Posted on March 7, 2025 by Dimitrious Havadjia and Lindsay Taylor 2

Employers can be liable for psychiatric injuries arising from termination

In December 2024, the High Court overturned a long-standing precedent preventing an employee from claiming damages for psychiatric injury arising from a breach of an employment contract by an employer.

In Elisha v Vision Australia Limited [2024] HCA 50, the High Court overturned a decision of the Victorian Court of Appeal and affirmed an award of just under $1.5 million in damages made by the primary judge to a former employee who claimed to have suffered psychological injury as a result of a termination of their employment in breach of the requirements of the employee’s employment contract.

Background

In 2015, Mr Elisha (Employee) was on a work trip while working for Vision Australia Ltd (Vision). Allegations were made by the hotel owner about the Employee’s conduct. Following an investigation, Vision terminated the Employee. While doing so, they did not comply with the relevant due process and procedural fairness requirements contained in the Employee’s contract and the relevant industrial relations instruments. Following his termination, the Employee was diagnosed with a major depressive disorder and was found to have no capacity for work in the foreseeable future.

The Employee commenced unfair dismissal proceedings. Vision settled those proceedings by agreeing to pay the Employee $27,248.68, being the maximum the Employee was entitled to in those proceedings at that time.

Around 5 years later, the Employee commenced further legal proceedings against Vision. He alleged that the company had breached his employment contract and was negligent in the termination process, which caused his significant psychiatric injury.

Although the Employee was successful in the first instance, the Victorian Court of Appeal rejected the Employee’s claim on the basis that:

1. damages for psychiatric injury were unavailable for a breach of an employment contract, unless they arose from a physical injury caused by the breach,
2. the psychiatric injury damages were too remote, and
3. the duty of care of employers does not extend to avoiding injury to employees in the implementation of processes leading to and resulting in the termination of employment.

Decision

In a departure from long-standing precedent, the High Court upheld the Employee’s claim for damages for psychiatric injury suffered in connection with the manner of termination of his employment by Vision.

The Court was satisfied that the Australian legal position had changed since the UK decision in Addis v Gramophone Company Ltd [1909] AC 488, which established the rule precluding recovery of damages for breach of contract in respect of psychiatric injury caused by manner of dismissal. The Court held that the employment contract should not be treated differently to any other contract, and the usual contractual principles regarding the calculation of damages, including for injury, should apply.

The Court held that it was reasonable to expect that the Employee ‘would have been so distressed by the manner in which [Vision] breached the [employment contract] and by the consequences of the breach for him, including his dismissal for alleged misconduct from the employment that he had held for nearly a decade, that there was a serious possibility that [the Employee] would suffer a serious psychiatric injury’ (at 69).

The Court found that, on application of the relevant contract law principles, damages for the Employee’s claimed psychiatric injury were not too remote and reinstated the primary judge’s award of $1,442,404.50 in damages to the Employee.

Implications

This case significantly expands the legal avenues available to employees if they wish to make legal claims against their employer in connection with the termination of their employment for three key reasons:

1. breach of contract claims can be made in addition to claims available under statues such as the Fair Work Act 2009 and the Industrial Relations Act 1996,
2. contract claims can be made by all employees, including private, federal, local and state government employees, and
3. breach of contract claims are not subject to the statutory limits that often apply to claims made under industrial instruments or anti-discrimination legislation.

However, to seek damages for a psychiatric injury, an employee will need to connect the injury to a breach of a term of their employment contract. Therefore, the availability of this new legal claim will turn on the wording of the employment contract, the nature of the obligations it creates, and whether the injuries and damages were truly caused by the breach. These matters need to be adjudicated by a court.

With that in mind, all employers should ensure that they understand the extent of their contractual obligations, including whether the wording of their contracts incorporates policies and codes of conduct into the contract itself, particular in relation to awards and industrial agreements, which often include very prescriptive processes for discipline and termination (e.g. clause 38 of the Local Government (State) Award 2023). As demonstrated in this case, the incorporation of disciplinary procedures into Vision’s contracts of employment resulted in a significant financial liability being incurred when those procedures were not followed.

The awarding of damages to an employee for psychological injury suffered in connection the termination of employment in breach of their employment contract demonstrates the now well-established willingness of Australian courts to recognize diverse claims made by employees for psychiatric injuries suffered by them in connection with their employment.

If you have any questions or need assistance reviewing your employment contracts in light of this decision, please contract Dimitrious Havadjia or Lindsay Taylor.

The judgment can be found in full here: Elisha v Vision Australia Limited [2024] HCA 50.