High Court ruling increases employer risks in disciplinary procedures
A High Court decision ordering an employer to pay $1.44 million in damages to a former employee for causing psychiatric injury from employment contract breaches marks a significant shift in employment law, placing employers at greater risk of liability.
The decision in Elisha v Vision Australia Limited [2024] HCA 50 represents a significant shift in employment law, warning employers to review their contracts and internal policies carefully.
The longstanding view was that psychiatric injury caused by an employment contract breach could not be compensated (Addis v Gramophone Company Ltd [1909] AC 488), however, the Court decisively moved away from that view.
The case centred around Vision Australia’s disciplinary process, which culminated in the termination of the applicant’s employment, and he was subsequently diagnosed with a major depressive disorder.
The Court ruled that Vision Australia's breach of its disciplinary process directly contributed to the former employee's psychiatric injury, setting a legal precedent.
The Court distinguished diagnosable psychiatric illness from ordinary workplace stress or distress.
Incorporating policies into contracts
The Court clarified that contractual language indicating a need to comply with workplace policies, procedures and agreements can render these policies legally binding and an obligation under the employment contract.
Where a contract is drafted in this way, employers can be exposed to significant damages where any company procedures, including around disciplinary processes, are not strictly followed, particularly if the breach causes psychiatric harm.
In the case, the employer’s failure to follow its own disciplinary process was proven to contribute to the psychiatric injury.
The Court emphasised that such injury was a “serious possibility” within the reasonable contemplation of both parties at the time the contract was made.
Vision Australia's provision of psychiatric support for employees undergoing investigations demonstrated its awareness of the risk.
Remoteness of damage
The Court applied the Hadley v Baxendale test to determine if the psychiatric injury was too remote to justify compensation.
How we can help you
Our Employment Law team can draft and review your contracts, policies and procedures to ensure compliance with best practices with disciplinary processes, and keep you updated on legislative and award changes. Find out more
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- A lawyer will check compliance with legislation and flag any potential risks or issues.
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- Please send through copies of your internal employment documents as part of the red flag review to [email protected].
It concluded that the injury occurred in the “usual course of things,” making it a foreseeable consequence of the breach.
Importantly, the Court recognised the severe emotional and financial toll of unfair disciplinary processes, noting that employment provides individuals with “a livelihood, an identity, and a sense of self-esteem”.
Duty of care remains unresolved
While Elisha also argued that employers owe a general duty of care to ensure safe disciplinary processes, the Court refrained from making such a duty of care for all examples.
It expressed concerns about coherence with existing workplace laws and employers' rights to discipline staff, leaving this question unresolved.
Deed of settlement
An additional item of interest in this case was that another claim had been brought by the employee for unfair dismissal, and this claim had been settled after Vision Australia agreed to pay the former employee $27,248.68, the maximum he was entitled to.
However, this settlement did not preclude the employee bringing this further claim in the Supreme Court, and ultimately in the High Court, highlighting the importance of ensuring any settlement payment made to an employee is subject to a carefully drafted deed of settlement.
Other Resources
- Our IR Masterclass enables you to build on your knowledge across a range of industrial relations areas.
- FAQs on contracts of employment
- How to mitigate psychosocial hazards in HR conversations
Implications for employers
This decision highlights the need for employers to reassess their contractual and procedural frameworks. Key actions include:
- Reviewing employment contracts to identify incorporated policies and ensuring compliance.
- Mitigating risk by clearly defining liabilities and obligations in contracts.
- Following published company procedures carefully when conducting investigations or disciplinary actions, particularly where termination is a potential outcome.
This ruling serves as a clear warning: employers who fail to meet their contractual obligations during disciplinary proceedings risk severe legal and financial repercussions.
Managing both procedural fairness and mental health considerations is no longer optional – it’s essential.
CCIWA’s employment lawyers can assist you with all workplace relations matters, including employment contracts, polices and settlement documentation to ensure you are legally compliant and best placed to defend any potential claims. Contact our team on 08 9365 7746, or via [email protected].
Our Employee Relations Helpline is also available to respond to your questions on (08) 9365 7660, or via [email protected].
