Australia’s High Court finds employer liable for employee's psychiatric injury

In a landmark ruling, the High Court of Australia has decided 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 court – the highest in Australia - reinstated an AUS$1.4 million award of damages to an employee who was summarily dismissed in breach of the employer’s binding grievance procedures. The case, Elisha v Vision Australia Limited, is significant because it reverses the well-understood 115-year-old legal position that damages for psychiatric injury are not recoverable by an employee for an employer’s breach of the employment contract. We’ll look at what this case means for employers in Australia.

Melbourne-based lawyer Ben McKinley writes about the ruling in some detail in his article for Out-Law and sets out the facts of the case.

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 which contained a “due process” clause setting out the procedure for disciplinary matters.

Elisha 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. 

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 for the psychiatric injury that was caused by these contractual breaches.

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. In other words, 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.”

So, let’s get a view on this case and what it means for employers. Earlier I spoke to Ben McKinley who joined me by phone from Melbourne. I asked him how this case had gone down with employment lawyers in Australia:
 
Ben McKinley: “I don't think we quite know yet the fallout and the impact and the implications of the decision. We're all a bit crystal ball gazing at the moment, but certainly the potential impact from an employment perspective on employers is quite significant.”

Joe Glavina: “In your article, you mention a number of potential ways that employers can breach the employment contract. You highlight summarily dismissing employees as a particular risk. Can you expand on that?”

Ben McKinley: “Yes, so if an employer summarily dismisses an employee and it's found that summary dismissal wasn't warranted and they should have been dismissed or noticed, or not dismissed at all, because there was no conduct that was justifying it then that's a breach of the employment contract. So summarily dismissing an employee means that you need, as an employer, to be very certain that the findings of any investigation, or that the reason for dismissal, justifies summary dismissal rather than dismissal on notice and summary dismissal is quite a high bar in Australia. So certainly there is conduct, and there are things that undoubtedly justify summary dismissal – sexual harassment is something and there's serious breaches of the employment agreement by an employee – but as I said, employers need to be quite certain that the conduct rises to the level to justify summary dismissal, otherwise it will be a breach of the employment contract.”

Joe Glavina: “Another point that you make in your article, Ben, is that in this case the employer made the drafting mistake of incorporating policies into the contract and that is something you want to flag with clients because that is unusual and in best avoided.”

Ben McKinley: “Yes, absolutely. In my 10 or 11 years of doing this, every employment contract that I've written and suggested that clients have specifically says that policies are not incorporated into the contract, they don't have any contractual force, and that the policies are essentially guidelines for employees to follow. So, I suppose there's two parts to it. One is, in the employment contract having proper drafting to exclude the policies, but also making sure the policies are not promissory and creating obligations on the employer and are essentially guidelines and rules for conduct of employees, or what employees need to do, rather than creating obligations on the employer. So there's sort of two parts to that, review of your contracts, but also your policies.”

Joe Glavina: “A point the court didn't decide in this case was this special duty around procedural fairness but you think that although the decision wasn't made in this case on that point it was raised, and you think it's an important point for clients watching this programme to take on board. Why is that?”

Ben McKinley: “Yes, so they didn't need to decide it because there were two parts to this case. I suppose. The first one was the breach of contract causing psychiatric injury and that's the main part that was decided and overturned 115 years of law and because the employee was successful on appeal for that, there was no reason to then decide that the second part of his claim, which would have essentially got him the same amount. The way that the majority of the High Court was speaking was about the importance of the employment relationship on people's lives, and how big employment is in people's lives, and this huge focus on mental health and mental health in the workplace. There was one dissenting judge who found against it, but the others didn't deal with it, but the way they were talking means I can see a case being run like this in the future where that is the primary part of an employee's case and I can see one of our courts deciding on that favourably to employees and that being then upheld on appeal because there is this huge focus on mental health, and so duty of care of employers to ensure that there is a fair process, or at least a process that doesn't create a risk to health and safety to employees, and that is the risk to mental health as well. So, yes, certainly I can see probably in the next couple of years a decision about that and I predict that it would go in favour of the employee.”

Joe Glavina: “So, what’s your key message to viewers on the back of this case?”

Ben McKinley: “Well, review the contracts and policies to make sure they're not incorporated. There are a lot of ways to breach the employment contract and it's been cognisant of those. As I’ve said in the article, you know, failure to pay correctly which, in Australia, it's a very difficult pay system - I think it's one of the most complex in the world - and so it’s an easy trip up, I suppose, and there are a lot of other ways of breaching the employment contract. So I think employer compliance with workplace obligations has never been higher with the recent legislative changes, and this is just something else, I think, that's sort of bundled on top of all that. So employers need to have very rigorous systems and managers and senior managers and executives need to take a proactive approach to workplace obligations and how they're managing employees because it might be that senior executives have an understanding and they set rules but particularly for bigger clients, it's hard to make sure those rules are implemented throughout large businesses and so there's going to be a lot of training of managers and upskilling them about how they do things. As I said, discipline leading to dismissal procedures, if there's a pretty quick, haphazard, approach that's being taken by managers because they haven't been trained correctly on how to investigate misconduct or how to execute discipline or dismissal procedures, that's going to land the organisation in quite a bit of trouble, inadvertently.”

Ben’s article on this case is called ‘Breach of employment contract causing mental injury compensable in Australia’ and is available now from the Out-Law website. We’ve included a link to it in the transcript of this programme.

- Link to Out-Law article: ‘Breach of employment contract causing mental injury compensable in Australia’