Perhaps surprising HR and employment law practitioners, Australia’s High Court has recently handed-down a judgment with significant potential downside for businesses. Overturning the long-understood position, Australia’s highest court has ordered an employer to pay almost $1.5M in damages to an employee. The employer’s unfair disciplinary procedure, which led to the termination of the employee’s employment, caused him a psychiatric illness. He is unable to work for the foreseeable future. However – and importantly – with careful drafting by experienced employment lawyers, much of the risk the decision generates can and should be minimised.
The facts
Mr Elisha was employed by the not-for-profit Vision Australia Ltd as an adaptive technology consultant. Following a work trip by Mr Elisha, the owner of the hotel at which he stayed alleged that he had been “aggressive and intimidating” when dealing with her.
After apologising to the hotel proprietor, Mr Elisha’s manager gave him a stand down letter. He was to attend a meeting two days later to respond to the complaint about alleged “serious misconduct” concerning what had transpired during the hotel incident. Mr Elisha denied the allegations. However, Vision Australia decided to terminate his employment. Crucially, the decision-maker relied not only on the hotel incident but also other conduct of Mr Elisha and a pattern of aggression by him. After the termination, Mr Elisha developed a major depressive disorder and an adjustment disorder with depressed mood.
Breach of termination procedure
Mr Elisha’s employment contract stated that his employment conditions “will be in accordance with” Vision Australia’s employment policies and procedures, breach of which could result in disciplinary action. Mr Elisha agreed “to comply with” those policies and procedures. The High Court found that the common intention of Mr Elisha and Vision Australia was that the employer’s policies and procedures would be contractually binding insofar as they imposed obligations. The contractual language was clear and emphasised compliance. Moreover, the obligation to comply was not unilateral: both employer and employee agreed to be bound by the relevant policies and procedures. To suggest otherwise would, according to the High Court, “defy both logic and common sense”.
Specifically, Vision Australia’s disciplinary procedure required Vision Australia to take certain steps in serious matters. Relevantly, a formal disciplinary meeting was to be held. Before the meeting, Mr Elisha was to receive a letter outlining the entirety of allegations against him. He would have the opportunity to respond to them at the meeting.
Vision Australia “botched” its disciplinary procedure. The disciplinary meeting was, according to the Court, a “sham” and a “disgrace”. Vision Australia accepted the hotel proprietor’s account of the hotel incident but did so before the disciplinary meeting. Moreover, the “real reason” for the termination of Mr Elisha’s employment, his past history, was not put to him in the disciplinary meeting, or stated in the stand down letter.
In the end, Mr Elisha lost his employment for a reason he never had the opportunity of addressing. This breached Vision Australia’s disciplinary procedure and therefore the employment contract, which required that he have that opportunity.
Damages for breach of contract for psychiatric illness
The previously understood position was that an employee could not recover damages for the manner of termination either for breach of contract or in negligence (the issue of negligence was not determined in this case). Many assumed also that damages for loss occasioned by psychiatric illness, such as an inability to work in the future, was not recoverable.
The High Court has now overturned the long-held assumption. It reinstated the trial judge’s award to Mr Elisha of $1,442,404.50 in damages for his psychiatric illness. His psychiatric injury was caused by his termination, which followed from Vision’s Australia’s breach of its own disciplinary procedure.
In this regard, the High Court recognised the significance of the employment relationship for employees and the personal interests that employment furthers, noting that “for many workers dismissal is a disaster”. A job will often be a centre around which people organise their lives. It confers livelihood, an occupation, identity and sense of self-esteem. In other words, employment is not simply about the salary it gives an employee. Rather, employment is embedded in a “social reality” offering value to employees beyond wage earning. An unfair termination, said the High Court, places all this at risk. Importantly, injury flowing from that ought to be recognised by the law.
The High Court rejected the argument that, as matter of law, employees cannot recover damages for a psychiatric illness suffered because of the manner of termination. The decision on which the long-assumed bar to recovery was thought to rest, was now inapplicable. That decision – Addis v Gramaphone – was decided 1909, “in a different social context”. It should not be taken to stand for the proposition that employees could not recover for psychiatric illness because of the way their employment was terminated.
Instead of there being a rule of law preventing such recovery, whether an employer is liable for psychiatric illness due to termination will depend on whether the employer has assumed the risk of such injury under the contract.
In this case, the Court held that it was in the reasonable contemplation of the parties that Mr Elisha could be psychologically impacted by a breach of the disciplinary procedure, and that a psychiatric illness (as opposed to mere mental distress) was a serious possibility. It was reasonably foreseeable that the “sham process” would lead to psychiatric illness in an employee in “an acute position of powerlessness”.
Accordingly, because of the incorporation into the employment contract of the disciplinary policy, Mr Elisha was able to recover damages for the loss he suffered by reason of the breach of the disciplinary procedure.
What employers must do to ensure they are protected
Businesses should pay attention to the High Court’s decision. It recognises the potential for large and unrestricted damages awards being made for ‘dodgy’ termination procedures. Depending upon the circumstances of the case, employees can recover multi-million-dollar awards for psychiatric illness.
However, the significant award damages in this case arose from the peculiarity that the employer’s disciplinary procedure was incorporated into the employment contract. The employment contract in that case suffered from the defect of not having a clause to ensure that policies, which have potential to ground large compensation claims, were not incorporated into the contract. Competently drafted employment contracts exclude the incorporation of policies and therefore prevent a breach of the policy to result in compensation. As the High Court recognised, although psychiatric illness can be within an employer’s contractual duty regarding the manner of dismissal, that duty will be subject to the express terms of the contract.
Also vital for employers is to build flexibility into employment policies and procedures. Policies which prescribe detailed and rigorous procedures – be it in relation to discipline, grievance handling, workplace surveillance, or any workplace matter – can easily trip employers up. Employers want to retain an inherent flexibility to adapt or modify their procedures to the circumstances of the case.
For assistance with drafting your employment contracts or policies, or to respond to employee claims, please get in touch using the Contact Us form, or call 1300 565 846.
