NSW Workers Compensation Reform: What Employers Need to Know

Over the past year, there has been significant discussion about proposed changes to the NSW workers compensation scheme, particularly in relation to psychological injury claims.

These reforms represent one of the most substantial overhauls of the NSW workers compensation system in recent years, following concerns about the long-term sustainability of the scheme and rising claim costs.

Now, with the majority of reforms commencing on 1 July 2026, many employers are wondering what these changes mean for their business.

The good news? While the reforms introduce changes to how certain workers compensation claims are assessed and managed, they do not remove an employer’s obligation to provide a safe workplace or manage psychosocial risks—and they don’t require you to start from scratch.

In this article, we’ll explain what changed on 1 July 2026, what it means for employers in practical terms, and where leaders should be focusing their attention moving forward.

So, What Changed?

The NSW Government says the reforms are intended to improve the sustainability of the workers compensation scheme, provide greater clarity around psychological injury claims and protect employers from significant premium increases.

Prior to the reforms, the Government projected that, without intervention, employers could face average premium increases of 36% over the next three years.

As part of the reform package, an 18-month freeze on base workers compensation premiums was introduced, with the Government estimating this could save the average small business around $12,000 over four years.

While that may provide some welcome relief for employers, it doesn’t mean workplace risk has disappeared.

If anything, the message from these reforms is clear: employers are expected to place an even greater focus on prevention, injury management and supporting employees to return to work as early and safely as possible.

In practical terms, the changes include:

• Higher penalties if you don’t help injured workers return to suitable duties
• More focus on return-to-work plans and offering appropriate work as early as possible
• Tighter rules for psychological injury claims, with stricter eligibility requirements
• New claims and assessment processes, especially for psychological injuries
• Changes to long-term compensation eligibility (higher impairment thresholds for ongoing benefits)
• More documentation and compliance obligations for employers during claims management

What About Psychological Claims

A primary psychological injury is a mental health condition that arises primarily from work, rather than as a consequence of a physical injury. Examples may include conditions arising from workplace trauma, bullying, harassment, excessive workload or exposure to distressing events.

The reforms relating to primary psychological injuries include:

• A clearer definition of what constitutes a primary psychological injury.
• New eligibility requirements for primary psychological injury claims.
• Changes to how whole person impairment (WPI) is assessed.
• Reduced entitlement periods for some workers with psychological injuries.
• A new bullying and harassment pathway through the NSW Industrial Relations Commission.
• Changes to medical treatment and assessment processes.
• Clearer guidance on the reasonable management action defence.

The claims pathway is also now more structured.

This means there is now greater clarity around how psychological injury claims are assessed and the evidence required to support them.

Any new psychological injury claims commencing on or after 1 July 2026, now needs to move through a defined assessment framework. An employee can only be paid compensation for a psychological injury if 3 core requirements are met:

1. the injury was caused by a relevant event or series of relevant events
2. there is a real and direct connection between the relevant event or events and the worker’s employment
3. employment is the main contributing factor to the injury

Existing claims are largely dealt with under the previous arrangements.

For most employers, this means ensuring leaders are equipped to identify psychosocial hazards, manage concerns early and maintain appropriate documentation if issues arise.

The Biggest Mistake Leaders Could Make

The biggest mistake would be assuming these changes give you permission to ignore psychosocial risks.

We’ve seen a significant increase in the focus on psychosocial hazards over recent years through:

• WHS legislation.
• Psychosocial Codes of Practice.
• Increased regulatory attention.
• Growing expectations from employees around psychological safety.

Workers compensation is only one piece of the puzzle.

A leader can still face a complaint, investigation, WHS issue, Fair Work matter or reputational damage even where a workers compensation claim is unsuccessful.

That’s why prevention remains the best strategy.

So, Where Should You Focus?

If you’re a small business or not-for-profit leader, I’d suggest asking yourself five questions:

1. Have we identified psychosocial hazards in our workplace?
2. Are our leaders confident managing difficult conversations?
3. Do we have clear processes for complaints and investigations?
4. Are workloads reasonable and regularly reviewed?
5. Would our documentation support us if a matter was ever scrutinised?

If you can confidently answer “yes” to those questions, you’re already in a much stronger position than many organisations.

The Bottom Line

If you’re wondering where to start, keep focusing on the fundamentals: managing psychosocial hazards, addressing workplace conflict early, training leaders to have difficult conversations, documenting concerns appropriately, monitoring workloads and supporting employees to return to work following an injury.

• Manage psychosocial hazards.
• Address workplace conflict early.
• Train leaders in having difficult conversations.
• Document performance and conduct concerns appropriately.
• Ensure workloads are reasonable and monitored.
• Respond promptly to complaints of bullying and harassment.
• Support employees returning to work following an injury.

The NSW workers compensation reforms have changed parts of the system, particularly for psychological injury claims.

But they haven’t changed one fundamental truth:

Healthy workplaces remain the best form of risk management.

Investing in good leadership, clear communication and psychologically safe workplaces was the right thing to do before 1 July 2026—and it’s still the right thing to do today.

Because at the end of the day, workers compensation should never be your people strategy.

Prevention should be.