The NSW workers compensation reforms are being discussed as premium relief for business.
That matters, but it is not the whole story.
The more important change for employers is that primary psychological injury claims now have a clearer front gate.
From 1 July 2026, major reforms to the NSW workers compensation scheme came into effect. The NSW Government says the reforms are designed to put the scheme on a more sustainable footing, protect businesses from significant premium increases, provide clearer pathways for psychological injury claims, and improve coordination between workers compensation, industrial relations and workplace health and safety systems.
For employers, this is not just an insurance update.
It is a workplace systems issue.
It asks a much sharper question:
If a psychological injury claim was made in your business tomorrow, could you clearly show what happened, what was known, how the issue was managed, and whether your workplace practices were reasonable?
That is where the reform becomes practical.
Why the NSW Government acted
The business impact behind these reforms is significant.
The NSW Government says around 340,000 NSW businesses pay workers compensation premiums, covering approximately four million workers. It also says that without reform, employers were facing average premium increases of 36 per cent over the next three years. As part of the reform package, the Government introduced an 18-month freeze to base workers compensation insurance premiums, which it says will save the average small business $12,000 in premium increases over four years.
SIRA has separately confirmed that premium rates at a scheme level will be held at 2025-26 levels for the 2026-27 and 2027-28 policy years. However, SIRA also makes clear that an individual employer’s premium may still change because of wages, business activity, classification, claims experience, discounts, incentives or other adjustments.
That distinction matters.
The premium freeze may ease immediate cost pressure, but it does not mean employer risk has disappeared. If claims experience worsens, wages increase, business activities change, or injury management is poor, the business impact may still be felt.
The reform also introduces stronger employer obligations around insurance and injury management. SIRA says penalties have increased for employers who do not hold a workers compensation policy, and there is a new offence for recklessly failing to provide information relevant to premium calculation. SIRA also confirms that employers must provide suitable work to an injured worker where reasonably practicable, and the penalty for failing to do so has increased.
The message is clear: employers may receive some premium relief, but the system now expects stronger discipline around prevention, claim response, injury management and return to work.
The real reform: psychological injury claims now have a clearer front gate
Psychological injury claims have become one of the most difficult areas of workers compensation.
They are often complex, sensitive and costly. They can involve workload, bullying, harassment, trauma, performance management, interpersonal conflict, organisational change, leadership conduct and unresolved workplace concerns.
The NSW Government says the reforms will establish, for the first time, a clear definition of psychological injury and when such an injury is compensable. It also says the reforms will provide clearer guidance on the reasonable management action defence.
This is a major shift.
It does not mean psychological injuries are not real. They are real, serious and often deeply disruptive for the person affected and the workplace around them.
It does mean the claim pathway is now more structured.
For primary psychological injury claims first notified to the employer on or after 1 July 2026, the claim now needs to move through a defined assessment framework. SIRA explains that a worker can only be paid compensation for a primary psychological injury if three core requirements are met:
- the injury was caused by a relevant event or series of relevant events
- there is a real and direct connection between the relevant event or events and the worker’s employment
- employment is the main contributing factor to the injury
For employers, it is useful to explain this as a five-question gateway.
Not because the law lists five separate criteria in those exact words, but because this is the practical sequence employers need to understand.
The five gateway questions employers should understand
1. Does the claim fall within the new primary psychological injury rules?
The new rules apply to primary psychological injuries first notified to the employer on or after 1 July 2026.
SIRA says the changes do not apply to certain groups and claim types, including exempt workers such as police officers, paramedics and firefighters, coal miners, volunteers, dust disease claims, primary psychological injuries notified before 1 July 2026, or secondary psychological injuries where the psychological injury arises from, or is secondary to, a physical injury.
This first question matters because not every psychological injury claim will follow the same pathway.
For employers, the practical takeaway is simple: do not assume. Check which claim pathway applies before making decisions or communicating with the worker.
2. Is there a psychological injury as defined by the legislation?
SIRA says a psychological injury is now defined as a mental or psychiatric disorder that causes behavioural, cognitive or psychological dysfunction.
This means the claim process is not simply dealing with workplace stress, dissatisfaction or conflict in a general sense.
The claim needs to involve a psychological injury that meets the legislative definition.
Employers should not try to diagnose the worker. That is not the employer’s role. But employers do need to understand that the claim process will look for medical information, including details of the injury and a medical certificate with one or more mental or psychiatric disorders specified.
3. Was the injury caused by a relevant event or series of relevant events?
This is the key filter.
SIRA says compensation can only be paid for a primary psychological injury if it was caused by a relevant event or series of relevant events. Relevant events include:
- an act of violence or threat of violence
- being subjected to indictable criminal conduct
- witnessing a traumatic incident
- the death of a person in the worker’s care
- vicarious trauma
- bullying
- sexual harassment
- racial harassment
- excessive work demands
SIRA’s insurer guidance also states that psychological injuries arising from something other than a relevant event are not compensable.
This is where the reform becomes very practical.
The claim now needs to identify what relevant event is being relied on.
For employers, that means vague records will not help. If the claim relates to workload, bullying, harassment, violence, trauma or another relevant event, the business needs to be able to provide clear information about what occurred, when it occurred, who was involved, what was reported, and how the business responded.
4. Is there a real and direct connection between the event and employment?
It is not enough for a relevant event to have occurred somewhere in the background of the worker’s life.
SIRA’s insurer guidance says there must be a real and direct connection between the relevant event and the worker’s employment.
For employers, this is where context becomes critical.
What was the worker’s role?
Where did the event occur?
Was it connected to work duties, workplace behaviour, workload, a customer interaction, a manager, a colleague, a roster, a work system or the work environment?
What records exist?
Was it reported at the time?
Were there witnesses?
Were there previous concerns?
SIRA says insurers must consider relevant information when determining whether a psychological injury is compensable, including the worker’s account of the relevant event, witness accounts, dates, times, locations, the nature of any relationship between the worker and another person involved, medical information, information held by the employer such as audio or video recordings, and any reports made to the employer, a union, NSW Police, SafeWork NSW, the Fair Work Commission or another investigative body.
That is the evidence trail employers need to be ready for.
5. Was employment the main contributing factor?
SIRA says all primary psychological injuries must meet the threshold of employment being the main contributing factor to the injury before compensation is payable.
That is a higher bar than simply saying work contributed in some way.
Again, this does not mean employers should dismiss the worker’s experience or try to argue causation without advice. But it does mean employers should understand that the claim process will look more closely at the cause of the injury, the relevant event relied upon, and the connection between that event and employment.
For business owners and leaders, the shift is important.
The reform gives the claim process more structure. It also makes employer evidence more important.
Relevant conduct claims have an even sharper process
Some psychological injury claims now have an additional pathway.
SIRA explains that claims caused by bullying, excessive work demands, racial harassment or sexual harassment are treated as “relevant conduct” claims. These claims require a completed claim form and, as far as reasonably practicable, details of the conduct that caused the injury. This includes the specific nature of the conduct, whether it happened repeatedly, examples of specific instances, dates, times, locations, people involved, witnesses, and an explanation of the relationship between the conduct and employment.
This is a major practical shift.
It means claims involving bullying, harassment or excessive work demands should not sit in vague language for months. They need detail. They need context. They need enough information for the insurer to understand what is being alleged and how it connects to work.
SIRA also confirms that insurers cannot reasonably excuse or provisionally accept a relevant conduct claim. Instead, insurers have 42 days from the date the completed claim is received to decide whether to accept or dispute liability. If the insurer does not make a decision within that time, the claim is deemed to have been accepted. During that determination period, workers are entitled to weekly interim entitlement payments and up to $7,500 in medical or related treatment for the relevant injury.
For employers, this means speed and quality of information matter.
If the issue is bullying, the employer needs to know what was reported, what was observed, whether behaviour standards were clear, what action was taken, and whether leaders intervened early.
If the issue is sexual or racial harassment, the employer needs to be able to show reporting pathways, training, leadership action, complaint handling, prevention steps and how concerns were managed.
If the issue is excessive work demands, the employer needs to understand workload, staffing, role expectations, supervision, hours, rostering, work patterns and whether the demands were reasonable in all the circumstances.
Excessive work demands should be a loud signal for employers
One of the most important reform areas for employers is excessive work demands.
SIRA describes excessive work demands as demands that are beyond the requirements expected of the worker’s role, repeated or persistent, and not reasonable in all the circumstances.
SIRA also says that when determining whether demands are excessive, insurers must consider factors such as usual industry work patterns, supervision and control, unreasonable surveillance, the nature of the role, employment arrangements, entitlements, workplace needs, staffing levels, skill mix, industrial arrangements and whether the employer has made repeated and serious contraventions of work health and safety laws or requirements.
This is not just a claims issue.
It is a workforce planning issue.
It asks employers to look at questions such as:
Is the workload reasonable for the role?
Has the role expanded without review?
Are employees regularly working beyond ordinary expectations?
Are priorities clear, or is everything urgent?
Are managers noticing workload pressure early?
Is the business relying on goodwill, unpaid extra effort or sustained overwork to keep operating?
Are staffing levels, skills and systems adequate for the work being required?
This is where workers compensation reform connects directly with psychosocial safety.
DreamStoneHR has explored this in our related article, NSW Psychosocial Safety Laws: What Employers Need to Prove Now, which explains why NSW employers now need to be able to show how they identify, manage and review psychosocial hazards in practice.
The connection is important.
Workers compensation reform deals with the downstream claim pathway. Psychosocial safety deals with the upstream prevention framework.
If workload, role clarity, poor management support, harassment, bullying or unsafe behaviour are not being identified and managed as psychosocial hazards, they may later show up as absence, complaints, turnover, conflict or workers compensation claims.
By then, the issue is much harder to control.
Reasonable management action is not the first question
A lot of employers jump straight to reasonable management action.
That is understandable. If an employer has been managing performance, misconduct, change or redundancy, they may immediately ask whether the claim can be defended on the basis that the injury was caused by reasonable management action.
But the sequence matters.
SIRA’s insurer guidance says the reasonable management action defence is only relevant if it has first been established that:
- there was an injury arising out of or in the course of employment
- the psychological injury was caused by a relevant event or series of relevant events
- there is a real and direct connection between the relevant event or series of relevant events and the worker’s employment
- employment was the main contributing factor
Only after that does section 11A become relevant.
Under the reforms, a psychological injury will not be compensable if the significant cause was reasonable management action taken or proposed by the employer, or the worker’s expectation or perception of reasonable management action. SIRA also confirms that management action must be taken in a reasonable way and be reasonable in all the circumstances.
This is the practical employer lesson:
Reasonable management action is not a shortcut. It is a defence that depends on the quality of the process.
A performance review may be reasonable.
A vague, inconsistent or humiliating performance process may not be.
A misconduct investigation may be reasonable.
A poorly scoped, biased or procedurally unfair investigation may not be.
A redundancy process may be reasonable.
A rushed process with weak consultation and unclear selection criteria may not be.
A transfer, demotion, redeployment or dismissal may be reasonable in the right circumstances.
But the business still needs to show that the action was handled in a reasonable way.
The business impact: weak people systems are harder to defend
The reform gives employers a clearer claim process, but it also makes weak people practices harder to defend.
That is the business message.
If a psychological injury claim is made, the insurer may need to understand:
- what relevant event is being alleged
- when it occurred
- who was involved
- whether it was reported
- whether there were witnesses
- what the employer knew before the claim
- what action was taken
- whether the employer had records
- whether workload was reasonable
- whether performance or conduct action was handled properly
- whether the issue connects to employment
- whether employment was the main contributing factor
That means employers should not wait until a claim arrives before thinking about evidence.
Most workplace issues do not become difficult because the employer made a bad decision. They become difficult because the employer cannot clearly show how the decision was made.
This is especially common in small and medium businesses.
A manager has “a few chats” with an employee about performance, but no notes.
A business owner changes duties because the business needs have shifted, but there is no consultation record.
A team is overloaded for months because everyone is trying to help, but there is no documented workload review.
A complaint is handled informally because “we know everyone here”, but no one records what was raised, what was checked or what action was taken.
A return to work plan is treated as an insurer process, rather than a workplace planning process.
None of this usually comes from bad intent.
It comes from busy workplaces relying on memory, goodwill and informal conversations.
The problem is that workers compensation, workplace health and safety and employee relations issues often require evidence. Not excessive paperwork. Not corporate theatre. Just enough clear, contemporaneous information to show what happened.
Injury notification and return to work still matter
The reforms do not remove core employer obligations around injury notification and return to work.
SIRA says workers and employers must give notice of workplace psychological injuries, and employers must notify the insurer within 48 hours after becoming aware that a worker has received a workplace injury. SIRA also says that notification of a primary psychological injury will require the nomination of one or more relevant event types as the cause of the injury so the claim can be appropriately triaged by insurers.
This is a useful reminder because psychological injury concerns do not always present neatly.
Sometimes an employee says they are stressed.
Sometimes they provide a medical certificate.
Sometimes they raise bullying, workload or conflict concerns.
Sometimes they stop attending work.
Sometimes a manager becomes aware that an employee is struggling but does not escalate the issue because they are unsure whether it is “formal enough”.
Employers should not wait until everything is legally perfect before acting.
The first step is often to clarify what has been raised, check immediate safety and support needs, notify the insurer where required, and seek advice early if the situation is unclear.
Return to work also remains central. SIRA says employers must provide suitable work to a worker with an injury where reasonably practicable, and early suitable work is a key expectation that supports recovery at work.
That means employers should avoid treating return to work as something that sits entirely with the insurer or doctor.
The workplace has a central role to play.
Suitable duties, manager communication, workload adjustment, team communication, privacy, supervision and check-ins all influence whether return to work is practical and sustainable.
What employers should do now
The reforms are technical, but the employer response does not need to be overwhelming.
Start with these practical steps.
1. Check your workers compensation insurance position
Confirm your policy is current, your wages are accurately declared, your business activities are correctly classified, and your insurer details are easy to access.
SIRA has increased penalties for some insurance failures, including not holding a required workers compensation policy and reckless underinsurance.
This is not an area to leave to assumption.
2. Update your injury reporting process
Employees and managers should know how to report an injury, who to notify internally, what information needs to be captured, and when the insurer must be contacted.
This should include psychological injury concerns, not just physical injuries.
Managers need to know that psychological injury issues can arise through workload, bullying, harassment, trauma, violence, conflict or other work-related events.
3. Train managers on early escalation
Managers do not need to become workers compensation experts.
They do need to recognise when something needs escalation.
That includes psychological injury concerns, repeated workload concerns, bullying or harassment allegations, trauma exposure, medical certificates, conflict affecting work, and employees saying they feel unsafe or unable to continue.
The earlier the issue is identified, the more options the business usually has.
4. Review workload and role design
Do not wait for a claim before asking whether work demands are sustainable.
Review roles that have expanded over time. Look at repeated overtime, after-hours contact, staffing gaps, turnover, sick leave, customer aggression, role confusion and manager overload.
If excessive work demands are foreseeable, employers should be taking practical steps to assess and manage them.
5. Tighten performance management and conduct processes
If you are relying on reasonable management action, your process needs to be reasonable.
That means clear expectations, specific examples, procedural fairness, respectful communication, appropriate timing, support where required and records that show what occurred.
This is particularly important for performance reviews, disciplinary action, misconduct investigations, redundancies, transfers and role changes.
6. Connect workers compensation data with psychosocial safety
Claims data, incident reports, complaints, leave patterns, exit feedback and manager concerns can all help identify psychosocial hazards.
The mistake is treating workers compensation as a downstream insurance issue only.
A claim may be the first formal signal, but it is rarely the first workplace signal.
7. Review your return to work capability
Ask whether your business can identify suitable duties quickly, support managers to communicate appropriately, protect confidentiality, and keep the employee connected to the workplace in a way that supports recovery.
Return to work should not be improvised after the claim arrives.
The bigger lesson for employers
The NSW workers compensation reforms provide premium relief, but they also point to a more mature expectation of employers.
The scheme is moving toward clearer claim pathways, earlier intervention, stronger evidence and better coordination between workers compensation, workplace health and safety and workplace relations.
The NSW Government has also linked the reforms to a $344 million workplace mental health package, including additional SafeWork NSW inspectors, psychosocial inspectors and psychosocial investigators.
That should tell employers something.
This is not just about what happens after a claim.
It is about whether businesses are managing the workplace conditions that make claims more likely in the first place.
For employers, the best response is not panic, over-documentation or avoiding difficult conversations.
It is better leadership discipline.
Clear roles.
Fair processes.
Early intervention.
Workload awareness.
Psychosocial risk management.
Good records.
Managers who know when to escalate.
And decisions that can be explained clearly, calmly and credibly if questioned later.
That is where good HR, workplace relations and WHS practice meet.
And that is where businesses can protect both their people and their commercial position.
Need help reviewing your employer readiness?
DreamStoneHR supports employers with practical HR, workplace relations and psychosocial safety support, including HR health checks, policy reviews, manager guidance, performance and conduct processes, workplace investigations, workload reviews and practical psychosocial safety support.
If you are unsure whether your current processes would stand up to scrutiny, now is a good time to step back and review how your business manages workload, injuries, complaints, performance, conduct and return to work in practice.
You may also find these DreamStoneHR resources useful:
