The High Court of Australia has upheld a decision of the Supreme Court of Victoria awarding $1.4 million in damages to an employee for psychiatric injuries suffered because of a breach of the employee’s employment contract. The employer failed to adhere to its disciplinary policy, which was expressly incorporated into the employment contract.
The landmark decision of Elisha v Vision Australia Ltd [2024] overturns the longstanding precedent of Addis v Gramophone Company Ltd [1909], stating that subject to the particular terms and context of any particular contract, liability for psychiatric injury is not beyond the scope of a contractual duty concerned with the manner of dismissal, particularly in serious breaches.
Employees may now seek damages far exceeding the capped compensation typically available in unfair dismissal claims (e.g., $87,500 as of 2024-25). Importantly, this decision means employers must adhere strictly to their contractual obligations, particularly those involving disciplinary procedures, as policies incorporated into contracts become binding.
Background
The dispute involved Mr. Elisha, an employee of Vision Australia, whose employment was terminated following allegations of misconduct. The employer’s disciplinary process was flawed. Contrary to the contractual obligation, Vision Australia failed to allow an opportunity for Mr Elisha to respond to all of the reasons for his dismissal, including perceptions of past transgressions. As a result of the summary dismissal Mr. Elisha developed psychiatric injuries, including major depressive and adjustment disorders, which rendered him unable to work.
The High Court upheld the trial court’s decision, awarding $1.4 million in damages and holding Vision Australia liable for the harm caused by the procedural breach.
Key Findings from the High Court
1. Policies as Binding Terms
Workplace policies explicitly referenced in employment contracts are binding. Vision Australia’s failure to follow its disciplinary policy constituted a breach of the employment contract.
2. Psychiatric Injury as Compensable Damage
Psychiatric injuries resulting from contractual breaches are compensable if they are foreseeable.
3. Foreseeability and Remoteness
Psychiatric injuries are not too remote for compensation if they are a reasonably foreseeable consequence of procedural failures at the time the contract is formed.
Practical Steps for Employers
1. Review and Clarify Employment Contracts
- Action: Exercise caution when including employment policies and procedures. Only incorporate or more ideally reference clearly defined policies and procedures that are necessary for formation of contractual obligations.
- Reason: Ambiguities can unintentionally create binding obligations, increasing liability risks.
2. Implement Fair and Transparent Disciplinary Processes
- Action: Develop and maintain consistent procedures that ensure procedural fairness while keeping them separate from employment contracts.
- Reason: Inadequate processes can lead to breaches, reputational damage, and liability. Excluding policies from contracts reduces the risk of incorporation.
3. Conduct Pre-employment Assessments
- Action: Communicate to prospective employees the importance of disclosing physical or psychiatric conditions that may affect job performance.
- Reason: The Work Health and Safety Act 2011 (Cth) obliges employers to safeguard psychological health.
4. Document and Communicate Clearly
- Action: Keep detailed records of disciplinary actions, including communications, employee responses, and final decisions.
- Reason: Accurate documentation demonstrates compliance and procedural fairness.
- Best Practice: Use standardised templates for investigations and communications. If you require assistance with this contact Maguire Legal, for tailored templates.
Conclusion
The High Court’s decision in Elisha v Vision Australia Ltd marks a turning point in Australian employment law. This decision underscores the importance of reviewing employment contracts, avoiding unintentional incorporation of policies, and addressing procedural fairness proactively. We intend to review our standard employment contract terms in the New Year. Further advice on this will be provided to Maguire Legal clients to ensure they do not fall foul of the new contractual rules.
For further assistance, and advice with managing employment contracts and mitigating risks, contact Maguire Legal here