Australia: NSW Workers Compensation Reforms Now in Force

Following announcements earlier this year, the NSW Government has now implemented a significant overhaul of the State’s workers compensation scheme. 

The key legislative changes commenced on 1 July 2026, supported by a new Workers Compensation Legislation Amendment Regulation 2026 and updated SIRA Workers Compensation Guidelines.

The reforms fundamentally tighten eligibility for psychological injury claims, adjust permanent impairment and benefit thresholds, and include a two-year freeze on average premiums. The key changes are summarised below.
 

Summary of NSW Reforms

Psychological Injuries

• New Compensability Tests: Primary psychological injuries must now meet a stricter, three-part test to be compensable. The injury must be caused by a defined “relevant event” (or series of events), have a real and direct connection to the worker’s employment, and employment must be the main contributing factor. This narrows compensability compared to the previous regime (which did not require a specific event). Relevant events include violent incidents, serious crimes, witnessing a traumatic incident, vicarious trauma, or workplace conduct like bullying, sexual or racial harassment, or excessive work demands. 
   
• Expanded Reasonable Management Action Exception: A primary psychological injury is not compensable if reasonable management action was the significant cause of the injury. The “reasonable management action” defence has been broadened and clarified to cover actions like performance appraisals, feedback, counselling, suspensions, disciplinary action, training, investigations, transfers, and redundancies taken reasonably. 
   
• Exclusions: The new psychological injury requirements do not apply to exempt workers (police officers, paramedics, firefighters), coal miners, or volunteers. These categories remain subject to their existing rules. 
   
• “Relevant Conduct” Claims – IRC Pathway: A special pathway now applies for psychological injuries caused by “relevant conduct” (bullying, sexual or racial harassment, or excessive work demands). Before such a claim can proceed at the Personal Injury Commission, the Industrial Relations Commission (IRC) must rule on whether the alleged conduct actually occurred and meets the statutory definitions. Insurers have 42 days to decide these “relevant conduct” claims, and must commence interim weekly payments (within 7 days) and up to $7,500 in medical treatment while the claim is investigated. 
   

WPI Thresholds and Premiums

• 130-Week Limit and Higher WPI Thresholds: Weekly compensation for primary psychological injuries will generally cease at 130 weeks unless the worker has sustained a high degree of permanent impairment. The reforms raise the Whole Person Impairment (WPI) threshold needed to access weekly benefits beyond 130 weeks (and to pursue work injury damages). From 1 July 2026, a psychological injury must reach at least 25% WPI (up from 15%) for continued weekly benefits beyond 2.5 years. This threshold will increase over time – rising to more than 26% WPI from 1 July 2027 and to at least 28% WPI from 1 July 2029. These phased increases aim to sharply limit long-duration psychological claims and confine extended benefits to only the most serious cases. 
   
• Intensive RTW Program: As a bridge for moderately serious cases, the reforms introduce an “intensive return-to-work” program for workers assessed at 21% or higher WPI (but below the new threshold). Eligible workers can receive up to 52 extra weeks of income support (extending total weekly entitlements from 130 to 182 weeks), along with an additional year of medical expenses and tailored vocational rehabilitation to assist their recovery.
   
• Medical Benefits Limit: For psychological injury claims, medical and related treatment expenses are now limited to 12 months after weekly payments cease, except for “highest needs” workers (those with >30% WPI) who will still have lifetime medical coverage under the scheme.
   
• Premium Rate Freeze: The Nominal Insurer’s premium rate has been frozen for 2026–27 and 2027–28, averting a projected 36% rise in premiums over three years.
   

Other Key Changes 

• Permanent Impairment Assessments: The scheme moves to a “principal” permanent impairment assessment model. Each worker will generally have one combined assessment for the injury, covering physical and psychological impairments from the same incident and determining all related entitlements (i.e. weekly benefits, medical costs, lump sum compensation, commutations, and work injury damages claims).
   
• Medical Expenses and Treatment Exclusions: From 1 October 2026, the test for an entitlement to medical or related treatment and domestic assistance will change from ‘reasonably necessary’ to ‘reasonable and necessary’. The scheme will also exclude certain alternative therapies, wellness services, recreational or social activities, and companion animal services, subject to limited exceptions.
   

Summary of Key Dates and Next Steps 

• 1 July 2026 – Main reforms commence, including the new psychological injury gateway, higher WPI threshold, principal assessment model and relevant conduct claims process.
   
• 1 October 2026 – Medical expenses test and treatment exclusions commence.
   
• 1 July 2027 – WPI threshold for new psychological injury claims increases to more than 26%.
   
• 1 July 2028 – Deadline for workers with pre-reform WPI assessments to make lump sum claims.
   
• 1 July 2029 – WPI threshold for post-2029 psychological injury claims rises to at least 28%.

Further information is available from SIRA and related agencies (see SIRA’s website for guidelines, employer guidance and FAQ materials). Employers and other stakeholders should familiarise themselves with these changes now in effect and ensure worker claims and injury management procedures are updated accordingly. 

If you have questions about how these reforms affect your organisation or a specific claim, please contact your usual Herbert Smith Freehills Kramer adviser.

This article provides a general summary and does not constitute legal advice. Obtain specific advice for any particular circumstances.