The NSW workers compensation scheme has undergone its biggest reform in decades.
The reforms have introduced significant changes, particularly in relation to how psychological injury claims are assessed and managed, effective from 1 July 2026.
The changes provide greater certainty for employers about what types of conduct and events give rise to a compensable psychological injury, while also narrowing the scope of eligible claims. This should bolster employers’ confidence to make fair decisions about common workplace matters that can arise during the employment lifecycle, such as decisions about managing performance, taking disciplinary action when it is necessary, and implementing organisational changes to achieve business objectives.
However, early identification and appropriate management of psychosocial hazards in the workplace, such as bullying, sexual or racial harassment and excessive work demands, remain critically important to ensure that employers meet their work health and safety obligations.
Background to the reforms
In March 2025, the NSW Treasurer announced the government’s intention to table legislative reform aimed at addressing the costs and complexities of managing psychological injury workers compensation claims whose numbers have almost doubled in recent years.
The workers compensation framework was deemed ill-equipped to effectively manage psychological injury claims and return injured workers to the workplace, and the NSW government predicted that without legislative intervention, the rising costs of managing psychological claims would lead to a 36% increase in employers’ insurance premiums by 2028.
A raft of changes to the current scheme were proposed, including to eligibility requirements and thresholds for workers compensation benefits.
Two Bills were subsequently tabled in Parliament and signed into law:
- Workers Compensation Legislation Amendment Act 2025
- Workers Compensation Legislation Amendment (Reform and Modernisation) Act 2026
The legislative changes have taken effect in two tranches, with changes commencing on 27 March 2026 and on 1 July 2026 respectively.
What are the key changes to psychological injury claims?
Psychological injury claims now have a narrower scope
The reforms narrow the circumstances in which psychological injury claims can be made, focusing on defined workplace conduct such as bullying, harassment, workplace violence and excessive work demands, with claims arising from general workplace stress intended to fall outside of the scheme.
From 1 July 2026, compensation for a psychological injury is conditional on establishing that:
- The injury was caused by a relevant event or a series of relevant events, as defined in section 8G of the Workers Compensation Act 1987 (NSW) (the Act);
- There is a real and direct connection between the relevant event(s) and the worker’s employment; and
- Employment is the main contributing factor to the psychological injury.1
In determining whether conduct amounts to a relevant event that caused a psychological injury, an objective test2 will be applied. The question is whether a reasonable person having regard to all of the circumstances would have anticipated that another person would be offended, insulted, humiliated or intimidated by the conduct.
Notably, a worker’s perception of the conduct or event will only be relevant to the extent that the perception is reasonable. This is a significant departure from the current common law position that the injured worker’s perception of the conduct can be determinative when determining an employer’s liability for the injury, even when the worker’s perception is not grounded in fact.
Reasonable management action defence has been expanded
The introduction of a statutory definition of reasonable management action in Section 8F of the Act provides greater clarity and expands the scope of employer actions and communication that can constitute reasonable management action. In addition to performance management, counselling, and disciplinary action, the new definition includes such things as investigating alleged misconduct, reclassifying a worker’s position, and providing training in relation to the worker’s employment.
An amendment to Section 11A of the Act also clarifies that a psychological injury will not be compensable if it arises from a worker’s expectation or perception of a reasonable management action. Above all, however, reasonable management action must be taken in a reasonable way and be reasonable under all the circumstances.
A special pathway for disputed ‘relevant conduct’ claims
The Industrial Relations Commission of New South Wales (NSWIRC) now has jurisdiction to determine whether the relevant conduct has occurred in circumstances where the insurer has disputed liability for the claim on grounds that include that the conduct was not relevant conduct.
From 1 July 2026, a worker must obtain a certificate of determination from the NSWIRC before an application may be made to the Personal Injury Commission (PIC).
The compensation framework is changing
The Whole Person Impairment threshold for lump sum compensation and access to common law damages has increased from 15% to 25%, with further increases planned over the coming years. Weekly payments for most primary psychological injury claims will generally be capped at 130 weeks, although some workers with higher levels of impairment may qualify for additional support. The reforms also raise the threshold for funding medical treatment and rehabilitation.
Premiums remain stable for now
The Nominal Insurer’s premium target collection rate has been frozen until 30 June 2028, providing greater certainty across the scheme. Individual employer premiums, however, may still change depending on wages, business activities and claims history.
Key takeaways for employers
These reforms don’t change the fundamentals of good workplace management.
Employers still have an obligation to provide a psychologically safe workplace, manage psychosocial risks and deal with workplace issues appropriately. Those obligations continue under work health and safety legislation, regardless of the changes to the workers compensation scheme.
Having sound policies and processes, capable and trained managers, and ensuring early intervention when issues arise will continue to put employers in the strongest position.
Need to review your workplace processes?
The reforms reinforce the importance of well-managed performance, disciplinary and complaint handling processes. If you’re unsure whether your policies or management practices are fit for purpose or if you have questions about the recent changes, the Emplawyer team can help you navigate the changes and minimise workplace risk.
1 Workers Compensation Act 1987 (NSW) s.8O
2 Workers Compensation Act 1987 (NSW) s.8L
