High Court confirms: Employees can recover compensation for psychological injury caused by unfair dismissal

In a major shift for Australian employment law, the High Court of Australia has confirmed for the first time that an employee can recover damages for psychological injury caused by the way their employment was terminated.

The decision in Elisha v Vision Australia Ltd [2024] HCA 50 significantly reshapes the risk profile for employers when managing disciplinary processes and dismissals.

What happened in the Elisha case?

Mr Elisha had worked for Vision Australia since 2006. In 2015 he was dismissed following allegations about his conduct during a work trip. During the investigation, the employer relied on prior misconduct that was never put to him for a response, contrary to its own disciplinary procedure.

Mr Elisha lodged an unfair dismissal claim in the Fair Work Commission, which later settled. After the dismissal, he was diagnosed with major depressive and adjustment disorders and was unable to work.

Although the parties signed a deed of settlement, the Supreme Court of Victoria found the deed only released claims connected to the Fair Work proceedings, not all potential claims arising from his employment.

The Court held that Vision Australia breached its contractual obligations (contained partly in its Enterprise Agreement) by failing to give him a fair chance to respond to the allegations. The judge awarded over $1.4 million for the psychological harm he suffered.

The Court of Appeal overturned that decision, relying on an old English authority which limited damages in dismissal matters to economic loss only.

The High Court’s ruling

The High Court rejected the old English approach and reinstated the trial judge’s findings.

The High Court held that:

• Damages can be awarded for psychiatric injury caused by the manner of dismissal.
• Psychological harm arising from a flawed dismissal process is reasonably foreseeable.
• The employer’s breach of contract, by failing to follow its own disciplinary procedures, directly caused the employee’s injury.
• The earlier English decision relied on by the Court of Appeal is not applicable in modern Australian employment law.

This is the first time Australia’s High Court has explicitly recognised that an employee may recover compensation for psychological injury resulting from unfair or mishandled termination.

Why this matters for employers

This decision marks a significant development in the legal obligations employers owe during investigations, performance management and dismissal processes. It confirms that:

1. The manner of dismissal now carries real legal risk.

If an employer fails to follow its contractual or policy procedures, psychological injury may give rise to substantial damages.

2. Psychological safety must be considered during disciplinary processes.

Employers should assume that psychological harm is a foreseeable consequence of mishandled terminations.

3. Deeds of release will be interpreted narrowly.

General wording may not extinguish all legal claims unless drafted clearly and comprehensively.

4. Employment contracts and workplace policies matter.

If an employer’s procedures form part of the employment contract, breaching them can now result in significant compensatory exposure.

Key takeaways for businesses

Employers should urgently review:

• Disciplinary and investigation procedures
• Employment contract terms and incorporated Enterprise Agreements
• How dismissal decisions are documented and executed
• The clarity and wording of settlement deeds

This decision reinforces that fairness, process, and communication are not just HR issues, they are now central to managing legal risk.

If you require assistance reviewing your contracts, policies or disciplinary processes in light of this decision, our employment and litigation teams at Baker Love Lawyers can help.

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