Questions left unanswered: When will an employer be liable for an employee’s psychiatric injury?

In December 2024, the High Court concluded an almost decade long legal saga over an employee’s dismissal by reinstating an award of damages for over $1.44 million for psychiatric injury.

In so doing, the Court overturned precedent that had arguably precluded recovery of contractual damages for the manner of dismissal, and set a high-water mark for this type of claim.

This article provides insights into Elisha v Vision Australia¹ (Elisha) and what this case means for employers.

Background

Elisha concerned what was described as a “sham” investigatory process and a “botched disciplinary procedure”. The relevant employee commenced employment in 2006 pursuant to a written employment contract, which relevantly provided that:

• the employee’s “Employment Conditions [were] in accordance with regulatory requirements and [the Company’s] Policies and Procedures. Breach of the Policies and Procedures may result in disciplinary action.”
• the employee “agree[d] to comply with these terms and conditions of employment and all other Company Policies and Procedures.”

The employer’s policies included a disciplinary procedure that was varied during the employment. At the time of the dismissal, the disciplinary procedure relevantly provided that where a concern raised in relation to an employee is of a serious nature, “a formal disciplinary meeting will occur” and the “employee will be provided with a letter containing a written outline of the allegations”, and following that, a meeting will occur and the employee will be given an opportunity to respond to the allegations.

In March 2015, the employee stayed at a hotel while on a work trip, during which he had a number of terse interactions with the hotel proprietor. One of those interactions involved a late-night complaint about a noise outside his room. Those interactions became the subject of an internal investigation by the employer.

The employee was alleged to have engaged in serious misconduct by behaving in a verbally aggressive and intimidating manner towards the hotel proprietor. On the proprietor’s account, he was alleged to have, among other things, walked towards her, raised his voice, waved his arms, and blocked her exit when she attended his room in the middle of the night to investigate the noise complaint.

The employee was found by his employer to have engaged in the alleged serious misconduct and was dismissed from his employment in May 2015. Instrumental in the reason for his dismissal, but never put to him, was what his immediate manager called a history of aggression and making excuses.

The employee brought an unfair dismissal application that settled for six months’ salary. Inexplicably, the settlement deed was not sufficient to prevent him commencing further proceedings in the Supreme Court of Victoria for a claim for damages in contract and tort as a result of serious psychiatric illness he suffered following his dismissal.

The first instance judge gave judgment in favour of the employee and awarded him a substantial sum in damages ($1.44 million). The judge held that the employer had breached the contract of employment. On appeal, the Court of Appeal disagreed and held that damages for severe psychiatric illness were too remote and, in any event, an early 20th century House of Lords decision, Addis v Gramophone² (Addis), would have precluded recovery. The employee then appealed to the High Court.

What the High Court said…

The majority of the High Court gave judgment for the employee and reinstated the trial judge’s award of damages. The majority held that parts of the disciplinary procedure were incorporated into the employee’s contract of employment and so imposed binding obligations on both parties. Further, because the employer had set out onerous and specific assurances and promises in the disciplinary procedure, rather than aspirational ones, those obligations had contractually binding effect. As the employer had failed to follow the disciplinary procedure, it had opened itself up to a contractual claim by the employee.

The heart of the issue before the Court was whether the damage suffered by the employee was within the scope of the employer’s contractual duties and whether that harm was too remote. The majority held that the Addis decision did not stand in the way of recovery for a number of reasons, including that “a great deal of water has passed under the bridge” since the case was decided, and so it is no longer good law.

This means that a barrier previously thought to be imposed on employees bringing contractual claims against their employer for the manner of their dismissal has been lifted. In other words, there is another arrow in the quiver of dismissed employees against their former employer, separate to statutory unfair dismissal laws and other claims under the Fair Work Act 2009 (Cth).

What was left unanswered…

The High Court declined to answer the question of whether there exists a general duty of safe system of investigation and decision-making with respect to discipline and termination of employment. If that duty does exist, it would not necessarily require a contractual breach for an employer to be liable. This underscores the need for employers to engage in fair investigatory and disciplinary processes.

Key takeaways

Elisha is a salutary reminder to employers about the potential costs of defective investigatory and disciplinary processes. In particular, employers should be mindful that:

• their contracts of employment do not inadvertently incorporate workplace policies or otherwise create additional enforceable rights and obligations concerning disciplinary processes;
• their workplace policies are not expressed in contractually binding language. Often, less is more and flexibility is key so that matters can be dealt with on a case-by-case basis;
• they abide by procedurally fair investigatory and disciplinary processes; and
• settlement agreements are carefully drafted to avoid multiple successive claims.

Footnotes

1. Elisha v Vision Australia Limited [2024] HCA 50
2. [1909] AC 488