In late 2024, the High Court ruled that Australian employers may be liable for psychiatric injury caused by a breach of an employment contract.
This ruling overturns a longstanding position in employment law and has significant implications for employers.
Case Background:
An employee of an Australian charity was accused of aggressive behaviour towards a hotel owner during a work-related trip in March 2015.
The organisation stood him down and invited him to a disciplinary meeting. During this meeting, the employee denied the allegations, but the organisation terminated his employment, citing a "pattern of aggression".
The employee was not given an opportunity to respond to the claims regarding his past behaviour. As a result, he was diagnosed with major depressive disorder and adjustment disorder, which left him unable to work.
The employee filed a common law claim for damages, alleging the organisation’s failure to follow its disciplinary procedures caused his psychiatric injury.
The Supreme Court of Victoria initially ruled in his favour, finding that the disciplinary process was a "sham" and that the organisation had breached its employment contract by not following its own policies. The employee was awarded damages for this breach. However, the Victorian Court of Appeal overturned this decision.
High Court Decision:
The High Court reinstated the Supreme Court's ruling, awarding the employee $1.44 million in damages.
The Court determined that the disciplinary procedures were incorporated into the employee’s employment contract, as the contract explicitly referenced compliance with the employer’s policies and procedures. This made the failure to adhere to these procedures a breach of contract.
Importantly, the High Court also confirmed that psychiatric injuries are compensable under breach of contract claims, marking a significant shift in the law.
The Court found that the psychiatric injury suffered by the employee was not "too remote" from the breach. Given the nature of the termination process, it was foreseeable that the employee would experience significant distress, potentially leading to a psychiatric injury.
Important Considerations for Employers:
This decision marks a key development in employment law, allowing employees to claim damages for psychiatric injuries caused by breaches of employment contracts.
Improper handling of disciplinary actions may cause psychiatric harm. Employers must follow their own disciplinary and termination procedures, ensuring they are fair and legally enforceable.
Employers should review their employment contracts to avoid inadvertently incorporating binding policies.
To mitigate the risk of costly claims, it’s important to understand your employer obligations under workplace laws and review your HR protocols such as your employment contracts and HR policies.
For assistance or more information, please contact us today.