Psychological injury claims overhaul the centrepiece of NSW workers' compensation reforms

Enacted through the Workers Compensation Legislation Amendment Act 2025 and the Workers Compensation Legislation Amendment (Reform and Modernisation) Act 2026, together with accompanying updated guidelines from the State Insurance Regulatory Authority (SIRA), these reforms fundamentally alter how psychological injury claims are managed in the state. 

The reforms are part of a package aimed to address an unsustainable workers’ compensation regime in NSW. In 2025, it was identified that there had been a 97.6% rise in the average costs of psychological injury claims over five years. The NSW government projected a 36% increase to employer premiums if changes to the scheme weren’t made. Employers, in our experience, are dealing increasingly with frequent claims based on little information about the alleged connection to the workplace and cause of the injury or illness, with workers simply citing “stress” or “workplace conflict”.   

Other reforms in the package include: 

• increased investment in return to work programs; 

• appointment of new SafeWork inspectors and investigators specifically focused on psychological injury claims; and 

• strengthening of the powers of the Industrial Relations Commission (IRC) of NSW to determine public sector employee claims about psychological injuries and workplace bullying and sexual harassment matters.   

While these changes are specific to NSW, employers and workers compensation regimes in other jurisdictions across Australia, based on the experience of our clients, are facing similar problems. For example, WorkSafe Victoria has reported that mental injury claims take significantly longer to resolve than physical injury claims and carry higher average costs. Given the prevalence and apparent consistency of the problem and the generally uniform adoption of workplace health and safety law across jurisdictions, we anticipate increasing pressures for similar changes to be made to other Australian workers’ compensation regimes.   

WHS codes of practice legally enforceable 

In a parallel initiative to address workplace health and safety concerns, including psychological injury claims, NSW work health and safety codes of practice are now legally enforceable, instead of providing guidance only. This includes SafeWork’s ‘Managing psychosocial hazards at work’ code, which sets out the minimum performance standards an employer is expected to comply with when managing hazards and risks to psychological safety in the workplace. Failure to comply with a code is now unlawful, exposing an employer to the risk of prosecution.  

For employers, these changes, while increasing the risk of potential prosecution for non-compliance with codes, will also provide more certainty about what types of incidents or issues can give rise to compensable psychological injury claims at work. They also have the capacity to reduce the frequency and costs of psychological injury claims and limit the likelihood of employees using workers’ compensation claims successfully to defeat or avoid legitimate performance management and disciplinary processes at work.   

A new eligibility threshold for psychological injuries

The foundational change is the introduction of a new eligibility threshold for primary psychological injury claims at work. Under the new framework, compensation is payable for a primary psychological injury only if:  

• the injury is caused by a relevant event or a series of relevant events;  

• there is a real and direct connection between the relevant event(s) and employment, and;  

• employment is the main contributing factor to the primary psychological injury.  

This is a profound departure from the previous position, under which a broad range of workplace stressors – including general management pressure, slight gaps in procedural fairness or organisational justice, organisational change, disciplinary action and interpersonal friction – could ground a compensable claim. 

What constitutes a ‘relevant event’? 

A 'relevant event' is defined by new section 8G of the Workers Compensation Act 1987. The defined relevant events relevant to most employers are: 

• being subjected to violence or a threat of violence; 

• being subjected to indictable criminal conduct; 

• witnessing a traumatic incident; 

• witnessing a dead or seriously injured person at the scene following a traumatic incident; 

• the death of a person in the worker's care from a traumatic incident (a "prescribed death"); 

• experiencing vicarious trauma; 

• being subjected to bullying; 

• being subjected to sexual harassment; 

• being subjected to racial harassment; 

• being subjected to excessive work demands. 

A prescribed death, for a worker, means the death of a person in the worker's care if the person dies as the result of a traumatic incident; there is a real and direct connection between the person's death and the worker's employment; the person was under the immediate and primary care of the worker at or near the worker's workplace when the traumatic incident occurred; the relationship between the person and the worker was pre-existing, ongoing and close at the time of the person's death; and the relationship was a requirement of the worker's employment. This is a narrowly defined category – it will principally apply to workers such as healthcare and aged care workers. 

Critically, general work stress or pressure, procedural fairness flaws and interpersonal conflict are expressly not compensable events under the new laws. The practical significance of this cannot be overstated. Many of the common sources of psychological injury claims – stressful workloads that do not rise to "excessive”, difficult manager-subordinate relationships, performance management, disciplinary or investigative processes where inadvertent mistakes are made, and general workplace tension – will no longer give rise to a compensable claim. 

Reasonable management action – expanded defence   

One of the more employer-friendly features of the reformed framework is the broadened scope of the ‘reasonable management action’ defence. Under the new laws, a psychological injury claim will be excluded from compensation where the employer's reasonable management action is the “significant cause” of the injury. The exclusion now also extends to injuries that arise from the worker’s subjective expectations or perception of that conduct. 

The legislation introduces a statutory definition that had previously been absent: management conduct will qualify for the defence where it is both appropriate in the circumstances and carried out in an appropriate manner. The legislature has provided illustrative examples of conduct capable of falling within the definition – including managing underperformance, taking disciplinary steps, providing feedback or warnings, conducting appraisals, reorganising workplace structures, and directing how and to whom work is assigned.  The list is non-exhaustive, which likely gives the defence considerable breadth in practice. 

The practical significance of this change should not be underestimated. Under the previous regime, in our experience, workers were frequently able to ground a psychological injury claim in a response to management action that was, in substance, and when viewed objectively, entirely legitimate. The reformed provision addresses this directly. By expressly bringing within the exclusion injuries that stem from a worker's subjective reaction to otherwise legitimate management decisions – rather than any objective failing in those decisions – the legislature has substantially narrowed the space for claims that are, in reality, a challenge to lawful and appropriate employer conduct. 

That said, the defence is not without limits. The requirement that conduct be carried out in an appropriate manner imports both substantive and procedural scrutiny. A decision to performance manage, for example, may be entirely warranted; but if it is conducted in a manner that is disproportionate, inconsistent, or deliberately undermining, it may not fall within scope of the exclusion. Likewise, a restructure is a recognised management prerogative. However, if it is implemented in bad faith or without adequate communication it may fall outside the definition's protection. The IRC will be tasked with examining not merely what action was taken, but how it was taken. Employers should anticipate close scrutiny of both dimensions and plan their actions accordingly. 

In our view, employers should prioritise three things. 

First, they should ensure that every significant management decision is accompanied by a clear written rationale recorded at the time it is made – not reconstructed after a claim arises.  

Second, they should apply relevant policies, procedures, and standards consistently across the workforce. Selective, arbitrary or capricious application or interpretation is precisely the kind of conduct the IRC is likely to view unfavourably in our view. 

Third, they should invest in structured education and training that equips supervisors and managers to handle difficult conversations, underperformance, and disciplinary matters in a measured, objective and procedurally sound way. 

In the new landscape, where the IRC has jurisdiction to scrutinise the conduct of management in the context of compensation claims, the rigour of an employer's people management processes – and the evidence supporting them – will likely be decisive in determining the outcome of a challenge. 

Other changes 

The new laws also make changes to:  

• claims pathways and compensation processes depending on whether the claim is a ‘relevant conduct’ or ‘relevant event’ claim;  

• notification requirements on employers, including a requirement to specify the relevant events / conduct;  

• disclosure requirements for employees at the claim lodgement stage, including setting out the specific nature of the conduct, whether the conduct has been carried out repeatedly, examples of specific instances including the date, time and location, the persons involved in the conduct, and the names of any witnesses to the conduct;  

• insurers will not progress claims that do not include the specific detail required from employees, with workers only entitled to payments from the date the claim is completed properly and not from the date of the worker's injury;  

• the IRC will be able to hear disputes about insurer decisions regarding liability – for example, if the insurer denies liability on the basis that the conduct alleged does not constitute bullying, harassment, or excessive work demands, or that it constituted reasonable management action, the dispute may ultimately be referred to the IRC for determination; and  

• increased penalties for employers that fail to hold a workers’ compensation policy or do not comply with injury management obligations.  

In light of these reforms, NSW employers should now: 

• review and update injury management procedures– they should ensure that internal incident reporting and notification processes identify the relevant events and update policies and procedures to ensure employees know about the required detail at claim stage;
• strengthen documentation of management action and decisions –to ensure information can be produced to object to or defend claims, all investigations, complaint handling, performance management, disciplinary processes, role changes, and other management actions should be documented contemporaneously, with clear rationales. Employers should seek legal advice where appropriate and consider the application of legal professional privilege; 
• maintain their psychosocial risk framework– regardless of these changes, the WHS duty of care requires ongoing management of psychosocial hazards. Review your risk assessments, policies, and training to ensure they remain current and comply with all relevant codes of practice;
• take advice before disputing claims– where an insurer proposes to dispute a relevant conduct claim on the basis that the alleged conduct does not constitute bullying, harassment, or excessive work demands, or constitutes reasonable management action, employers should seek legal advice early to identify any gaps or legal risks.