Employees can (sometimes) claim damages for psychological injury arising from breach of employment contracts
A recent High Court decision in Elisha v Vision Australia Limited (2024) has significant implications for employment law, particularly concerning an employer’s obligations to follow the disciplinary procedures set out in their employment contracts.
Employment contracts often stipulate specific steps that an employer must take when terminating an employee. These may include providing a formal warning or letter prior to a disciplinary meeting.
The facts and decision in Elisha
In Elisha, the employer’s enterprise agreement required them to provide Mr Elisha with a letter, prior to a discipline meeting, containing the allegations made against him. He was not given that letter before the disciplinary meeting. During that meeting, he was confronted unexpectedly with allegations of misconduct, including claims of aggressive behaviour. The employer then summarily terminated his employment based on these allegations. As a result of the breach in procedure, Mr Elisha suffered a serious psychiatric injury.
Historically, the law has limited damages for breach of contract to compensation for financial losses. Compensation has not been available for mental distress. However, in Elisha the High Court determined that this limitation should not apply where the breach of a contractual duty directly results in psychiatric injury. The court held that when both parties enter into an employment contract, they reasonably expect that adherence to disciplinary procedures will prevent outcomes such as severe mental health issues. In this case, the employer’s failure to follow its own process was deemed to have foreseeable consequences.
Implications for Employers and Employees
The Elisha decision reinforces that employers can be held liable for damages if they breach contractual termination procedures in a way that was reasonably anticipated at the time the contract was signed could cause psychiatric injury. It is not clear whether damages for psychological injury are available for other breaches of employment contract, but the door is at least somewhat open.
It serves as a critical reminder that employment contracts are not merely formalities; they establish mutually understood obligations that, when breached, can result in substantial liability.
More importantly, the decision reinforces that employers should think very carefully about what is in their employment contracts.
