In the recent decision of Elisha v Vision Australia Ltd [2024] HCA 50 the High Court of Australia held that damages for psychiatric injury were available to an employee in circumstances where the injury arises from the manner of the employee’s dismissal. In this case the employee was awarded close to $1.5 million in damages.
On the face of it, this is a highly troubling finding for employers, and a boon for employees, opening up the possibility of substantial common law damages claims by employees for flaws in the termination process.
While the decision needs to be noted, and its potential consequences given serious consideration, the effect of the case is of limited scope. Critically, the case does not establish a duty of care in tort that employers owe employees in relation to the manner of dismissal. The High Court decided that in the circumstances of this case it did not need to consider whether such a duty exists.
The outcome of this case rested on breach of contract. Specifically:
- the Disciplinary Procedure of Vision Australia was found to be incorporated into the contract of employment;
- that procedure was breached by Vision Australia;
- psychiatric injury is part of a class of injury for which damages are recoverable for breach of contract; and
- psychiatric injury was within the reasonable contemplation of the parties at the time the contract was entered into, meaning the loss of the employee was not too remote for recovery.
A key lesson for employers from this case is to ensure disciplinary procedures are not incorporated into the contract of employment. This is not a new lesson but rather this High Court decision emphatically reinforces an existing point about the risks of policies and procedures being incorporated as contractual terms.
Some employers mistakenly believe that having policies and procedures (particularly those relating to employee conduct, discipline and termination) incorporated as terms of the employment contract is important as it gives those policies greater weight or significance.
Actually:
- employers can impose conduct and performance standards on employees through policies founded on the right of the employer to issue lawful and reasonable directions; and
- employers should not incorporate disciplinary policies and procedures into an employment contract, in effect making a “rod for their own back” in the way they investigate and address allegations of misconduct or deficient performance (including disciplinary outcomes arising from such procedures). It is not necessary. There is little benefit to employers in doing it. This is especially the case where the policies and/or procedures in question are highly prescriptive (which, of course, simply makes it more likely they will be breached by the employer in practice, notwithstanding the best intentions of the employer).
Employers were put on notice of the potential of disciplinary policies being incorporated in employment contracts with the decision of the Full Court of the Federal Court in Romero v Farstad Shipping (Indian Pacific) Pty Ltd (2014) 231 FCR 403. In considering whether the Disciplinary Procedure was incorporated into the contract of employment the High Court cited that earlier case and observed:
“…the existence of clear language with sufficient emphasis upon the need for compliance with the terms of a company policy indicates an intention that such terms will be contractually binding.”
Observations
Some considerations for employers arising from the Elisha decision:
- if an employer has policies relating to discipline or termination such policies should be very carefully followed, especially if such policies are incorporated as a term in the employment contract (or there is a risk that is the case);
- employers should carefully review contracts with a view to amending them to ideally eliminate, or at least minimise, the prospect policies relating to discipline and termination of employment are incorporated into the employment contract;
- the decision does not apply to all cases where there is a psychiatric injury arising from a disciplinary process or termination of employment – there must be a breach of a term of the employment contract (which, in this case, arose from the breach of the Disciplinary Procedure); and
- further to this, there is not yet a general duty of care owed to employees in the manner in which disciplinary and termination procedures are undertaken, however, the question of whether such a duty exists is now ripe for consideration.
