Compensation for Psychological Injuries Arising From Dismissal

By Ben Gibson

Argues that the duty of trust and confidence, owed to an employee by their employer, should not be implied into contracts of employment so as to prescribe the manner in which an employee is dismissed,

The paper seeks to establish that a duty of trust and confidence of the kind envisaged by Lord Nicholls in Malik v Bank of Credit and Commerce International SA ('Malik')1 ought not be implied at law into contracts of employment, so as to allow compensation for employees who suffer psychological injuries as a result of the manner in which they are dismissed.

Part one of the paper argues that the duty of trust and confidence, owed to an employee by their employer, should not be implied into contracts of employment so as to prescribe the manner in which an employee is dismissed, as the implication of such a term would run contrary to fundamental principles of contract law and would undermine the statutory system for unfair dismissals established by Parliament. Part two argues that such a term is not necessary where the employment contract either explicitly considers the manner of an employee's dismissal,2 or where such a term can be incorporated by reference to the employer's disciplinary procedures. 3 In such cases, it is argued, there is no principled basis for prohibiting the award of damages for mental harm suffered as a result of the manner in which an employee is dismissed in a claim for breach of contract, notwithstanding the decision of the House of Lords in Addis which may purport to create a special rule to the contrary for contracts of employment.

Part three of the paper considers why neither the rule in Addis, the general rule that damages should not be available for distress associated with a breach of contract,4 or the common law test of remoteness should bar the award of compensation for psychological harm caused by a breach of the contract of employment, in light of the special nature of the employment relationship. Part four examines why implying a duty of trust and confidence is not necessary where an employee suffers psychiatric harm as a result of a course of conduct by their employer which precedes the employee's dismissal. Finally, part five considers the other remedies that may be available both at law and under Commonwealth and State statutory schemes, including workplace relations, occupational health and safety and workers' compensation schemes, where an employee suffers psychological harm as a result of the manner in which they are dismissed.

Centre for Employment and Labour Relations Law; The University of Melbourne

March 2006

Working Paper No. 37