Practical steps for not-for-profits: Protecting an employee's mental health during disciplinary proceedings

The High Court of Australia has handed down a landmark decision affirming that an employee was entitled to substantial damages for psychiatric injury suffered as a result of his employer’s breach of the employment contract by their conduct during disciplinary proceedings that resulted in the employee's termination. The decision overturned long-standing precedent, reflecting the changed view of society regarding injury to an employee’s mental health.

Practical steps

Given the risk that an employee may suffer compensable psychiatric injury if their employer breaches the employment contract, potentially resulting in substantial damages, not-for-profits (NFPs) will need to:

• review employment contracts to identify whether any policies or other documents incorporated by reference (expressly or impliedly) impose, or may arguably impose, binding obligations on the parties;
• when amending policies or other documents, ensure that the potential impact on employment contracts, both templates and existing contracts, is considered; and
• ensure that policies and procedures that form part of the employment contract are fully complied with by the NFP's officers, employees and agents, with particular care in the context of disciplinary proceedings and termination of employment.

Background

The case of Elisha v Vision Australia Limited [2024] HCA 50 (Elisha v Vision Australia) arose from Mr Elisha’s summary dismissal from his employment at the not-for-profit organisation, Vision Australia, following an allegation that he had been ‘aggressive and intimidating’ towards a hotel manager during a work trip (the serious complaint). Mr Elisha was informed of the serious complaint, his employer conducted an investigation and consequently his employment was terminated. After his dismissal, Mr Elisha was diagnosed with a severe psychiatric illness (the psychiatric injury) and was unable to work in the foreseeable future. He sued his former employer in the Supreme Court of Victoria for damages for the psychiatric injury arising from its breach of the terms of his employment and for negligence in breaching an alleged duty of care imposed upon employers to provide a safe system of investigation and decision-making with respect to discipline and termination of employment.

The case in the Supreme Court of Victoria^[i]

Vision Australia maintained that the investigation and dismissal were based on the serious complaint and that Mr Elisha was given the opportunity to respond to the allegation. However, the primary judge found that Vision Australia had formed the view that the incident was part of a longstanding history of aggressive behaviour which Mr Elisha was never informed of, and this was the basis for termination.

Vision Australia also argued that the disciplinary procedure was intended to be a one-sided, lawful and reasonable direction that applied to employees that it was not bound by. The primary judge determined that Mr Elisha’s employment contract included the disciplinary procedure and found that Mr Elisha’s contract had been breached as the disciplinary process adopted for Mr Elisha was ‘nothing short of a sham and a disgrace’. Mr Elisha was awarded damages of approximately $1.44 million for loss of earning capacity, pain and suffering, and, principally, from the serious and ongoing psychiatric injury on the basis that the parties should have reasonably contemplated that the risk of potential psychiatric illness was a serious possibility if the protective processes directly contemplated by the terms of the contract were not followed. The Court rejected the negligence claim on the basis that Vision Australia did not owe the alleged duty of care to Mr Elisha.

The case in the Victorian Court of Appeal^[ii]

The Court of Appeal upheld the primary judge’s findings that the disciplinary procedure formed part of the employment contract binding on both parties and that Vision Australia had breached the contract and was liable to pay damages for that breach. However, the Court found that Vision Australia was not liable for damages for psychiatric injury because on the evidence that injury was too remote, so Mr Elisha could only be awarded nominal damages for the breach of contract. It also upheld the rejection of the negligence claim. Although not required for its decision, the Court also stated its view that damages for psychiatric injury would not have been available in any event in view of Addis v Gramophone Co Ltd [1909] AC488 (Addis), in which the House of Lords held that a dismissed employee could not recover damages for breach of contract in respect of ‘injured feelings’ and loss of employment prospects arising from the harsh manner of the dismissal.

The case in the High Court of Australia‍

Mr Elisha appealed to the High Court of Australia which allowed his appeal and held that:

• the disciplinary procedure formed part of the employment contract;
• subject to the particular terms and context of a particular employment contract, liability for psychiatric injury was not beyond the scope of Vision Australia's contractual duty concerned with the manner of dismissal;
• Addis was decided in a different social context and has been overtaken by more recent legal developments in Australian law and by legislation relating to unfair dismissal;
• the scope of Vision Australia’s contractual duty was determined by the nature of liability the parties might have contemplated and accepted, not by the damage that might have been foreseen;
• remoteness of damage was a separate legal consideration from the scope of a contractual duty;
• in the specific serious circumstances of this case, liability for psychiatric injury was not too remote; and
• remoteness of damage is assessed by looking forward from the date of the contract and requires consideration whether the damage of the type suffered was a 'serious possibility' arising naturally from the breach or was within the contemplation of both parties as a probable result, rather than merely foreseeable.

The Court stated that the loss of some contractual certainty by incorporating policies and procedures that could change from time to time was not a reason to deny a clearly expressed intention that a particular policy or procedure will have contractual effect. However, it left open the question of the extent of an employer’s power to unilaterally amend policies and procedures, and if there is any constraint (such as reasonableness) on that power.

As Mr Elisha won on his first ground, it was strictly unnecessary for the High Court of Australia to consider the negligence claim. However, they did briefly address that ground and its comments suggest the view that that there is no general principle against such negligence claims and each case will turn on the coherence of the applicable employment legislation with the administrative law in the relevant jurisdiction at the relevant time.

Work health and safety legislation

In addition to the common law duties owed by the employer to the employee addressed in this case, the work health and safety legislation in the Australian States and Territories requires persons conducting a business or undertaking to manage not only risks to physical health but also psychosocial hazards. These are hazards arising from or related to the design or management of work, the work environment, workplace interactions, or behaviours, which may cause psychological harm. Factors to be considered in managing hazards include systems of work, workplace interactions and behaviours and the information, training, and supervision provided to workers. While the legislation does not mention disciplinary procedures specifically, on general principles, they are part of workplace interactions and systems of work and could potentially give rise to psychosocial hazards if not managed appropriately.

Need help navigating these changes?

We exclusively support charities and NFPs and as such have a specialised and in-depth knowledge of the practical legal, regulatory, and governance needs of charities and NFP organisations.

Contact us today to review your compliance and ensure you are up to date.  

Call us on 07 3160 0010, email reception@nfplawyers.com.au, or submit a contact form to arrange a consultation.

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[i] Elisha v Vision Australia Ltd [2022] VSC 754

[ii] Vision Australia Ltd v Elisha [2023] VSCA 265

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