By Daniel White (Partner), Elizabeth Moran (Special Counsel), Claudia King (Paralegal)

Employers should pay close attention to a recent decision of the High Court of Australia (HCA), Elisha v Vision Australia Limited,[1] which tells a strikingly cautionary tale about:

• The need to follow proper processes when dismissing employees;
• The capacity for employees to claim damages for psychiatric injury caused by the manner of a dismissal; and
• The ways that employers’ policies and procedures can become terms of the employment contract, even when this was not explicitly intended.

Many readers of our updates will be familiar with the requirement of procedural fairness under the unfair dismissal regime of the Fair Work Act 2009 (Cth).  The Elisha case is significant because it was not an unfair dismissal claim but a common law action in the courts which raised the important question: can an employee claim damages for a psychiatric injury resulting from the manner of dismissal?

Botched Dismissal Process

Mr Elisha was summarily dismissed from his employment after allegations were raised that he had been involved in an aggressive altercation in a hotel during a work-related regional trip (Mr Elisha had denied the allegations).  Following dismissal he suffered a significant psychiatric injury which prevented him from working and entailed a poor prognosis.

The real reasons for dismissal became the subject of dispute when Mr Elisha sued his former employer in the Supreme Court of Victoria (VSC), arguing that the employer’s disciplinary procedure was a term of the contract of employment, the term had been breached, and this caused his psychiatric injury.

The primary judge in the VSC described the disciplinary process as “unjust”, a “sham” and a “disgrace”, which entailed “secret slurs” about Mr Elisha’s prior conduct.  The judge found that the hotel incident had not occurred as alleged by the hotel worker and that the disciplinary process was deficient because:

• The real reason for termination was a claimed history of aggression and excuse-making by Mr Elisha (separate from the hotel incident) but this was never put to him;
• The decision to prefer the hotel worker’s version of events had been made even before Mr Elisha attended a disciplinary meeting at which he was to have an opportunity to respond;
• The alleged history of aggression discussed by decision makers was “hopelessly vague and insubstantial”; and
• Mr Elisha was never told of the role his claimed history of aggression played in the decision to terminate his employment.

The primary judge also found that:

• The implementation of the disciplinary process breached both the “due process” requirements under the applicable enterprise agreement (EA) and the employer’s disciplinary procedure;
• Both the EA clause and the procedure were incorporated into the contract of employment;
• The employer had breached this term by failing to provide a letter to Mr Elisha prior to the disciplinary meeting setting out the allegations on which it acted in terminating the employment (i.e. containing the alleged prior aggressive behaviour); and
• Except for the breach, the employer would not have summarily dismissed Mr Elisha, and he would not have suffered a psychiatric injury.

Because Mr Elisha did not know all the matters taken into account by the decision-makers on dismissal, he found the decision to summarily dismiss him after many years of employment “unfathomable”. This was accepted as one factor in the causation of his psychiatric injury, as he ruminated on an opaque decision.

Damages of almost $1.5 million were awarded.

On appeal, the Victoria Court of Appeal reversed this primary decision, and the case made its way to the HCA.

In the HCA

The HCA considered the disciplinary process that led to dismissal and, in the words of Justice Jagot, found that its failures were not merely trivial:

“A fundamental purpose of those procedures was to ensure that an employee who was to be disciplined, including by termination of employment, was made aware of the misconduct of concern to the employer and given a real opportunity to put their side of the story to the employer before the taking of any disciplinary action. Not only did that not occur, but what occurred involved ensuring that Mr Elisha was not aware of a key reason why his version of events concerning the hotel incident was not accepted”.

This “key reason” was the alleged history of aggressive conduct, which was never put to him, yet informed the decision to summarily dismiss him.

The HCA determined that the employer’s failure to adhere to its disciplinary procedure was a contractual breach. The policy wording was not merely “aspirational” but created obligations, including that:

• Employees were expected to act in accordance with certain values, and if they did not, would be subject to disciplinary action; and
• The employer promised that a specific procedure “will” be followed, including the requirement for a formal letter containing a written outline of the allegations before a disciplinary meeting.

The contractual status was reinforced by the fact that Mr Elisha had been required to sign an “acceptance” by which he promised to comply with all company policies and procedures.

It is not unprecedented for a Court to determine that an employer’s policy or procedure has become a contractual term (to the extent that it imposes obligations) provided there is clear language emphasising the need for compliance. More contentious was the separate question: can damages be claimed for a psychiatric injury that results from the manner of a dismissal?

In the HCA, the employer used older UK case to argue that there is a rule by which damages for psychiatric injury are beyond the scope of any contractual term concerning the manner of termination. The Court rejected the existence of this rule in Australia, viewing the UK statutory framework and its development of implied common law duties in employment as distinct from our legal context.

In the absence of such a rule, the scope of the contractual duty regarding the manner of termination was decided in the usual way: what liabilities could the parties fairly be regarded as having been willing to accept at the time they entered the employment contract? Did this include liability for a psychiatric injury resulting from the manner of dismissal? In this case, the answer was ‘yes’, given there was no basis to find that employment contracts are a special class of contract that excludes such liabilities.

The HCA also determined that the damage of psychiatric injury was not too “remote” to be compensated because damage of that type should have been reasonably contemplated as a “serious possibility” at the time the employment contract was created:

“the precise psychiatric injury suffered…need not have been contemplated…but it was reasonable to expect that Mr Elisha would have been so distressed by the manner in which [the employer] breached the [employment contract] and by the consequences of the breach for him, including his dismissal for alleged misconduct from the employment that he had held for nearly a decade, that there was a serious possibility that Mr Elisha would suffer a serious psychiatric injury.”

Note: “psychiatric injury” in this sense is a diagnosable mental condition, not merely hurt feelings.

What should employers take away from this decision?

• Failure to comply with disciplinary procedures entails a risk not only of unfair dismissal claims: employees (including those ineligible for the unfair dismissal jurisdiction) are able to bring common law claims based on a psychiatric injury caused by the manner of dismissal where a disciplinary procedure is a term of the contract of employment. This risk may extend to other types of policies, for example those that prescribe a process for internal or external investigations.
• Employers can include an express statement in contracts and policies/procedures to the effect that they are not incorporated into the contract of employment and this has been common practice since cases such as Goldman Sachs JB Were Services Pty Limited v Nikolich [2007] FCAFC 120.  This will be a factor that points away from contractual effect, but care needs to be taken with promissory language more generally.
• Employers need to carefully consider whether they want policies and procedures to be incorporated into the contract of employment. If they do not want this, great care needs to be taken with policy wording: merely “aspirational” statements do not have a contractual quality. By contrast, clear wording that creates promises and obligations may well have contractual effect, as in this case:
• Mandatory language (“will”) regarding procedural steps; and
• The obligation that employees to comply with company values on pain of disciplinary action, reinforced by a requirement to sign an “acceptance” of this obligation.
• The more serious the breach of a contractual procedure, the more likely it is that a court will decide that a serious psychiatric injury is not too “remote” to be compensated.
• There is also a work health and safety aspect to be considered. With safety regulators becoming increasingly involved in investigating potential breaches of WHS legislation arising from day-to-day human resources practices such as investigations and redundancies, employers should be mindful that a breach of their own HR policies may be considered a failure to ensure the health and safety of their workers, as required by the primary duty in WHS legislation around the country.  This is particularly where having a specified process documented in a policy (whether for investigations, displinary matters or redundancies) is likely to be deemed as evidence of what the employer considered to be ‘reasonably practicable’ in relation to that process, for the purpose of the regulator assessing the adequacy of the employer’s measures to ensure health and safety in the workplace.

Employers should also be mindful about the potential limitations that workers’ compensation schemes across Australia can possibly have on psychiatric injury claims.  Some schemes may impose a limit on the extent to which employees can seek an award of damages for a psychiatric injury arising out of a breach of contract.

[1] Elisha v Vision Australia Limited [2024] HCA 50.