Yesterday the High Court handed down its judgement in Elisha v Vision Australia [2024] HCA 50, in which it was asked to determine whether an individual could recover damages for psychiatric injury in circumstances where the individual was dismissed from their employment following a disciplinary hearing that was described as a "sham".
Adopting the summary of Jaygot J in her separate judgement:
“An employer botches its own disciplinary procedures by not informing an employee of key allegations that the employer ultimately considers in deciding whether to terminate the employee's employment and, therefore, fails to give the employee any opportunity to respond to those undisclosed allegations or a real opportunity to respond to the allegations in fact notified to him. In so doing the employer breaches terms of the employment contract. The employer unlawfully summarily dismisses the employee. The employee develops a serious psychiatric illness, which it is found was caused by both the botched disciplinary procedure leading to the unlawful termination of the employment and that unlawful termination.”
Executive summary
The High Court considered whether damages should be awarded to the employee as a result of a breach of contract by the employer flowing from the conduct of a disciplinary meeting and/or under the laws of negligence for a breach of an employer’s alleged duty to take reasonable care to avoid injury to the employee in implementing processes leading to and resulting in their termination.
In summary the High Court determined:
- in particular circumstances a breach of an employment contract (or a contractually binding policy) by an employer can result in damages being payable where an employee suffers a psychiatric injury arising from the manner of termination. This part of the decision removes any suggestion that the storied House of Lords decision in Addis v Gramophone [1909] AC 488 prevents an employee recovering those types of damages; but
- the majority of the Court did not decide whether the duty of care owed by an employer to its employees extends to providing them with a safe system of investigation and decision-making with respect to discipline and termination of employment.
We have set out the factual background and the High Court’s reasoning in detail below.
Facts in detail
The employee, Mr Elisha, was employed by Vision Australia in 2006 as an Adaptive Technology Consultant. His employment was governed by the terms of a written employment contract signed on 27 September 2006 (2006 Contract), with duties that involved visiting homes and workplaces across Australia to set up or assist with software and hardware systems for the vision impaired.
Between December 2014 and July 2015, the employee was treated by a general practitioner and a psychologist for anxiety and depression. The psychologist considered that the employee had significantly heightened sensitivity to particular sounds, chronic workplace stress and interpersonal difficulties with some staff members.
In March 2015, the employee was involved in an incident when he was staying in a hotel in rural Victoria while travelling for his work duties. The exact circumstances of the incident were disputed. In general terms, the incident involved allegations that the employee had telephoned the reception of the hotel at around 12.30am and complained of a noise emanating from outside his room, resulting in him being moved to a new room.
The employee subsequently went on leave, and during that period, two other employees of Vision Australia stayed at the same hotel and were then informed of the prior incident. The hotel proprietor alleged that the employee had been aggressive and intimidating during the incident, including while checking out of the hotel the next morning. This account was then reported internally and then escalated within the employer.
On the day that the employee returned from leave, he was informed that a serious complaint had been made against him involving his prior hotel stay. He was provided with a “stand down letter” containing various allegations and was stood down from his employment. Two days later, he was required to attend a disciplinary meeting to respond to that complaint and the allegations contained in the letter. In the letter, the employee was informed that the meeting was being conducted in accordance with the due process clause in the relevant enterprise agreement and he was provided with a copy of the employer’s written disciplinary procedures (2015 Disciplinary Procedure).
The employee provided a written response to the allegations, and also attended the meeting with various managers, denying the allegations. Following a subsequent discussion between those managers, the employer decided to terminate the employee’s employment on the basis that it preferred the version of events provided by the hotel proprietor. Without further discussion with the employee, he was provided a termination letter stating that on the balance of probabilities the employer considered that he had behaved in the manner described by the hotel proprietor, that the employee’s behaviour caused her to feel intimidated and humiliated, and that the employer considered this behaviour to be serious misconduct.
Following the termination of his employment, the employee was diagnosed with a major depressive disorder and an adjustment disorder with depressed mood, and found to have no capacity for work in the foreseeable future.
In June 2015 the employee commenced unfair dismissal proceedings against Vision Australia in the Fair Work Commission. The proceedings were subsequently settled after Vision Australia agreed to pay the employee the maximum compensation amount payable in those proceedings. In August 2020 the employee commenced proceedings in the Supreme Court of Victoria seeking to recover damages for the psychiatric injury he had suffered.
Judgements
Supreme Court of Victoria decision at first instance
The trial judge at first instance made a number of important factual findings in favour of the employee:
- during the hotel incident the employee had not yelled or shouted, was not aggressive or threatening, and when leaving the hotel he did not throw the room key towards the reception desk in an aggressive or threatening manner (all as had been alleged);
- prior to the disciplinary meeting the hotel proprietor’s account of the incident had already been accepted by some of the employer’s decision makers;
- some of those decision makers, who had rarely if ever dealt with the employee previously, were told by one of the managers that the employee “was aggressive and apt to engage in untenable excuse making” and this was claimed to be the real reason for the termination;
- the employee was not given any notice of, or opportunity to respond to, the allegation that he had a history of aggression and excuse making and he was not told of the role of that allegation in the decision to terminate his employment;
- the process which led to the employee’s termination was “unfair, unjust and wholly unreasonable” and ultimately “was nothing short of a sham and a disgrace”;
- the disciplinary process was found to breach the relevant enterprise agreement and the 2015 Disciplinary Procedure, both of which were held to have been incorporated into the 2006 Contract. In particular, the employer failed to provide the employee with a letter prior to the disciplinary meeting which contained all of the allegations made against him (including the allegation as to a pattern of aggressive behaviour) upon which the employer ultimately acted in terminating his employment;
- if a proper process had been undertaken, then the slurs made against the employee concerning his alleged prior aggression and excuse making would not have prejudiced the conduct of the disciplinary meeting or if raised then the employee would have had a proper opportunity to respond to those allegations, and the employee’s employment would not have been terminated; and
- it was clear that what had occurred had contributed very significantly to the employee’s chronic psychiatric illness.
The Court held that the parties should be taken reasonably to have had in contemplation that distress and potential psychiatric illness was a risk that was a “serious possibility”, “not unlikely” or “on the cards” if proper processes were not followed and the employee’s employment was therefore wrongly terminated.
For those reasons, the trial judge held that the employee succeeded in his claim for damages for breach of contract and Vision Australia was ordered to pay damages of $1,442,404.50 to the employee. The employee’s alternative claim for damages for breach by Vision Australia of a duty to take reasonable care failed.
Victorian Court of Appeal
The employer appealed that decision on various grounds, including:
- the relevant terms of the enterprise agreement and the 2015 Disciplinary Procedure were not incorporated as terms of the 2006 Contract;
- even if those terms were incorporated, the employer had not breached them;
- damages were not available for any psychiatric injury suffered by the employee; and
- damages for the psychiatric injury suffered by the employee were also too remote to be recoverable by him.
The employee appealed the decision contending that the employer did owe a duty to take reasonable care to avoid injury to the employee in its implementation of the processes leading to and resulting in the termination of his employment.
The Court of Appeal held:
- the relevant terms of the enterprise agreement had not been incorporated into the 2006 Contract but the 2015 Disciplinary Procedure had been;
- the employer had breached an incorporated term by failing to give the employee notice of, and afford him the opportunity to respond to, the allegations of prior aggressive behaviour and excuse making;
- nevertheless, damages for psychiatric injury were not available for the breach of contract, on the then accepted basis that they were only recoverable where the psychiatric injury was consequent upon physical injury caused by the breach of contract or where the very object of the contract was to provide enjoyment or relaxation, and in this case the psychiatric injury was too remote from the breach of contract; and
- an employer owes no duty of care to avoid injury to employees in the implementation of processes leading to and resulting in the termination of employment.
High Court’s decision – the contractual claim
The 2006 Contract provided that the employee’s employment conditions would be in accordance with regulatory requirements and the employer’s policies and procedures. The Court rejected the employer’s contention that it was not contractually bound by its own 2015 Disciplinary Procedure or that a reasonable person would not have understood that the policy was intended to be contractually binding.
The Court said that it was the common intention of the parties that those policies and procedures would be contractually binding where they imposed obligations (but not those parts which were merely aspirational), and it would defy both logic and common sense to suggest that an employer who was subjecting an employee to disciplinary action according to contractual policies would not also be bound by those policies.
The Court also rejected the employer’s submissions that incorporating those policies and procedures as binding on both parties would undermine contractual certainty. The Court said that a reasonable person would understand the intention was to incorporate those policies and procedures into an employment contract as they may change from time to time, instead of requiring formal amendment to the contract every time those policies or procedures are varied. The Court acknowledged that this may not be the case where any amendment of a policy created substantially new or onerous obligations.
Having determined that the 2015 Disciplinary Procedure was contractually binding on the employer, the question for the Court was then whether an employee was prevented from recovering damages arising from their manner of dismissal in accordance with the binding authority of Addis v Gramophone. The employer adopted the position (along with many commentators) that as a result of that case, damages for psychiatric injury could not be recovered for a breach arising from the manner of termination of an employment contract. The Court said that the employer’s position and its reliance on Addis v Gramophone was wrong, stating that that case did not decide that damages could never be recovered for psychiatric injury arising from the manner of termination, and in any event, that case was decided more than a century ago in a different social context having been now overtaken substantially by more recent decisions.
Having determined that the 2015 Disciplinary Procedure was contractually binding and that there was no rule preventing the employee from recovering damages for psychiatric injury as a result of the breach, the question for the Court then became whether any such damages would be too remote as to not be recoverable. In simple terms, the test for when a loss will be too remote to be recovered as damages for breach of contract starts with a consideration of the facts, and asks as at the date a contract is entered into, whether the damages arose “according to the usual course of things” or whether the damages could have reasonably been in the contemplation of the parties as the probable result of any breach of the contract. The majority of the Court found that in order to not be too remote, the damage for psychiatric injury was required to have been reasonably contemplated as at the date the 2006 Contract was entered into as a serious possibility arising from its breach.
To be recoverable it was not necessary for the parties to have contemplated the precise manner in which the employer’s breach caused the employee’s psychiatric injury, but an important consideration was that without the employer’s breach, the employee would not have been dismissed for serious misconduct and the injury could not have occurred. The Court found that it was reasonable to expect that the employee would have been so distressed by the manner in which the employer breached the 2006 Contract and by the consequences of that breach to him, including his dismissal for alleged misconduct from his employment of nearly a decade, that there was a serious possibility that the employee would suffer a serious psychiatric injury. The Court said that in this case liability for psychiatric injury was not too remote, in light of the employer’s breaches, and the Court ordered that the trial judge’s damages award be reinstated.
In a separate judgment, Jaygot J stated the relevant question was whether the parties should reasonably have contemplated as a serious possibility that the employer acting in serious breach of the 2015 Disciplinary Procedure in a way that caused serious injustice to the employee could have resulted in him developing a serious psychiatric illness. Her Honour determined that the employer’s serious unfairness to the employee as part of the disciplinary process, meant that the parties could reasonably have contemplated such resulting harm and that damages could be recovered.
In contrast, Steward J considered that to be recoverable, the type of harm that needed to be in contemplation of the parties at the time of the 2006 Contract was “serious” psychiatric harm. He found that while it may have been contemplated that an employee could become “upset, stressed and disturbed”, the parties would not have reasonably contemplated that level of harm and as a result, damages could not be recovered by the employee as they were too remote.
High Court’s decision – the negligence claim
Given it found that the employer had breached the employee’s employment contract and that the majority had concluded that the employee could receive damages for his psychiatric injury arising as a result, the Court was not strictly required to determine whether an employer is required to provide a safe system of investigation and decision-making with respect to discipline and termination of employment.
The majority of the Court noted that in New South Wales v Paige (2002), the New South Wales Court of Appeal had previously held that an employer was not under a general common law duty of care to provide a safe system of work which included providing a safe system of investigation and decision making in respect of employees who are considered to be in breach of their terms of employment. A central factor in reaching that decision was that the extension of the duty of care in that way could result in it being inconsistent with existing employment law legislation and with administrative law.
The majority of the Court determined that it needed more comprehensive submissions from the parties, particularly in relation to that potential inconsistency or “coherence” point, in order to determine whether the duty on employers should be extended in the way argued for. Steward J alone considered that the position had been sufficiently argued before the Court, saying that the decision in New South Wales v Paige was correct, and that the duty of care should not be extended.
Key takeaways for employers
There are a number of key points which employers need to consider in light of the High Court’s decision:
- without appropriate drafting or consideration, the contents of disciplinary and termination policies and procedures can be incorporated into the terms of an employee’s employment contract, with the unintended consequence that a breach of those policies or procedures can amount to a breach of contract and a damages award, particularly where a termination occurs.
The High Court said that the common intention of the parties for the policies and procedures to be contractually binding (to the extent to which they imposed obligations) was further reinforced by the terms of the employee’s acceptance of the employment contract, by which he undertook to "comply with ... all other Company Policies and Procedures". Statements to this effect in employment contracts are commonplace.
This is consistent with the Full Federal Court’s statement in Romero v Farstad Shipping (Indian Pacific) Pty Ltd [2014] that 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.
Employers need to carefully consider the interplay between employment contracts and company policies / procedures and employment contracts should expressly state that “policies and procedures do not form part of the employment contract” (if this is what is intended);
- the High Court stated that it would “defy both logic and common sense” to suggest that an employer who was subjecting an employee to disciplinary action according to contractual policies, would not similarly be bound by those policies.
It is also common for an employment contract to contain a statement to the effect of “the policy or procedure are for the benefit of the employer and do not create any enforceable rights or entitlements in favour of the employee.”
In light of the High Court’s views, the effectiveness of statements to that effect to assist an employer to avoid a breach of contract claim where they depart from their own policy / procedure must be questioned;
- the High Court noted that while a disciplinary policy can contain statements which may be merely aspirational and do not have any contract effect such as recitals of broad commitments, recognitions, and goals, those broad recitals will not detract from other specific assurances and promises that may be made.
Those specific contractual obligations will obviously differ depending on the policy or procedure itself, but could include providing an employee with allegations in writing, holding a disciplinary meeting to provide the employee an opportunity to respond to the allegations, and specific decision-making procedures to be adopted post that meeting.
Employers need to be aware of what steps their own policies / procedures require them to take and act accordingly. As a result, employers may wish to review (and amend where necessary) their policies / procedures to ensure that they reflect best practice and the way in which they conduct workplace investigations, conduct disciplinary processes, and ultimately effect terminations where required. Employers should also ensure that a policy / procedure allows sufficient internal flexibility, so that they can modify processes to appropriately suit particular factual circumstances; and
- where an employer does not comply with any contractually binding disciplinary or termination policy, then an employer can be liable for any resulting psychiatric injury suffered by an employee arising from the departure from that policy / procedure and the manner in which a termination is affected.
To be liable, an employer does not need to have considered the precise manner in which the employer’s breach has caused a psychiatric injury; it will be sufficient if there was a serious possibility that the employee would suffer a serious psychiatric injury as a result of the employer’s contractual breach.
The more serious a departure by an employer from its own policy, the more likely it is that the employer will be liable where an employee suffers a psychiatric injury as a result of the termination process.
While the High Court did not determine whether an employer owes a duty of care to provide a safe system of investigation and decision-making with respect to discipline and termination of employment, employers will need to continue to monitor for any further developments in this space.