Australia: Significant reforms to the NSW Compensation Scheme on the horizon

In late May 2025, the NSW Government introduced the Workers Compensation Legislation Amendment Bill 2025 (Bill) to Parliament for review. The Bill proposes significant amendments to the Workers Compensation Act 1987 (NSW) (WC Act) aimed at addressing spiralling costs and increased premiums associated with psychological injuries in NSW.

Among other things, the Bill outlines substantial changes to how psychological injury claims will be defined and managed in NSW, as well as the impairment thresholds required to be met by employees before they can access lump sum payments under the regime.

Premier Chris Minns stated that the aim of the reforms is to ‘shift the workplace injury system towards solving the root causes and preventing injuries in the workplace rather than having a cycle of payment, premiums increasing and then the status quo in either the public or the private sector across New South Wales’.

These reforms follow significant changes to the Victorian workers scheme in 2024, in respect of psychological injury claims.

The Bill passed Parliament’s Lower House, but has now been referred to a committee for further inquiry and report. 

NSW Reforms

The legislative reforms outlined in the Bill are reasonably extensive, with key proposed changes including:

• More narrowly defining compensable psychological injuries under the scheme and limiting compensation to those arising out of a defined “relevant event”. Under the current Bill, a relevant event means:
  • 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, or the threat of death or serious injury;
  • experiencing vicarious trauma (within a limited definition);
  • being subjected to sexual harassment, racial harassment or bullying (with each term being defined under the Bill to align generally with accepted definitions under employment and safety laws); or
  • excessive work demands (this being defined under the Bill to be work demands that are— (a) beyond the requirements expected of the worker’s role, and (b) repeated or persistent, and (c) not reasonable in all the circumstances).
• Introducing an expedited eight-week claims assessment process for insurer’s to determine liability for psychological injuries caused by bullying, harassment, or excessive work demands (a finding by a commission, court or tribunal that the relevant conduct has occurred will be taken to be evidence the relevant conduct occurred). 
• Broadening and more clearly defining the concept of "reasonable management action" under the regime.  
• More closely aligning whole-person-impairment thresholds in the State's workers' compensation laws with those used in South Australia and Queensland.
• Adopting a number of the anti-fraud measures that the Commonwealth jurisdiction recently enacted to protect the National Disability Insurance Scheme.
• Implementing many of the recommendations made by recent legislative reviews, including of Safe Work NSW, the State Insurance Regulatory Authority, and the Law and Justice Committee.

Compensable psychological injuries

The Bill confirms that compensation will not be payable for a primary psychological injury unless it was caused by a ‘relevant event’ or a ‘series of relevant events’ (as defined); there is a real and substantial connection between the relevant event or series of events and the worker’s employment; and employment is the main contributing factor to the primary psychological injury.

These requirements are likely to see a far more restrictive approach to claims relating to psychological injuries.  

Reasonable management action definition

The Bill also provides a new definition of ‘reasonable management action’ for which related injuries are not compensable. This means that, provided management action is ‘taken in a reasonable way’ and is ‘reasonable in all the circumstances’, it will not give rise to a compensable psychological injury under the regime.

The new definition confirms that reasonable management action will include (but is not limited to) appraisal of or feedback about the worker’s performance, counselling of the worker, suspension or stand-down of the worker’s employment, disciplinary action taken in relation to the worker’s employment, training a worker in relation to the worker’s employment, and investigation by the worker’s employer of alleged misconduct.

This definition expands upon the concept of management action as currently used in the WC Act, and is intended to prevent litigation in relation to whether particular actions taken by an employer fall within the parameters of a management action.

Threshold of permanent impairment

The Bill increases the permanent impairment threshold required to be met by an injured worker before they are able to access lump sum payments. Specifically, the Bill confirms that the required impairment threshold for a psychological injury will increase from 15% to 25% initially, and then raising to 31%, before a worker will be entitled to receive a lump sum payment under the scheme. Similarly, the threshold for claiming work injury damages associated with a psychological injury will increase on the same basis.

The extent of the whole person impairment threshold under the Bill has emerged as a key area of opposition, with opponents claiming that a whole person impairment threshold of 31% would functionally restrict access to lump sum payment to all but debilitating psychological injuries.

Broader workplace interventions

In addition to the changes proposed under the Bill, the NSW Government is progressing a number of broader workplace interventions to prevent injury in the workplace, including:

• Incorporating gender equality and the elimination of discrimination into the Industrial Relations Act objectives.
• Transforming SafeWork NSW into a standalone agency to investigate psychological injury.
• Implementing a new Psychological Health and Safety Strategy to enhance compliance enforcement by SafeWork NSW.
• Creating mental health programs for small and medium businesses, in partnership with the Black Dog Institute and Transitioning Well.
• Introducing wellbeing units in public sectors tailored to support different government services.
• Launching new iCare Workplace Mental Health Coaching and Training initiatives for small and medium businesses and not for profits.
• Establishing a new Whole of Government Return to Work policy for public sector workers.
• Expanding the capabilities of SafeWork inspectors with specialised training.
• Introducing a new offence for underinsurance and a two-week employer excess to encourage safer workplaces.

Next steps

The NSW Upper House has referred the Bill to the Public Accountability and Works Committee for further inquiry and report before it progresses. Submissions are currently open until 23 July 2025, with a hearing before the committee scheduled for 29 July 2025.