Breach of employment contract causing mental injury compensable in Australia

The second issue the High Court was asked to consider – whether employers owe a ‘special’ duty of care to employees in processes leading to and resulting in dismissal – was left unresolved. A finding on that point was unnecessary because the employee was successful on the first issue.  However, there is a strong probability such a duty would be found to exist if it were argued in future.

This landmark decision means employers are far more susceptible to potentially significant awards of damages against them if they breach the employment contract, which generally consists of both express and implied terms. There are many ways an employer can breach the employment contract, including, among others:

• unwarranted summary dismissal of an employee, or giving less notice than the contract requires;
• failing to follow policies or an enterprise agreement that are incorporated into the employment contract;
• underpaying an employee’s wage, whether deliberate or not;
• §non-compliance with an incentive scheme, including non-payment of a ‘discretionary’ bonus; and
• altering an employee’s position or duties without their consent.

Further, if a special duty of care does exist, to avoid legal exposure, employers should ensure all disciplinary and dismissal processes are objectively fair, reasonable and unbiased. This means, among other things, not surprising employees, disclosing and seeking responses on critical allegations or issues, informing the employee of potential outcomes or consequences of substantiated allegations, giving the employee a reasonable opportunity to respond, and making unbiased decisions on the available material.

The case – Elisha v Vision Australia Limited

Mr Elisha was an employee of Vision Australia for 9 years. While travelling for work, he was the subject of a “serious” complaint, which was said to have been “aggressive” and “rude” conduct in breach of Vision Australia’s policies.

Vision Australia had a disciplinary procedure, and the employee was covered by the Vision Australia unified enterprise agreement (EA) which contained a “due process” clause setting out the procedure for disciplinary matters.

The employee was summarily dismissed by Vision Australia, which found that his conduct constituted serious misconduct. He was subsequently diagnosed with a major depressive disorder and adjustment disorder with depressed mood, i.e. a psychiatric injury.

The trial judge found that Vision Australia’s disciplinary process was "unfair, unjust and wholly unreasonable", and “nothing short of a sham and a disgrace”. It was found to be in breach of the disciplinary procedure and due process clause in the EA, both of which were held to be incorporated into the employment contract. The judge determined that if Vision Australia had undertaken a proper disciplinary process, the employee would not have been dismissed because his conduct did not warrant dismissal at all, let alone summary dismissal.

Consequently, the judge held that Vision Australia breached the employment contract in two ways: through non-compliance with the disciplinary procedure and EA; and by unlawfully terminating the employment. The employee was awarded more than AUS$1.4 million (US$900m) for the psychiatric injury that was caused by these contractual breaches.

The employee’s alternative claim – that Vision Australia had a duty of care in processes leading to and resulting in dismissal – was unsuccessful.

Vision Australia successfully appealed. The Court of Appeal based its decision on over a century of precedent dating back to a 1909 English case that damages for psychiatric injury are unavailable for a breach of contract, except where psychiatric injury was caused by physical injury, or the primary object of the contract was for relaxation and enjoyment, or alternatively that psychiatric injury for breach of contract would not have been reasonably contemplated by the parties when entering into the contract, i.e. damages were too remote.

The employee appealed to the High Court of Australia, which upheld his appeal and reinstated the initial award of damages based on the breach of contract claim. In doing so, the court said that the 1909 decision had been interpreted and applied incorrectly, was decided in a different social context, and had been, perhaps inadvertently, reversed in a High Court decision in 1993. 

The High Court of Australia said: “It has been described as a ‘social reality’ that a person's employment ‘is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem.’ An unfair process of termination for alleged misconduct could affect all three of those interests; i.e. a person's livelihood, identity, and self-esteem.”

Lessons for employers

The decision has significant implications for all employers. Any breach of contract now comes with the exposure of damages for the financial loss caused by the breach, as well as damages for psychiatric injury with which the employee is consequently diagnosed.

In light of this decision, employers should:

• be extremely cautious when summarily dismissing employees;
• review and revise their employment agreements and any industrial instruments so that they limit their contractual obligations to employees, e.g. policies, processes, and procedures should be expressly excluded from having contractual force;
• review their policies and procedures so they don’t create binding obligations on the employer; and
• ensure all investigations are conducted in a fair and unbiased manner, and provide sound outcomes on which to base disciplinary decisions.