In December 2024 Maguire Legal alerted readers to the High Court of Australia decision of Elisha v Vision Australia Limited [2024] HCA 50. The court decided liability for psychiatric injury is not beyond the scope of a contractual duty concerning the manner of dismissal, particularly in serious breaches. Consequently, an employee may pursue common law damages that far exceed the typical capped compensation available in unfair dismissal claims (e.g., $87,500 as of 2024-25). In this decision the damages exceeded $1.4m.
The decision
Compensation for a serious failure to adhere to disciplinary procedures of which the employer is contractually bound, will be available as long as the damage (i.e. psychiatric illness) could ‘reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach …’
In other words, the employer should reasonably have known that there was a serious possibility of the employee developing a psychiatric illness as a result of a serious breach of disciplinary procedures involving serious unfairness leading to dismissal. The consequences of the breach must not be too remote, they should be foreseeable.
The reasoning of the High Court may surprise readers as the average employer is unlikely to know in advance how an individual employee would react in such circumstances and implementation of disciplinary action is rarely perfect. Nevertheless, employers should take stock of the decision and consider strategies to minimise the risk of litigation of this nature.
We advise the following action:
- Limit disciplinary action policy and procedures to simple principles of fairness rather than detailed obligations
- Eliminate any reference to adherence to disciplinary procedures in employment contracts
- Incorporate express terms into the employment contract limiting liability for breach of employment policies and procedures
Limiting liability in contract clauses
A simple strategy to minimise risk of liability of damages is to include a clause in your standard employment contracts limiting or waiving liability for breaches of employment policies and procedures.
Such a contractual term serves several important purposes and is designed with the following advantages:
- Preventing Employment Policies from Creating Legal Obligations
- Without a clear disclaimer, courts may interpret internal policies as legally binding terms of employment contracts. As stated above this can result in significant financial exposure if an employer does not strictly follow every aspect of a disciplinary procedure.
- The proposed clause ensures that employees expressly waive their right to damages in such cases.
- Clarifying the Scope of Employer Responsibilities
- The clause would define “employment policies and procedures” broadly to include company codes of conduct, confidentiality agreements, workplace safety rules, and other internal policies.
- This prevents employees from asserting breaches of such policies give rise to financial claims.
- Ensuring Employees Acknowledge and Accept the Terms
- The clause requires employees to confirm that they have read, understood, and had the opportunity to seek legal advice before agreeing to it.
- This proactive step strengthens enforceability and mitigates potential disputes over the fairness of the provision.
- Maintaining Flexibility in Policy Application
- Employers retain discretion over how they enforce internal policies without the fear that minor procedural missteps will result in costly legal claims.
- The clause would state that the waiver applies regardless of whether the breach is minor or substantial, further reinforcing employer discretion.
Are there any disadvantages?
A provision limiting or waiving liability for breaches that may result in psychiatric illness may be enforceable in contract, but cannot limit liability under workers compensation and tort law in negligence. However, this has always been the case, and as most employers appreciate, compensation is generally capped and covered by compulsory workers compensation insurance. A contractual clause limiting liability for breach of policy does not prevent an unfair dismissal or adverse action claim under the Fair Work Act 2009. While unfair dismissal compensation is capped at 6 months pay, there is not such limitation to damages awarded for adverse action claims. However, adverse action taken because of an employee’s exercise, or proposed exercise, of a purely contractual entitlement under a common law contract will not normally give rise to a general protections claim.
Further advice
Maguire Legal subscribers and other clients of Maguire Legal will be contacted in the next few weeks. For others wanting more information and advice in implementing the action discussed above please contact us.