Old employment contracts, prescriptive policies, and botched dismissal processes: a Vision of risk

The High Court has recently awarded $1.4 million in damages, plus costs, to a former employee of Vision Australia Ltd (Vision) for a serious psychiatric injury suffered following a botched dismissal process. 

So, (aside from being a lot of money) why is that a big deal?

It was previously understood that employees could not recover damages for mental distress arising out of the employment termination process, with few limited exceptions.

The High Court in Elisha v Vision Australia Ltd [1] has made clear that a breach of contract by an employer, including by failing to follow a binding disciplinary policy, may sound in big damages.

Facts

Adam Elisha was employed by Vision from September 2006 working with software and hardware systems to assist the visually impaired.

In March 2015, whilst staying at a hotel on a work trip, Mr Elisha was alleged to have behaved aggressively towards the hotel manager, though the details were disputed. Mr Elisha went on two weeks of pre-planned leave, but while he was gone, Vision began investigating the allegations.

On return from leave, Mr Elisha was issued a ‘stand down letter’ which referred to a ‘serious’ complaint against him and invited him to a disciplinary meeting to discuss the events that transpired at the hotel. Prior to the meeting, Mr Elisha provided a written response in which he denied the alleged misconduct.

Vision ultimately terminated Mr Elisha’s employment, with the reasoning for the decision being that one manager had heard similar stories in the past about Mr Elisha, and therefore favoured the hotel manager’s account of the events.

However, no allegations of previous misconduct or similar behaviour were put to Mr Elisha. According to the Primary Judge, Mr Elisha’s manager had already accepted the hotel manager’s version of events before the meeting. The employer’s disciplinary process was found to be “nothing short of a sham and disgrace”, and a failure to follow Vision’s documented disciplinary procedure.

Unfair dismissal proceedings 

Initially, Mr Elisha brought unfair dismissal proceedings in the Fair Work Commission against Vision, but these were settled for 26 weeks’ pay, being the maximum amount of compensation available in the jurisdiction. A deed was signed, although it did not prevent further proceedings.

Mr Elisha’s case 

Following the dismissal, Mr Elisha developed major depressive disorder, which he claimed was attributable to the disciplinary process and ultimate dismissal.

In August 2020, Mr Elisha brought new proceedings alleging that Vision had, by breaching its own Disciplinary procedure, breached the 2006 contract of employment. The proceedings also alleged Vision had breached a duty of care that Mr Elisha said he was owed in relation to the manner in which his employment was terminated.

That claim made its way through the Victorian Supreme Court, through the Court of Appeal, to these proceedings in the High Court.

The Breach of Contract

The High Court found that Vision’s Disciplinary procedure was incorporated as part of Mr Elisha’s employment contract because the employment contract, and the procedure itself, required Mr Elisha to follow Vision’s policies and procedures, with threat of disciplinary action if they were not followed. 

By failing to follow the Disciplinary procedure, the High Court found that Vision had breached its contract with Mr Elisha. 

When one party breaches a contract, it may be required to pay damages to the other party.  There was a question whether the damages suffered by Mr Elisha were ‘too remote’ to be awarded, or whether they could not have been reasonably contemplated when the contract was entered. The majority judgment found that, while the ‘unfathomable nature’ of Mr Elisha’s injuries may not have been specifically contemplated, it was reasonable to expect that Mr Elisha would have been so distressed by the shambolic nature of the disciplinary process, including dismissal from a role he’d held for nearly a decade, that there was a serious possibility that Mr Elisha would suffer a serious psychological injury. In that context, Mr Elisha was entitled to be awarded damages of approximately $1.4 million plus costs.

The High Court then addressed the old House of Lords authority of Addis v Gramophone Company Ltd (Addis)[2]. Addis has long been understood to stand for the proposition that an employee cannot claim damages for ‘hurt feelings’ or ‘difficulty finding employment’ arising from the manner of dismissal. The Court noted the difference between those matters in a case decided in 1909 and what is now understood to be psychiatric injury. The court found that psychiatric injuries arising from the manner of dismissal could fall within the liability that an employer could reasonably be considered to have agreed to accept at the time of entering into the contract. It is now clear that Addis is no longer good law in Australia.

Having found against Vision regarding the breach of contract, the Court did not express a view as to whether there was some other duty owed by employers to employees during the disciplinary process.

What does this mean for employers?

It's definitely not the first time an employer’s policy has been found to be contractually binding, although the risk of damages for an employee’s resulting psychological injuries has increased the stakes. If an employer breaches a policy or procedure that is found to be contractually binding, the amount of potential damages are high.

Employers are well advised to review their employment contracts to assess the risk that any additional documents may be incorporated into them. You may find you need to update your employment contracts, and relevant policies or procedures, to mitigate that risk.

The Vision decision also brings into focus the importance of sound legal advice around deeds of release. If an employer is paying money to settle a claim, it should be clear to them whether they can rely on that settlement as a bar to future proceedings.

Need help with a tricky employment situation? Give our team a call.