Australia: Significant reforms to the NSW Compensation Scheme passed

Following the NSW Government’s attempts to push through sweeping changes to the NSW workers compensation scheme under urgency in May 2025 (with those attempts ultimately being thwarted and the proposed changes being referred for further parliamentary inquiry), the NSW Parliament has passed two Bills representing a major shift in how psychological injuries in the State will be assessed and compensated going forward.   

These reforms, passed in November 2025 (Workers Compensation Legislation Amendment Bill 2025 (NSW)) (November Bill) and February 2026 (Workers Compensation Legislation Amendment (Reform and Modernisation) Bill 2026 (NSW)) (February Bill) respectively, are expected to reduce the number of compensable psychological injuries under and the scheme and go some way to addressing spiralling costs and insurance premiums. 

The November 2025 reforms will take effect on a date to be proclaimed, while the February 2026 reforms are expected to progressively take effect from July 2026. 

Summary of NSW Reforms

Psychological injuries 

The amendments passed in November 2025 principally relate to how psychological injuries will be assessed and compensated under the scheme going forward. Key changes include:

• More narrowly defining compensable psychological injuries under the scheme and limiting compensation to those arising out of a defined “relevant event”. A relevant event means:
  • being subjected to an act of violence or a threat of violence;
  • being subjected to indictable criminal conduct;
  • witnessing a traumatic incident happen or a dead or seriously injured person at the scene of a traumatic incident;
  • experiencing vicarious trauma (within a limited definition);
  • being subjected to sexual harassment, racial harassment or bullying (with each term being defined to align generally with accepted definitions under employment and safety laws); 
  • being subjected to excessive work demands (this being defined as work demands that are (a) beyond the requirements expected of the worker’s role, (b) repeated or persistent, and (c) not reasonable in all the circumstances); or
  • any other event as may be prescribed by the regulations.
• Introducing an expedited 42 days claims assessment process for insurers 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. 
• Capping weekly payments for primary psychological injuries at 130 weeks (2.5 years), unless the worker is assessed as having sustained a whole person impairment (WPI) of 21% or higher. 
• Amending the test for medical treatment costs associated with a qualifying injury from those which are “reasonably necessary” to the higher threshold of “reasonable and necessary”. 

WPI Thresholds and premiums

In addition to the key changes passed in November 2025, further amendments to the scheme to address spiralling costs have now passed and are awaiting royal assent. 

These further changes principally relate to WPI thresholds for access to lump sum payments and common law damages, with the required threshold for access to these payments increasing to 25% WPI from 1 July 2026.

The February 2026 will also provide premium relief for employers, with premiums to be frozen at current rates for 18 months, preventing a forecasted 36% increase in premiums over the next three years. 

Reforms in further detail

Compensable psychological injuries

The November Bill introduced new provisions which provide 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 far more restrictive than the current approach to compensable psychological injuries, which do not require qualifying injuries to arise out of a specific relevant event. 

Reasonable management action definition 

The November Bill also introduced 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 under the current regime and is intended to prevent litigation in relation to whether particular actions taken by an employer fall within the parameters of a management action.

WPI thresholds of permanent impairment and premium relief

The February Bill introduces gradual increases to the WPI thresholds required to be met by an injured worker before they are able to access lump sum payments, and weekly compensation beyond 130 weeks. 

The impact is that weekly compensation will be capped at 130 weeks except in the most serious cases. Additionally, the Bill prevents increases to premium rates until 30 June 2028. 

The February Bill as amended provides that:

• WPI will increase from 15% to at least 25% by 1 July 2026;
• WPI will increase to at least 26% by 1 July 2027;
• WPI will increase to at least 28% by 1 July 2029; and
• from 30 June 2026, there can be no increases in the insurance premium rate by the Nominal Insurer until 30 June 2028. 

Next steps

While both the November and February Bills have passed, neither has taken effect as yet, with the November Bill taking effect from a date to be proclaimed, and the February Bill awaiting Royal Assent (but expected to take effect from July 2026 to align with the Bill’s provisions).