisha commenced further legal proceedings against Vision Australia alleging the company had breached his employment contract and was negligent in the show cause process and that this had caused him significant psychiatric injury.  

Why did the settlement deed not bar Mr Elisha’s subsequent claim?

At first instance, Vision Australia contended that the release Mr Elisha had signed in relation to his unfair dismissal claim should bar him from being able to commence any subsequent legal proceedings against the company. This argument was however rejected due to the release providing that it applied to Mr Elisha’s employment, the unfair dismissal proceedings and his termination. It was found by the court that the use of the operative word “and” limited the release to only matters related to the unfair dismissal proceeding.

The court found that Mr Elisha’s subsequent breach of employment contract and negligence claims were not matters that fell within the scope of the release. As such, the court found that Mr Elisha was not barred from bringing these claims in court.

How did Vision Australia breach Mr Elisha’s employment contract?

Mr Elisha's employment contract stated that his employment with Vision Australia would be in accordance with its policies and procedures, and that a breach of the policies and procedures may result in disciplinary action. There was no clause within Mr Elisha’s employment contract that provided that these policies and procedures were not incorporated into his employment contract. Based on the promissory and mandatory language used in reference to the policy clause of Mr Elisha’s employment contract, the High Court found that Vision Australia’s disciplinary procedure was incorporated as a term into the contract.

The High Court found that Vision Australia had breached this incorporated disciplinary policy by not following the applicable procedure in its dismissal of Mr Elisha and accordingly had breached an incorporated term of the employment contract.

Could Mr Elisha obtain damages for his psychiatric injury arising from the breach?  

The High Court confirmed in its decision that psychiatric injury is part of a class of physical or personal injury for which damages are recoverable for as part of a breach of employment contract claim. This is a change from the previous legal position that confirmed such an injury did not attract compensation. The High Court further confirmed that damages of this nature were not too remote to be recoverable as part of Mr Elisha’s claim and accordingly that the near $1.5 million that was awarded to him at first instance should be upheld.

Did the High Court expand employers general duty of care as part of its decision?

Mr Elisha argued as an alternative to his breach of contract claim that Vision Australia should be liable under the tort of negligence for his psychiatric injury. Mr Elisha argued that the general duty of care that applies to all employers should be expanded to require employers to take reasonable steps to prevent an employee from incurring a psychiatric injury during a disciplinary process.

This differs to Mr Elisha’s breach of contract claim, as rather than the liability forming under the terms of an employment contract, which can be managed through careful drafting – the obligation would apply as a general obligation on all employers irrespective of the terms of the employment contract.

The High Court did not make a finding on this issue as it was not necessary to do so in light of the court having accepted Mr Elisha’s breach of contract argument. This means that the current legal position on this issue remains, which is that there is no general law duty on employers to avoid psychiatric injury to their employees in a disciplinary process. The High Court not making a finding on this issue does however leave this line of argument open in any subsequent claim that may be litigated before the courts.

What should employers be aware of following the Elisha decision?  

Following the Elisha decision, employers should:

• Undertake a detailed review of their employment contracts to ensure there are no express terms or incorporated policies/instruments that may underpin a legal claim for a psychiatric injury. Employers should take particular care with the language used within their employment contracts around the application of policies or codes of conduct. Employers should be clear that these policies and codes of conduct are not incorporated into the employment contract, but rather apply to the employee as a matter of a lawful and reasonable direction. A clear and express statement to this effect should be included within all employment contracts (and on the policy documents themselves) to reduce the risk of an inadvertent incorporation of extraneous material.
• Review and revise any disciplinary policies to use aspirational language and to set guiding principles regarding disciplinary matters, rather than providing for rigid processes that may be found to impose contractually binding obligations and that provide an enforceable process based entitlement to employees.
• Check any template settlement agreements or deeds that are used by the business. The use of the word “or” instead of “and” in the release that was agreed to between the parties in an earlier unfair dismissal claim may have fully barred the subsequent claim made by Mr Elisha. Care should be taken when using standard form settlement agreements from the Fair Work Commission to ensure that the release used fully bars any further claim that could be made by the employee (noting that workers compensation and superannuation claims cannot be contracted out of).
• Carefully review any disciplinary procedures contained within any applicable enterprise agreements to understand the legal exposure to a similar claim being made under the Fair Work Act for non-compliance with an enterprise agreement term. We expect this may be a new avenue explored by employees and unions following the Elisha decision given the availability of compensation under section 545 of the Fair Work Act for non-compliance with an enterprise agreement.
• As always, undertake thorough investigations, follow robust show-cause processes, and be aware of the legal risks when considering terminating an employee’s employment irrespective of whether they are eligible for unfair dismissal claims or not.

If you would like more information or advice on how your business can undertake the above steps, please reach out to a member of our team.