NSW has entered a defining new era in workers' compensation with the passage of the Workers Compensation Reform and Modernisation legislation, ushering in the most significant changes to psychological injury claims in more than a decade. As psychological injuries continue to rise and place mounting pressure on the scheme, the government have acted to create clearer definitions, streamline assessments, and improve the pathway to recovery for affected workers.

Most notably, the reforms directly target the rapid rise in psychological injury claims, an area long criticised for complexity, lengthy disputes, inconsistent assessments, and escalating scheme costs. Only 50% of workers with psychological injuries were returning to work within a year, compared with 95% of those with physical injuries, underscoring the need for a more robust early intervention and return to work model.

Government data and parliamentary inquiries also highlighted that unclear definitions, multiple assessments, and protracted disputes were contributing to poor worker outcomes and spiralling scheme liabilities.

Key Threshold Changes

Under current legislation, the WPI threshold for all work injury damage claims sits at 15%. The 2026 Act lifts this
threshold for psychological injury claims through a phased schedule:

• From 1 July 2026: WPI threshold increases to 25%
• From 1 July 2027: WPI threshold increases to 26%
• From 1 July 2029: WPI threshold increases to 28%

The same staged increases will apply to the minimum WPI threshold required for access.

Legislative Changes and Their Impact

1. Clearer and More Objective Definitions of Psychological Injury

The reforms introduce specific, objective criteria for psychological injuries arising from:

• Bullying
• Excessive work demands
• Racial harassment
• Sexual harassment

A claim will only succeed where employment is the main contributing factor, creating greater certainty and consistency across liability decisions.

2. Dispute Resolution Via the Industrial Relations Commission

This aims to streamline disputes and reduce the need for lengthy appeals.

3. Refined Definition of Reasonable Management Action

Section 11A has been updated to provide clearer guidance on what constitutes reasonable management action, addressing a long-standing source of contention in psychological injury claims.

4. New Medical Expense and Treatment Threshold

The standard for payment of medical and treatment expenses has shifted from “reasonably necessary” to “reasonable and necessary”, establishing a higher threshold and reducing subjective interpretation.

5. Streamlined Whole Person Impairment (WPI) Assessments

This reduces duplication, disputes, and assessment shopping.

6. Caps on Weekly and Medical Benefits for Psychological Injuries

Weekly payments for primary psychological injuries

• 130 weeks, unless the worker is assessed at 21% WPI or higher
• Medical expenses for psychological injuries are also time-limited under amendments to Section 59A.

7. Permanent Impairment Threshold Maintained at 15%

The threshold for permanent impairment from 15% to 31% WPI was not passed, following criticism from unions and mental health professionals. The threshold remains at 15%.

Reform Aims

The NSW Workers Compensation Reforms aim to deliver:

• Greater clarity around what does and does not constitute a compensable psychological injury
• More consistent medical and impairment assessments
• Early dispute resolution
• Clearer pathways to treatment and return to work support

The NSW legislation now places strong emphasis on early recovery, functional rehabilitation, and re-employment, with long-term care reserved for higher-impairment cases.

Need Help?

Given the recency of these NSW Workers Compensation Reforms, time will be required to understand real-world implications. Despite these reforms, our continued focus remains leveraging our expertise, relationships and partner network to help achieve return-to-work outcomes for our clients' injured workers to help minimise workers compensation premium impacts. For assistance, contact us to discuss.

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Further information

Source: SIRA
Title: Workers compensation reforms pass parliament - SIRA

Read time: 5+ mins

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Source: NSW Government
Title: Workers compensation reforms pass parliament | NSW Government

Read time: 5+mins