NSW Workers Compensation Changes: What the New Psychological Injury Reforms Mean for Employees
- Anna Kiaos
- 6 days ago
- 4 min read
Psychological injury claims in NSW have been rising steadily over the past decade. In response, the NSW Government has introduced significant reforms to the workers compensation scheme that will change how psychological injuries are assessed, supported and compensated. While the reforms are framed around improving sustainability and strengthening return-to-work outcomes, they carry real implications for injured employees.
If you are experiencing a work-related psychological injury — or advising someone who is — here is what you need to understand.
Why the Reforms Are Happening
Psychological injury claims now represent one of the fastest-growing areas of workers compensation in NSW. These claims are often more complex, take longer to resolve, and require longer periods of support compared to many physical injuries.
The Government has argued that reform is necessary to ensure the long-term financial sustainability of the scheme. However, sustainability comes with structural change — and those changes will directly affect injured workers.
The Key Changes Affecting Psychological Injury Claims
1. Higher Impairment Thresholds
One of the most significant reforms is the increase in the Whole Person Impairment (WPI) threshold required to access lump-sum compensation for psychological injury. From 1 July 2026, the threshold will rise to 25%, and then progressively increase further in subsequent years.
In practical terms, this means injured employees will need to demonstrate a more severe level of permanent impairment before qualifying for certain long-term benefits. For many workers experiencing significant distress, this higher bar may mean they no longer qualify for lump-sum compensation — even if their injury has materially affected their life and capacity.
2. Time Limits on Weekly Payments
Weekly income replacement and medical treatment benefits for psychological injuries will be more tightly structured, with caps around approximately 130 weeks unless a high level of permanent impairment is established.
This places greater pressure on injured workers to either recover and return to work within that timeframe or meet the higher impairment threshold. For employees experiencing complex trauma, workplace bullying, chronic stress exposure or cumulative psychosocial harm, recovery timelines do not always align neatly with policy caps.
3. “Reasonable Management Action” Clarifications
Psychological injury claims in NSW are often complicated by the “reasonable management action” defence. This relates to situations where injury arises during performance management, disciplinary processes, restructures or other managerial actions.
The reforms update how this principle is applied and interpreted. For employees, this means that claims arising in the context of performance management or organisational change may face increased scrutiny. The legal interpretation of what is considered “reasonable” can significantly affect whether a claim succeeds.
4. Stronger Emphasis on Return to Work
The reforms introduce enhanced return-to-work programs designed to provide structured support to injured workers. In principle, this is positive. Effective return-to-work processes can support recovery, preserve income stability and reduce long-term psychological harm. However, for some employees, premature or poorly managed return-to-work processes can exacerbate injury — particularly if the underlying cultural drivers of harm have not been addressed.
What This Means for Injured Employees
These changes collectively shift the system toward:
Higher evidentiary requirements
Greater emphasis on severity
Stronger focus on early return to work
More structured benefit timelines
For injured workers, this means documentation, medical evidence and early advice matter more than ever. It also means that many psychological injury claims that would previously have accessed longer-term support may now be time-limited.
The Broader Issue: Prevention
While the legislative reforms focus on compensation thresholds and system sustainability, they do not address the core driver of many psychological injury claims: unmanaged cultural pressure.
Psychological injury does not arise in a vacuum.
It emerges from:
Chronic workload demands
Normative pressure to perform
Dysfunctional subcultures
Leadership blind spots
Repeated exposure to conflict or control dynamics
Compensation systems operate after harm has occurred. The more important conversation is this: How do organisations prevent the pressure from building in the first place?
A Critical Moment for Employers and Employees
For employees, the reforms mean it is essential to:
Seek medical support early
Document workplace events carefully
Understand how impairment is assessed
Consider legal or specialist advice early in the process
For organisations, the reforms should act as a signal — not a shield. If access to compensation becomes harder, that does not reduce the existence of psychological harm. It simply shifts where and how that harm is absorbed.
Final Reflection
The NSW reforms mark a structural change in how psychological injury is recognised and compensated. They may improve scheme sustainability. They may streamline return-to-work processes. But they also raise the bar for injured employees seeking long-term support.
As these changes take effect, the real question becomes not just how claims are assessed — but how workplace cultures are structured to prevent psychological injury in the first place. Because pressure is inevitable. Psychological injury does not have to be.
For a confidential discussion, call us on +61 02 8114 4454
Dr Kiaos is a researcher and practitioner working at the intersection of organisational culture, change and mental health. She is the founder of Mind Culture Life Australia, supporting leaders and People and Culture teams to understand how work really gets done during change.
References
DLA Piper. (2026). New South Wales introduces major workers compensation changes affecting claims, premiums and return to work. https://knowledge.dlapiper.com
Harvey, S. B., Modini, M., Joyce, S., Milligan-Saville, J., Tan, L., Mykletun, A., Bryant, R. A., Christensen, H., & Mitchell, P. B. (2017). Can work make you mentally ill? A systematic meta-
review of work-related risk factors for common mental health problems. Occupational and
Environmental Medicine, 74(4), 301–310. https://doi.org/10.1136/oemed-2016-104015
NSW Government. (1987). Workers Compensation Act 1987 (NSW). https://legislation.nsw.gov.au
NSW Government. (1998). Workplace Injury Management and Workers Compensation Act 1998
NSW Parliament. (2025). Workers compensation legislation amendment (psychological injury reform) Bill 2025 (NSW). https://www.parliament.nsw.gov.au
Safe Work Australia. (2022). Managing psychosocial hazards at work: Code of practice. https://www.safeworkaustralia.gov.au
State Insurance Regulatory Authority (SIRA). (2024). Psychological injury in the NSW workers compensation system: Data and trends report. https://www.sira.nsw.gov.au
State Insurance Regulatory Authority (SIRA). (2024). Workers compensation reform updates. https://www.sira.nsw.gov.au
State Insurance Regulatory Authority (SIRA). (2024). Guidelines for the evaluation of permanent impairment. https://www.sira.nsw.gov.au
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