NSW Workers' Compensation Changes: Key Things to Know

The NSW government has unveiled further details on its plan to improve the NSW workers compensation system’s handling of psychological injuries.

Last month, we published an alert exploring the changes proposed by the exposure draft of the Workers Compensation Legislation Amendment Bill 2025. The NSW government has since released two new bills guided by union and other expert consultation to further refine the proposed scheme.

Following a strong backlash from unions, interest groups and others, the NSW government has made various revisions to the changes first proposed in the exposure draft, including to remove the proposed requirement that an injured worker obtain findings in a court or tribunal that bullying or sexual/racial harassment occurred, before being able to receive compensation for a resulting psychological injury.

The latest version of the NSW government’s changes are contained in two bills:

an updated Workers Compensation Legislation Amendment Bill 2025 (WC Bill); and
a new Industrial Relations and Other Legislation Amendment (Workplace Protections) Bill 2025 (IR Bill).

The primary aim of the two bills is to tackle issues related to the financial burden and unsatisfactory return-to-work results for workers suffering from psychological injuries at the workplace. The IR Bill also proposes to create new jurisdictions to allow the NSW Industrial Relations Commission (NSW IRC) to hear and make orders to prevent and remedy bullying at work and sexual harassment in connection with work for non-private sector workers.

The WC Bill

The WC Bill maintains the position that workers compensation will only be payable to a worker:

for a 'primary psychological injury';
if it arises from a 'relevant event';
where there is a real and direct connection between the relevant event and the worker’s employment – this has changed from the previous formulation of ‘real and substantial’;
where employment is the main contributing factor to the psychological injury; and
a significant cause of the psychological injury is not reasonable management action taken (or proposed to be taken) by an employer, or a worker’s expectations or perceptions of such action.

The WC Bill defines a psychological injury to be a 'mental or psychiatric disorder that causes significant behavioural, cognitive or psychological dysfunction', and also introduces specific definitions of a 'primary psychological injury' and 'secondary psychological injury', the latter being a psychological injury that occurs as a consequence of, or 'secondary to', a physical injury.

Relevant events are defined in the WC Bill to include acts of violence, indictable criminal conduct, witnessing traumatic incidents, experiencing vicarious trauma, and more controversially, 'being subjected to sexual harassment, … racial harassment, … bullying, or … excessive work demands'.

The key update to the proposed process is that claims for primary psychological injury due to bullying or sexual/racial harassment would no longer require a tribunal/court finding before compensation is payable. The removal of that requirement will be welcomed by many advocates and results from intense lobbying on this issue.

Instead, the WC Bill introduces a more structured process for those matters, with the claims pathway sitting primarily with the insurer:

within 42 days of receiving a claim, the insurer must determine whether to accept or decline the claim;
if the insurer disputes liability, the worker can seek internal review of the decision by the insurer;
following this, the worker may lodge an application to the NSW IRC to determine if the relevant conduct occurred;
if the NSW IRC finds the conduct did occur, but the insurer continues to dispute the claim, the dispute may be referred to the Personal Injury Commission for determination; and
throughout this process of determination and potential dispute over liability, the worker is entitled to weekly payments calculated with reference to the worker’s current work capacity and their pre-injury average weekly earnings, and a separate payment of up to $7,500 for treatment costs.

The NSW IRC’s powers in relation to determinations of bullying and sexual harassment are detailed in the IR Bill and explained further below.

The WC Bill also introduces the concept of ‘excessive work demands’ as a stand-alone compensable cause of primary psychological injury by expanding the definition of a ‘relevant event’, where work demands are beyond the requirements expected of the worker’s role, are repeated or persistent, and are not reasonable in all the circumstances. The concept of ‘work pressure’, which had been included in the exposure draft, has been removed. In determining what constitutes ‘excessive work demands’, matters such as industry work patterns, worker supervision, the worker’s role and responsibilities, the worker’s entitlement to overtime and other compensation for extra hours, workplace needs, staffing levels and skills, applicable industrial instruments, and other relevant factors will be considered.

Other updates include:

Objective test: an objective test must be used when determining whether an act or omission constitutes bullying, excessive work demands or racial/sexual harassment, in that the worker’s perception of the relevant event will be relevant but only to the extent that perception is reasonable.
Vicarious trauma: the meaning of ‘vicarious trauma’ has been updated and simplified to mean ‘the psychological impact of repeated exposure, in the course of a worker’s duties, to the traumatic experiences of others that result from traumatic incidents’.
Increase in penalty for no insurance: the maximum penalty for a large employer that does not hold workers compensation insurance has been substantially increased.
Threshold for Permanent Impairment: the WC Bill proposes a higher threshold for psychological injuries, requiring a degree of permanent impairment of at least 31% to pursue damages or have indefinite access to benefits, compared to 15% for physical injuries.
Whole Person Impairment (WPI) related payments: the media release accompanying the WC Bill states that psychologically injured workers whose assessed WPI does not exceed 30% may elect to commute their entitlement, receiving a lump-sum payment in advance of their weekly benefits ending. The impairment threshold for lifetime weekly payments will also rise incrementally, first to 25% in October 2025, and over 30% from 1 July 2026. These entitlements are likely to be implemented through future regulations.

The IR Bill

Workplace bullying changes

The IR Bill proposes to amend the Industrial Relations Act 1996 (NSW) (IR Act) by introducing a new Chapter 3A - Part 1 titled 'Stop Bullying at Work' to enable an employee (as defined below) who is bullied at work to seek an order from the NSW IRC to stop and remedy the bullying.

Importantly, while the definition of an 'employee' for these purposes replicates the much broader definition of 'worker' which is used in work health and safety laws and also includes trainees / apprentices, contractors / sub-contractors (and their employees), outworkers and volunteers, it expressly excludes a worker who may apply to the Fair Work Commission for a stop bullying order under the Fair Work Act 2009 (Cth) (FW Act). As a result, private sector employees will generally be excluded from accessing this new jurisdiction in the NSW IRC, leaving the jurisdiction for employees working in the NSW public service and for local governments.

Specifically the IR Bill provides:

an eligible employee who reasonably believes that they have been 'bullied at work' (or a union on their behalf) can commence an application for a stop bullying order;
being 'bullied at work' adopts the definition used in the FW Act, namely that this is where an individual (or group of individuals) repeatedly behaves unreasonably towards an employee (or a group of employees of which the employee is a member), and the behaviour creates a risk to health and safety.
also as with the FW Act, 'reasonable management action carried out in a reasonable way' is excluded from that definition;
there is no defined time limit by which applications must be commenced;
the NSW IRC must endeavour to settle the application by conciliation. When the NSW IRC considers that all reasonable attempts to settle the application have been made but have been unsuccessful, the NSW IRC must then determine the application by making a 'stop bullying order' or dismissing the application;
the NSW IRC can make any order it considers appropriate to prevent an employee from being bullied at work if it is satisfied that the employee has been bullied and there is a risk that the employee will continue to be bullied at work. Any such order can be made so as to apply to an individual (or one or more individuals in the group), the employer or a person conducting a business or undertaking (PCBU) if the bullying occurs in connection with that business or undertaking;
the NSW IRC can potentially make a variety of orders including:
- a prohibition on continuing or repeating the bullying;
- the performance of reasonable actions / conduct to redress any loss or damage suffered by the employee;
- the publication of an apology or retraction; and/or
- the development and implementation of a program or policy aimed at eliminating bullying.

Interestingly, and in a major departure from the position under the FW Act, it is proposed that the NSW IRC also be provided the power to award damages to an employee up to $100,000. The inability of the Fair Work Commission to make a compensation order under the equivalent jurisdiction in the FW Act is often put forward as one of the main reasons why that jurisdiction is comparatively under-utilised;

in determining what orders to make, the NSW IRC must take into account any other grievance or dispute procedures available to the employee, the outcome of any other investigations into the conduct being complained of, and any grievance or dispute procedures carried out in response to that conduct;
if a stop bullying order is breached, the NSW IRC can order a civil penalty of up to $18,870 against an individual, or up to $93,900 for a corporation; and
there are limits on when a stop bullying order may be applied for or the kinds of orders that may be sought where matters have been commenced concerning the same conduct under anti-discrimination laws.

Sexual harassment changes

The IR Bill proposes to amend the IR Act by introducing a new Chapter 3A - Part 2 titled 'Prohibition on sexual harassment in connection with work'.

The IR Bill provides that a person must not sexually harass another person where that person is an employee, a prospective employee, or a person conducting a business or undertaking. Employers can be vicariously liable for any breach committed by another employee during the course of their employment. Where there is a breach of that prohibition and a 'sexual harassment order' has been made (as referred to below), then the NSW IRC can order a civil penalty of up to $18,870 for an individual, or up to $93,900 for a corporation.

As with the proposed workplace bullying changes, the definition of an 'employee' for these purposes replicates the much broader definition of 'worker' which is used in work health and safety laws, but it expressly excludes a 'national system employee' under the FW Act. As a result, again private sector employees will generally be excluded from accessing this new jurisdiction in the NSW IRC.

Specifically the IR Bill provides:

an eligible employee who alleges that they have been sexually harassed (or a union on their behalf) can commence an application for a sexual harassment order;
the definition of sexual harassment which has been adopted is that contained in the Anti-Discrimination Act 1977 (NSW);
applications must be commenced no later than 24 months after the conduct complained of;
the NSW IRC must endeavour to settle the application by conciliation. When the NSW IRC considers that all reasonable attempts to settle the application have been made but have been unsuccessful, the NSW IRC must then determine the application by making a 'sexual harassment order' or dismissing the application;
the NSW IRC can make any order it considers appropriate to prevent an employee from being sexually harassed. Any such order can be made so as to apply to an individual who has committed the sexual harassment and/or an employer who is vicariously liable;
the NSW IRC can potentially make a variety of orders including those it can in relation to bullying matters. The NSW IRC will also have the power to award damages to an employee up to $100,000;
in determining what orders to make, the NSW IRC must take into account any other grievance or dispute procedures available to the employee, the outcome of any other investigations into the conduct being complained of, and any grievance or dispute procedures carried out in response to that conduct;
if a sexual harassment order is breached, the NSW IRC can order a civil penalty of up to $18,870 against an individual, or up to $93,900 for a corporation; and
there are limits on when a sexual harassment order may be applied for or the kinds of orders that may be sought where matters have been commenced concerning the same conduct under anti-discrimination laws.

Additional measures

As well as changes within the system, a Workplace Mental Health initiative, bolstered by $344 million in new funding, has been announced that aims to enhance mental health support in workplaces through, amongst other things:

Allocating new resources to SafeWork for injury prevention, including more than 50 new inspectors specialising in psychological injury.
Offering comprehensive psychological support to assist individuals with the claims process.
Enhancing Work Health and Safety compliance and enforcement to better prevent psychosocial risks.
Providing up to eight weeks of financial, medical, and vocational support for immediate assistance.

Next steps

Employers should take proactive steps to in anticipation of these future changes (as set out in our earlier article). In addition to the steps in our earlier article, employers should also:

Audit current psychological safety controls against the proposed statutory definitions: complete a gap analysis of existing bullying, harassment, excessive work demands and vicarious trauma controls against the WC Bill’s definitions and SafeWork NSW guidance, and update policies, risk assessments and incident-response protocols accordingly;
Stress-test the 42 day claims pathway: engage with insurers to confirm readiness for the 42-day claims timetable and allocate clear internal ownership to ensure evidence can be gathered, lodged and reviewed within the statutory timeframe;
Document ‘reasonable management action’: review employment contracts, position descriptions, performance-management templates and rostering practices so that managerial decisions likely to be scrutinised under an objective test are recorded and likely to be considered reasonable;
Upskill leaders and first responders: deliver targeted training to executives, line managers, HR, WHS representatives and return-to-work coordinators on the new definitions, evidentiary requirements and NSW IRC stop-order jurisdiction;
Refresh governance and reporting: include psychosocial risk indicators and claim metrics in board WHS reports;
Audit insurance coverage: audit group entities for compulsory insurance compliance in light of the higher penalties for not having insurance; and
Leverage new mental-health funding: engage early with SafeWork NSW regarding the Workplace Mental Health initiative to access inspectorate support, eight-week early-intervention assistance and any industry-specific programmes.