Australian employers could now be liable for psychiatric injuries that arise from contract breaches following a recent High Court ruling. Here’s what you need to know.

Employers regularly engage in disciplinary processes with employees to manage unsatisfactory behaviour or performance. Often such processes result in counselling, formal warnings or, in the most serious cases, termination of employment.  

In many cases, employers rely on their disciplinary polices and procedures to do so. And, to that end, many employers’ employment contracts contain clauses such as: 

“In addition, Employment Conditions will be in accordance with… [the Employer’s] Policies and Procedures. Breach of the Policies and Procedures may result in disciplinary action.

“[The Employee] agree[s] to comply with… all Company Policies and Procedures.”

We will come back to these clauses later.

A recent case that explored whether an employee can claim damages for psychiatric injuries arising from a disciplinary process has attracted significant employer interest and holds important lessons for HR practitioners.  

On 11 December 2024, the High Court handed down its long-awaited judgment, which held that a former employee would be paid $1.44 million in damages for a psychiatric injury resulting from the employer’s breach of the employment contract due to a flawed dismissal process.   

It all started at a hotel

The former employee had been employed by the organisation, an Australian charity, since 2006.  

In March 2015, the employee was staying at a hotel when he complained to the hotel proprietor about noise coming from outside his room. He was then moved to another room. 

Subsequently, it was reported to the organisation’s management that the employee had been “aggressive and intimidating” in complaining about the noise, including when he was checking out of the hotel.  

In May 2015, while the employee was on leave, a member of the employer’s people and culture team interviewed the hotel proprietor about the incident.  

When the employee returned from leave, he was informed that there was a “serious” complaint against him relating solely to the hotel incident, and he was stood down from duties and asked to attend a meeting two days later. 

In the stand-down letter, the employee was informed that the meeting would be conducted in accordance with the organisation’s enterprise agreement and its disciplinary procedure. 

The employee “vigorously” denied the allegations both in writing before the meeting and then again during the meeting.  

The organisation’s management then considered the matter and decided that it preferred the hotel proprietor’s version of events and, as a result, terminated the employee’s employment.   

In making this decision, the management team also took into account reports of the employee’s alleged prior “pattern of aggression”. However, these allegations were never put to the employee and he was not provided with any opportunity to respond to them. 

Subsequently, the employee was diagnosed with a major depressive disorder and adjustment disorder, leaving him unable to work.

“A person’s employment is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem.” – High Court of Australia

A lack of procedural fairness

In June 2015, the employee brought an unfair dismissal claim against his former employer in the Fair Work Commission, where the employer settled for the maximum amount to which the employee was entitled ($27,248.68).  

Following this, in November 2023, the employee then brought another claim in the Supreme Court of Victoria on the basis that he suffered a psychiatric injury caused by his former employer’s breach of his employment contract. 

The Court found that the employer had breached the employment contract, including the Disciplinary Procedure, which was found to be incorporated as a clause in the employee’s  employment contract.  

The Court found that the disciplinary procedure had not been complied with as the employer had failed to provide the employee with all the allegations prior to the meeting, including the alleged “pattern of aggression”.  

The Supreme Court held that the possibility that the termination could result in distress or even psychiatric injury was acknowledged by “the relevant witnesses at trial” and that the potential for psychiatric illness was a serious possibility in the event that the “protective processes directly contemplated by the terms of the contract [the Disciplinary Procedure]  were not followed and [the employee’s] employment was wrongly terminated”.  

The Court awarded the employee $1.44 million in damages.

As might be expected, the organisation then appealed the Supreme Court decision, which was overturned by the Court of Appeal.

The Court of Appeal held that while the disciplinary procedure was incorporated into the employment contract, and the employer had breached the contract by not following the procedure, damages for a psychiatric injury as a result of an employment contract breach could not be awarded.  

Among other things, the Court of Appeal found that a psychiatric injury was too remote to be contemplated as a result of the employer’s breach of contract.  

However, the employee persisted, taking his claim to the High Court of Australia. 

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The High Court ultimately decides 

The High Court found that the employment contract incorporated the disciplinary procedure. The contract’s clauses, referred to at the beginning of this article, were clear and indicated a common intention of the parties that the employer’s policies and procedures, including the disciplinary procedure, would be contractually binding for both the employee and employer.   

The Court then considered whether the employee should receive damages as a result of a psychiatric injury caused by this breach. It had previously been accepted that damages were not available for psychiatric injuries as a result of a dismissal. However, the High Court found that damages as a result of a breach of contract could be awarded.  

The High Court also decided that a psychiatric injury was not too remote to be within the contemplation of the parties. With this in mind, the Court upheld the original award of damages of $1.44 million. 

The following observation from the High Court is something that employers should consider more generally when conducting investigations and disciplinary processes:

It has been described as a “social reality” that a person’s employment “is usually one of the most important things in his or her life. It gives not only a livelihood but an occupation, an identity and a sense of self-esteem.”

An unfair process of termination for alleged misconduct could affect all three of those interests; ie, a person’s livelihood, identity, and self-esteem. 

Does this result in a new duty of care for employers?

One of the other issues raised by the employee in this case pertained to whether there is a duty of care for employers to provide a safe system of investigation and decision-making in relation to disciplinary matters and termination of employment.

The answer is ‘no’. There is no such duty. The High Court held that it did not need to deal with the issue as the employee was successful in his breach of contract claim. 

However, it is possible there may be future legal developments on this point which may lead to a new duty of care being imposed on employers.    

So where does this leave employers?

This case is important for a number of reasons, including that it is now possible for an employee to claim psychiatric injury as a result of a breach of the employment contract. 

Given the significant award of damages in this case, it is foreseeable that future employee claims may include claims for psychiatric injury for breach of contract.  

If we refer back to the clauses at the beginning of this article, it is likely that many employers have such clauses with similar phrasing in their employment contracts. 

Accordingly, there is a risk that employees who have their conduct investigated, or who are put through a disciplinary process, will carefully review whether the employer has followed its own policies and procedures. 

The following is a quick checklist for HR and employers based on the lessons set out in this case:

• Review your current investigation, disciplinary and termination policies and procedures to ensure there is sufficient scope and discretion to depart or vary any prescribed steps.
• Review and amend employment contracts to ensure that policies and procedures do not give rise to possible breach of contract claims.
• Follow the prescribed steps in any policy or procedure.
• Create a comprehensive investigation and disciplinary guide for managers to ensure they are following and relevantly applying the policies and procedures in investigation and disciplinary matters. The guide should also note that any investigation or disciplinary process should be as procedurally and substantively fair as possible.
• In any investigation, a finding should be based on conduct that has been put to the employee and the employee must have been given the opportunity to respond. 

Vigilance and thoroughness in adhering to employment policies and procedures can safeguard both employers and employees, fostering a more trusting and fair workplace, which is always a good thing. 

Aaron Goonrey is a Partner and leads the Australian and APAC Employment & Rewards practice at Pinsent Masons. 

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