High Court Ruling Makes Breaching Employment Contracts Riskier for Employers

Employers should be more cautious when including documents such as disciplinary processes, Awards, Enterprise Agreements, or similar policies in employment contracts.

The High Court's recent ruling in Elisha v Vision Australia Limited [2024] HCA 50 has set out that employers may be held liable for psychiatric harm resulting from breaches of employment contracts during disciplinary actions that end in termination.

The full decision is available to read here.

Facts

Mr Adam Elisha had been employed by Vision Australia as an adaptive technology consultant since 2006. His job involved assisting visually impaired individuals by setting up and managing technology solutions, which required frequent travel across Australia. Between December 2014 and July 2015, Mr Elisha sought medical treatment for anxiety and depression, which his psychologist linked to workplace stress and interpersonal difficulties with his colleagues.

In March 2015, Mr Elisha had an incident at a hotel during a work trip in which he complained about a noise outside his room and was later moved to a different room. The hotel proprietor, Ms Trch, alleged that Mr Elisha was aggressive and intimidating during this interaction, which was later reported to Vision Australia by two employees who had also stayed at the hotel. The incident eventually led to an internal investigation by Vision Australia.

Throughout the investigation process, Vision Australia referenced company policies and procedures, including the Vision Australia Unified Enterprise Agreement (2013) and the Vision 2015 Disciplinary Procedure which set out the process Vision Australia was to follow in respect of disciplinary matters.

Prior to Mr Elisha’s disciplinary meeting, Vision Australia had not provided him with a letter containing all allegations relied on to support his termination, nor was Mr Elisha made aware of the ‘pattern of aggression’ referenced by Vision Australia, a critical aspect of the decision to later terminate his employment.

During the disciplinary meeting, Mr Elisha denied the allegations and presented his version of events, including a possible discrepancy in the hotel bill. Despite this, the investigation proceeded with Ms Trch’s account of the incident being preferred and Vision Australia ultimately decided to terminate his employment.

After the termination, Mr Elisha was diagnosed with major depressive disorder and adjustment disorder, which his psychiatrists linked to the stress and trauma resulting from the termination process. One treating psychiatrist testified that Mr Elisha had shown no prior signs of anger or frustration, while another noted a significant change in his demeanour following the termination.

In June 2015, Mr Elisha commenced unfair dismissal proceedings against Vision Australia in the Fair Work Commission, which settled on 9 July 2015 after Vision Australia agreed to pay Mr Elisha a settlement sum of $27,248.68. However, on 27 August 2020, Mr Elisha commenced proceedings in the Supreme Court of Victoria, claiming psychiatric injury due to the breach of his employment contract during the disciplinary process.

The Supreme Court ruled his dismissal was ‘unfair, unjust, and wholly unreasonable,’ ordering Vision Australia to pay damages in the sum of $1,442,404.50 to Mr Elisha.

Decision

Historically, psychiatric injuries caused by breaches of employment contracts were not compensated. However, the High Court has moved away from this long-standing position, ruling that psychiatric injury resulting from a breach of contract can now be compensable.

The key challenge in such cases is proving the connection between the breach of contract and the psychiatric injury, known as remoteness. The Court applied the traditional two-limb test for remoteness from Hadley v Baxendale (1854), asking:

• What type of damage resulted from the breach?; and
• Was it foreseeable that this type of damage could occur?

In this case, the High Court ruled that Mr Elisha’s employment contract incorporated Vision Australia’s disciplinary policy. The Court based this conclusion on provisions within Mr Elisha’s employment agreement, which included a clause stating that ‘Employment Conditions will be in accordance with... Vision Australia Policies and Procedures,’ and another that required Mr Elisha to ‘comply with... all other Company Policies and Procedures.’ The High Court interpreted these terms as indicating the mutual intention of both parties for the policies and procedures to be legally binding.

As a result, the Court found that Vision Australia had breached this policy by failing to provide Mr Elisha with a letter outlining all the allegations against him prior to the disciplinary meeting. Notably, the letter did not mention the ‘pattern of aggression,’ which was later cited as the reason for his dismissal.

The High Court determined that Mr Elisha’s psychiatric injury resulted directly from Vision Australia’s breach, and the Court found that the liability for this injury was not too remote, especially given the seriousness of the breach. It was also determined that, had it not been for Vision Australia’s failure to follow its own procedures, Mr Elisha would not have been dismissed for the alleged misconduct.

Accordingly, the High Court allowed the appeal and awarded $1.44 million in damages to Mr Elisha on the basis of a psychiatric injury arising from breach of a disciplinary procedure incorporated into his employment contract.

Take Home Messages for Employers

The High Court's decision in this case serves as a critical reminder for employers to carefully review their employment contracts and disciplinary processes. Whilst at first blush the decision could have significant ramifications, it will not impact employment contracts which expressly prohibit policies and procedures being incorporated.

If the policies are incorporated, this decision puts employers on notice that they must be followed rigorously. The case also emphasises the importance of fairness and transparency in handling disciplinary matters, as failing to provide employees with adequate information and a fair process in breach of a disciplinary policy can lead to significant adverse outcomes.

Should you wish to discuss the matters raised in this article, please contact Lincoln Smith on +61 8 8210 1203 or lsmith@normans.com.au, or Shivani Gandhi on +61 8 8210 1227 or sgandhi@normans.com.au.