Breach of Employment Contract Claims – the Next Likely Employer Trap

In a recent High Court decision, an employer was ordered to pay an employee damages and compensation exceeding $1.4m in a claim for a breach of the employment contract. This was despite the fact that the employer had already settled the employee’s unfair dismissal application and a Deed of Settlement had been signed.

The claim arose out of the alleged breach of contract by the employer which resulted in the employee suffering psychological injury.

Background

Vision Australia employed Mr Elisha for about 10 years. Mr Elisha had a falling out with his manager who had complained that Mr Elisha was aggressive at work. In 2015, Mr Elisha was working away from home and stayed at a hotel. After his stay, the hotel manager complained to Vision Australia that Mr Elisha had been aggressive to hotel staff.

Because Mr Elisha’s manager had already raised concerns about Mr Elisha’s “aggression”, Vision Australia accepted the hotel manager’s version of events and dismissed Mr Elisha. Vision Australia claimed the dismissal was for serious misconduct, reputational risk and risk to health and safety in the workplace.

Mr Elisha commenced an unfair dismissal application, but this application was settled in the Fair Work Commission, with the parties executing a Deed of Settlement.

Five years after the unfair dismissal application, Mr Elisha commenced a breach of contract claim.

Mr Elisha asserted that Vision Australia breached his employment contract by not following its disciplinary policy (as contained within a disciplinary policy, Vision Australia’s enterprise agreement and as a term of his employment contract). Mr Elisha asserted that this breach caused him a psychiatric injury.

The Decision

At first, the Supreme Court of Victoria held that the Deed of Settlement for the unfair dismissal application did not prevent Mr Elisha from this further claim. It held that the release in the Deed of Settlement:

• was too broad to cover the breach of contract claim (it stated ‘all claims arising out of the employment’), and
• could not have reasonably contemplated Mr Elisha bringing a breach of contract claim for psychiatric injury because:
  • Mr Elisha hadn’t raised such a claim in the course of the unfair dismissal application; and
  • damages for ‘shock, distress or humiliation’ cannot be awarded in an unfair dismissal claim.

The Court then held that the enterprise agreement procedures and disciplinary policy were incorporated into Mr Elisha’s employment contract.

In summarising why the policy and procedures were incorporated into the employment contract, the Court relied on:

• a contractual provision to the effect that Mr Elisha’s employment would be ‘in accordance’ with Vision Australia’s policies and procedures; and
• in writing to Mr Elisha during the disciplinary process, Vision Australia repeated that the processes were ‘in line’ or ‘in compliance’ with the enterprise agreement procedures and the disciplinary policy.

The Court held that both the enterprise agreement and the disciplinary policy used prescriptive wording.

Vision Australia appealed to the High Court which dismissed the appeal, with the majority holding that:

1. a term of the employment contract to the effect – ‘the employment is in accordance with Vision Australia’s policies and procedures’ made the policies binding contractual obligations;
2. the employment contract’s objective created a one-sided obligation on Mr Elisha to comply with policies, but not Vision Australia – stating that “it would defy both logic and common sense” to say that the employer was not bound by contractual policies used in a disciplinary process; and
3. while some aspects of the disciplinary policy were aspirational, it used expressions such as a specific procedure ‘will’ be followed, making those assurances contractually binding.

Accordingly, the disciplinary policy became enforceable terms of the employment contract. Further, the High Court did not overturn the Supreme Court of Victoria finding that the Deed of Settlement (the parties used the Fair Work Commission’s general terms), while it settled the unfair dismissal, it did not cover a breach of contract claim.

What you need to do

This decision reinforces two important matters.

First, the need for careful drafting in employment contracts, policies, and procedures in order to ensure that policies and procedures do not become contractual terms. The risk of a policy becoming a contractual term can be minimised by using aspirational language in the policies.

Secondly, pay close attention to the release clause in any Deed of Settlement to ensure it covers all matters in connection with an employee’s employment – including breach of contract claims.

Too often an employment contract and policies/procedures can become a ‘set and forget’ tool once ‘templates’ are in place. It is important for employers to ensure that employment contracts and policies/procedures are up to date and don’t impose obligations beyond what was intended.

Don’t simply use a template Deed of Settlement believing that all you have to do is change the specific terms of the agreement. While a template is a good start, employers need to think about the circumstances that are being settled and ensure that all matters that need to be settled in connection with the employment are truly included in the release clause.

This case points the way for employees to re-enliven claims that many employers thought were resolved. If you are unsure whether:

1. your current policies and procedures are sufficiently aspirational;
2. a template you are using for a Deed of Release contemplates contractual claims; or
3. through some poor wording, a workplace policy may become a binding contractual term, then you need to have our employment team review these documents. It may save you over $1.4m.