When is an employer liable for a worker's psychiatric injury?

Most Australian business owners will eventually face an employee who is struggling. They are taking time off, working visibly long hours, or telling management the workload is too much. Sometimes that struggle hardens into a diagnosed psychiatric illness, and the question becomes whether the business is liable for it.

An employer is not automatically liable just because a worker develops a psychiatric illness at work. Liability in damages follows a legal test with three elements. The worker must have suffered a recognised psychiatric illness. That illness must have been reasonably foreseeable by the employer. And the employer must have failed to take reasonable steps to prevent it. All three must be made out before a court will award damages.

This article explains each element of that test, the role the employment contract plays in it, and the point at which you should bring in an employment lawyer. It draws on the leading High Court authority, Koehler v Cerebos (Australia) Ltd [2005] HCA 15, and on the New South Wales legislation that codifies parts of the test.

Two different paths to compensation

Before looking at the test itself, it helps to know which path a psychiatric injury claim takes. Most claims run through the workers' compensation system, which is a no-fault statutory scheme. Under the Workers Compensation Act 1987 (NSW), compensation is generally payable where the worker's employment was a substantial contributing factor to the injury (s 9A). For a primary psychological injury, New South Wales goes further and requires employment to be the main contributing factor (s 8O).

The second path is a common law damages claim against the employer for negligence. This is the harder path. In New South Wales, damages for a workplace injury cannot be awarded unless the injury results in death or a permanent impairment assessed at at least 15% for a physical injury and at least 25% for a psychological injury (s 151H). The three-part test below is the negligence test a court applies to that damages claim, and the same ideas of causation, foreseeability and reasonable care colour how compensation claims are assessed.

The first element: a recognised psychiatric illness

The starting point is that the worker must have a diagnosable psychiatric condition. In New South Wales, s 31 of the Civil Liability Act 2002 (NSW) provides that there is no liability to pay damages for pure mental harm from negligence unless the harm consists of a recognised psychiatric illness.

This matters because stress is not an injury. Safe Work Australia makes the point plainly: psychosocial hazards can create stress, but stress itself is not an injury. It is when stress is severe, frequent or prolonged that it can cause psychological harm such as anxiety, depression or post-traumatic stress disorder.

Feeling distressed, anxious or overwhelmed is therefore not enough to ground a claim. The worker needs a professional diagnosis of a recognised condition, usually from a psychiatrist or clinical psychologist, that meets accepted diagnostic criteria. This is why medical evidence sits at the centre of every psychiatric injury claim, and why an employer facing a claim should always ask to see the diagnosis rather than accept a description of symptoms.

The second element: a foreseeable psychiatric injury

The employer's duty is to take reasonable care to avoid psychiatric injury to its workers. That duty exists, but it is not a duty to guarantee anyone's mental health. The injury must have been reasonably foreseeable.

Section 32(1) of the Civil Liability Act 2002 (NSW) frames the duty this way: an employer owes no duty of care to avoid causing mental harm unless it ought to have foreseen that a person of normal fortitude might, in the circumstances, suffer a recognised psychiatric illness if reasonable care were not taken.

The leading case on how this operates is Koehler v Cerebos (Australia) Ltd [2005] HCA 15. Ms Koehler, a merchandising representative, repeatedly told management her workload was too big and that she needed more time or help. Nothing was done, and she later developed a major depressive illness. The High Court held the employer was not liable, because the risk of psychiatric injury was not reasonably foreseeable. Her complaints were about whether the work could be done. They did not alert the employer to a risk to her health, and she had shown no signs of distress or illness.

The lesson for employers is that foreseeability turns on what they knew or should have known. In New South Wales, s 32(4) of the Civil Liability Act 2002 (NSW) confirms the court does not disregard what the defendant actually knew about the worker. Warning signs matter: an employee who tells you their health is suffering, an employee with uncharacteristic or frequent absences, or an employee who discloses a mental health condition. So does the nature of the work itself. A task that is inherently traumatic, such as emergency response work, makes psychiatric injury more readily foreseeable than routine office work.

A worker's pre-existing vulnerability does not automatically defeat a claim. The employer must take account of what it knows about a particular worker, and the law's normal fortitude benchmark does not mean a vulnerable worker can never recover. But the practical point stands: an employer who has no reason to suspect a risk of psychiatric injury will usually escape liability, however real the worker's illness turns out to be.

The third element: a failure to take reasonable steps

Once a foreseeable risk is established, the question is whether the employer did enough about it. The standard is reasonableness, assessed along the lines the High Court set out in Wyong Shire Council v Shirt (1980) 146 CLR 40: the probability of the harm, the seriousness of it, and the burden of taking precautions.

There is a parallel statutory duty that points the same way. Under s 19 of the Work Health and Safety Act 2011 (NSW), a person conducting a business or undertaking must ensure, so far as reasonably practicable, the health and safety of workers, including a work environment without risks to health and safety and safe systems of work. That duty extends to psychological health, and it requires the business to manage psychosocial risks. Safe Work Australia lists the common psychosocial hazards, including excessive job demands, low job control, poor support, bullying, harassment and poor workplace relationships.

Reasonable steps in practice include responding to complaints about workload, investigating bullying or harassment allegations properly, adjusting duties where a worker is struggling, referring workers to support such as an employee assistance program, and training managers to recognise warning signs. What the law does not require is perfection. An employer that took reasonable, documented steps in response to what it knew will usually be able to defend the claim.

The work the employee agreed to do

The High Court in Koehler made a further point that shapes every psychiatric injury claim. The content of the employer's duty of care cannot be considered without reference to the contract of employment.

Where the injury arises from doing the very work the employee was engaged and paid to perform, and the employer has kept its side of the bargain, it is very difficult to establish a breach of the duty of care. An employee who accepts a role knowing its demands cannot later treat the ordinary performance of that role as negligence.

This is not an absolute exception. Liability can still arise where the employer varies the duties after the contract was made, where the demands placed on the worker go beyond what the contract contemplates, or where the employer knows of a particular vulnerability and does nothing. The point is that the contract is the backdrop against which reasonableness is judged, and an employer's liability is easier to establish the further the work drifts from what the employee signed up for.

A worked example: two accounts clerks, two outcomes

Consider a mid-sized accounting firm with two accounts clerks, both of whom develop major depressive disorder that their doctors attribute to work.

The first clerk repeatedly complained that her workload was too heavy and deadlines too tight. Her manager thought she was simply vocal about busy periods. She never mentioned her health, never took an uncharacteristic absence, and disclosed nothing about her mental state. Her claim fails at the second element. Her illness is real and work-related, but nothing available to the employer made the risk of psychiatric injury reasonably foreseeable. The complaints pointed to a workload dispute, not an injury.

The second clerk disclosed an anxiety disorder during onboarding. Six months later she lodged a written complaint that a supervisor was bullying her, and her absences began to climb. The firm did not investigate the complaint or adjust anything, and she was later diagnosed with major depressive disorder. All three elements are met. The firm knew of her vulnerability and of the bullying complaint, so the risk was foreseeable. It did nothing in response, so it failed to take reasonable steps. The firm is liable.

The difference between the two outcomes is not the severity of the illness. It is what the employer knew and what it did about it.

Common misconceptions

Several misconceptions about employer liability for psychiatric injury recur in practice, and each can push a business into a wrong decision. The most common are:

• Stress at work means the business pays: It does not. Stress is not an injury, and a claim needs a recognised psychiatric illness diagnosed by a qualified professional.
• Any psychiatric illness linked to work is the employer's fault: The illness must be a recognised condition, the risk must have been foreseeable, and the employer must have failed to take reasonable steps. Missing any element defeats the claim.
• Reasonable management action can never be a problem: In New South Wales, no compensation is payable for a psychological injury where the significant cause was reasonable management action (s 11A of the Workers Compensation Act 1987 (NSW)), such as a performance appraisal, counselling, discipline or a restructure carried out in a reasonable way. But the word "reasonable" is decisive. Bullying, harassment, humiliation and unjustified criticism are not reasonable management action, and the exclusion does not help an employer where other work factors were a significant cause.
• Personal problems can be blamed on work: The worker's employment must be a substantial contributing factor to the injury, and for primary psychological injuries in New South Wales it must be the main contributing factor. A claim fails if the real cause is a relationship breakdown or other personal matter.
• A worker with a pre-existing condition can never claim: Wrong. The employer must act on what it knows about a worker's vulnerability. A disclosed mental health condition makes psychiatric injury more foreseeable, not less, and ignoring it is exactly the kind of failure the test is designed to capture.

When you need a lawyer's help

If a worker lodges a claim, whether through workers' compensation or directly against the business, this is the point at which an employment lawyer earns their fee. A lawyer will review the employment records, the history of complaints and the responses to them, and the medical evidence, and will assess the claim against each element of the test. That assessment drives the strategy: defend the claim where an element is missing, negotiate a settlement where the claim is strong, and put the matter before the court only where the facts justify it.

A lawyer also works backwards, helping a business put systems in place so the next claim is harder to make. That means documenting how complaints are handled, auditing workload and psychosocial risks under the WHS framework, and training managers to recognise warning signs and escalate them. Preventative work of this kind is usually far cheaper than defending a claim that succeeds.

The question your records should answer

If an employee told you today that they cannot cope, could your records show what you did about it? This is the single question that decides most psychiatric injury claims. Courts and insurers weigh what the employer knew and what the employer did, and both are proven from the written record. The complaints that were never recorded, the bullying allegation that was never investigated, and the workload concerns that were never answered are the claims that succeed. A short written trail of what you were told and what you did in response is the cheapest liability protection your business can buy.