Legislative Shift

The NSW Workers Compensation Legislation Amendment Bill 2025 — now passed as of February 2026 — represents one of the most significant reforms to the scheme in recent years. The primary target: rising psychological injury claims and escalating scheme costs. For NSW employers, this reform is not simply technical legislative change. It has strategic implications for how psychological risk, management action and pre-employment processes are governed. Below is a practical breakdown.

1. Narrower Definitions for Psychological Injury

The reforms tighten the link required between employment and psychological injury.

“Relevant Events”
Primary psychological injuries are generally compensable only where caused by specific events such as:

  • Bullying
  • Sexual or racial harassment
  • Excessive work demands
  • Witnessing a traumatic incident
  • This significantly narrows broader stress-related claims.

“Main Contributing Factor”
Employment must now be the main contributing factor — not merely a contributing factor — raising the liability threshold.

Objective Standard
Conduct (e.g. alleged bullying) is assessed using a reasonable person test, rather than purely subjective worker perception.

Implication:
Employers must ensure management conduct is objectively defensible and well-documented.

2. Stronger Reasonable Management Action Defence (Section 11A)

The reforms clarify and strengthen protections for employers.

Psychological injuries caused by reasonable actions relating to:

  • Performance appraisals
  • Disciplinary processes
  • Organisational restructuring

are not compensable.

This provides clearer protection for legitimate management decisions — provided they are conducted appropriately.

Implication:
Documentation, procedural fairness and leadership capability are now even more critical.

3. Higher Whole Person Impairment (WPI) Thresholds

The WPI percentage determines eligibility for long-term weekly payments.

From July 1, 2026:

  • Workers must meet a 25% WPI to receive payments beyond 130 weeks.
  • This increases to 27% (2027) and 28% (2029).
  • A proposed jump to 31% was rejected.

Implication:
Fewer workers will qualify for long-duration benefits, increasing pressure on early recovery and return-to-work processes.

 

4. Faster Claim Decisions — 42-Day Window

Insurers must now determine liability for psychological claims involving bullying or harassment within 42 days.

During that time:

  • Workers receive provisional weekly payments
  • Medical expenses are covered

This aims to reduce uncertainty and delay — both recognised contributors to secondary psychological injury.

Implication:
Employers must be prepared to respond quickly and provide structured early information.

5. Stricter Medical Expense Standards

The standard for treatment has shifted from:

“Reasonably necessary” to “Reasonable and necessary”

This aligns with stricter motor accident (CTP) standards.

Additionally:

  • Workers are generally limited to one principal WPI assessment.
  • A second assessment requires significant deterioration (typically ≥10%).

Implication:
Medical scrutiny will increase, and disputes over impairment may reduce.

6. Financial Impacts for Employers

To stabilise the scheme:

  • An 18-month premium freeze has been implemented.
  • Most employers must now pay an excess equivalent to the first two weeks of wages per new claim.

This transfers some upfront cost risk directly to employers.

What This Means Strategically

These reforms attempt to reduce claim volume and scheme pressure.

However, they do not reduce employers’ WHS obligations to manage psychosocial risk.

In fact, the environment now demands:

  • Stronger early intervention
  • Clearer documentation of reasonable management action
  • Structured and defensible performance processes
  • Faster response capability
  • Proactive risk identification before claims arise

As thresholds tighten and benefits become harder to access, the commercial incentive shifts even further toward upstream prevention.

The real risk for NSW employers is no longer just claim acceptance.

It is:

  • Escalation into complex psychological claims
  • Secondary psychological injury during prolonged processes
  • Cultural and performance disruption
  • Premium volatility beyond the freeze period

The Emerging Pattern

The reforms signal a broader trend:

  • Governments are tightening claim access.
  • Regulators are strengthening psychosocial duties.
  • Insurers are scrutinising preventable claims.

Organisations that rely solely on reactive claim management will remain exposed.

Those investing in:

  • Smarter hiring decisions
  • Early psychosocial risk identification
  • Manager capability

Integrated MSD and psychological risk strategies will be better positioned in the evolving NSW environment.

Leadership Reflection The Practical Question for NSW Leaders

Has your organisation adapted its risk governance model to match the new legislative landscape?

Or are you operating under yesterday’s assumptions?

In 2026 and beyond, prevention is not just good practice — it is a financial and governance imperative.

Start your journey to Proactive Workplace Health

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