New proposed law reforms for Australian psychological injury claims

The New South Wales (NSW) government has released an exposure draft of the Workers Compensation Legislation Amendment Bill 2025, which will make greater use of workplace interventions to prevent psychological injuries, rather than relying on the state’s workers’ compensation scheme.

Bullying and harassment orders 

Under the proposed changes, NSW workers will be obliged to secure orders that bullying or harassment has occurred from the NSW Industrial Relations Commission before they can lodge a workers’ compensation claim for a related psychological injury.  

Psychological injuries are mental or psychiatric disorders that cause significant behavioural, cognitive or psychological dysfunction.  In the workplace, psychological injuries can be caused by bullying, racial harassment, sexual harassment or some other relevant event such as a worker witnessing an act of violence or motor accident.   

Before the bill, workers were not required to substantiate their psychological injury before making a workers’ compensation claim. This meant that in recent few years iCare, the NSW workers’ compensation scheme, had become inundated with psychological injury claims.  

In March, state treasurer Daniel Mookhey revealed in a ministerial statement that without some reform, iCare expects an additional 80,000 people to make psychological injury claims over the next five years. Mookhey also added that premiums for businesses are forecast to rise by 36% over the next three years. 

The proposed reforms are likely to reduce the burden on iCare, since the NSW Industrial Relations Commission will be able to filter out any frivolous bullying and harassment claims made by workers. However, it is uncertain whether the changes will reduce the time taken for a worker to be compensated for a psychological injury inflicted by bullying or harassment. The time and litigation costs may potentially increase for employers, as the worker will have to wait until the Industrial Relations Commission reviews the evidence.   

The government has stated that its intention is to “shift the workplace injury system towards solving the root causes and preventing injuries in the workplace”. Whether this reform can succeed at this objective remains to be seen.

While the proposed reform appears to be a ‘win’ for employers, it may not be all positive for them, as there will be additional legal uncertainty on whether a worker can lodge a successful workers’ compensation claim. Employers should also prepare for greater scrutiny into their people management and operations when an application for bullying or harassment is lodged into the Industrial Relations Commission.

Accessing workers’ compensation for psychological injury 

For those workers seeking to lodge an application for psychological injury compensation, the proposed law narrows their avenues for doing so to certain ‘relevant events’. These include: 

• being subjected to an act of violence or a threat of violence; 
• being subjected to indictable criminal conduct;
• witnessing an incident that leads to death or serious injury;
• witnessing a threat of death or serious injury;
• experiencing vicarious trauma;
• being subjected to conduct that has been found by the Industrial Relations Commission to be sexual harassment, racial harassment or bullying. 

The exposure draft bill also increases the impairment threshold for accessing lump sum payments. Workers claiming compensation must now be assessed as 31% impaired or greater by their psychological injury. Under the current system, workers only need to be assessed as 15% or greater impaired, so the proposed change is a significant increase. Similarly, workers claiming work injury damages associated with a psychological injury will need to be assessed as 31% impaired or more. The rises to the impairment thresholds are aligned to the standards set in South Australia and Queensland.  

These new rules are a major positive for employers, since higher thresholds and narrow avenues are likely to reduce the number of compensation claims lodged by workers.

New definition for ‘reasonable management action’ 

In a new change, the exposure draft bill has specifically defined the concept of reasonable management action. Reasonable management action refers to management action that is taken in a reasonable way and is reasonable in all the circumstances. For workers’ compensation claims, reasonable management action can be a defence if the employer can demonstrate that they took reasonable steps in relation to a worker’s psychological injury.

The exposure draft bill provides a non-exhaustive list of management actions that can be considered reasonable management action. For example, it is usually ‘reasonable management action’ for an employer to: 

• provide appraisal or feedback about the workers’ performance; 
• provide counselling to the worker;
• suspend or stand-down the worker;
• take disciplinary action in relation to the worker’s employment; 
• transfer a worker to another location of employment;
• demote, redeploy, or retrench a worker;
• dismiss or promote a worker;
• reclassify a worker’s employment position;
• provide leave of absence to the worker;
• provide benefits to the worker related to their employment; 
• provide training to the worker related to their employment; or
• investigate alleged misconduct either by the worker or by another person related to the employer’s workforce if the worker was involved or if worker was a witness.

The new definition intends to prevent and reduce litigation in instances where the employer takes action in a reasonable manner and takes appropriate steps. The proposed changes should be a positive as employers will have more guidance on what counts as reasonable management action.

Employers will also be able to use the examples as a guide when preparing a response to worker compensation claims.

Next steps and responses to the bill 

The NSW government has referred the exposure draft bill to a parliament inquiry for further examination. Subject to consultation, the government intends for the bill to be passed and effective from 1 July.

However, there may be amendments depending on feedback from the inquiry. Unions NSW are demanding that the government reevaluate its proposal and have launched an advertising campaign attacking the proposed changes. The reforms are receiving support from Business NSW, who claim the current system is “fundamentally broken”.

Based off these responses, employers should keep up to date with the progress of this bill, as further changes are likely.

Co-written by Andrew Herlinger of Pinsent Masons.