This article was written by Managing Partner, Sam McIvor, and Associate, Bronte Jackson
In a landmark decision, the High Court of Australia confirmed psychiatric injuries can lead to damages for employees in cases of breach of contract, overturning the previous position that such injuries were not compensable.
Case background
The case involved a former employee who, while on a work trip in March 2015, allegedly engaged in aggressive and intimidatory conduct. Shortly after the work trip, the employee was stood down and provided with a show cause letter. Relevantly, the allegations in the show cause letter related solely to his alleged conduct on the work trip.
At the show cause meeting, the employee denied the allegations set out in the show cause letter. Following deliberations, the employee was dismissed by his employer. The employer favoured the evidence of the complainant, and further noted the employee had displayed a ‘pattern of aggression’ during his employment. This was conveyed to the employee in his termination letter.
Following termination, the employee was diagnosed with a major depressive disorder and an adjustment disorder, which rendered him unable to work. He initially sought compensation through an unfair dismissal claim, on the basis he had not been afforded the opportunity to respond to the allegation/statement regarding his ‘pattern of aggression’. The employer ultimately agreed to pay the employee $27,000 as a settlement amount.
However, in 2020, the employee filed a common law action in the Victorian Supreme Court, alleging that the breach of his contract (or, in the alternative, the employer’s negligence) caused his psychiatric injuries. Specifically, the employee argued that, under his employment contract, he was contractually entitled to a procedurally fair disciplinary process. The employee’s alternative argument was that the respondent owed him a duty of care (that was ‘not presently recognised by common law’) and its failure to provide him a fair opportunity to address his ‘prior conduct’ was a breach of such duty.
Decision history
At trial, the Supreme Court of Victoria found the applicant was contractually entitled to a disciplinary process in regard to his alleged ‘prior conduct’. The Supreme Court of Victoria went further to comment that the employer’s disciplinary process, in terminating the employee’s employment, had been a ‘sham and disgrace’. As the employee was awarded damages for the breach of contract, his alternative argument (being the employer’s alleged common law duty of care) was not considered.
The employer’s appeal of this decision, to the Victorian Court of Appeal, was successful in 2023.
The High Court decision
The High Court of Australia reinstated the original trial judgement, awarding the employee $1.4 million in damages. The Court’s key findings included:
- the employer was contractually obligated to afford the employee a disciplinary process. This was on the basis the employment contract indicated the employer intended to be bound by the workplace policies that sought to expressly provide the employee with procedural fairness;
- psychiatric injuries resulting from a breach of an employment contract are compensable; and
- the psychiatric injury was foreseeable, as the employee’s distress from being denied the opportunity to respond to the historical allegations was a ‘serious possibility’. In other words, his loss was not too remote.
These findings are significant as High Court decisions cannot be appealed.
The High Court declined to rule on the employee’s argument regarding the common law duty of care. However, the High Court expressed reservations with this cause of action, noting existing workplace health and safety laws already govern disciplinary processes and an extension to the scope of the duty of care may conflict with employers’ inherent rights to manage their workforce (by way of investigations and disciplinary action).
This decision marks a significant shift in how the courts view psychiatric injuries in the workplace, highlighting the potential for employees to seek damages for emotional distress resulting from contractual breaches.
We are closely monitoring case law developments and we are available to support businesses navigate these changes. Whether you require updated employment contracts or a review of your disciplinary procedure or policies, our team is available to guide you through this process.
If you would like to discuss how this case impacts your business and strategies to minimise risk, please don’t hesitate to contact us.
