The NSW government has announced a potential major overhaul of the NSW workers compensation system to address concerns regarding the cost impact and poor return to work outcomes of workers experiencing workplace psychological injuries.
The NSW government has identified that under the current system, only 50% of workers with a psychological injury are returning to work within a year (compared to 95% of workers with a physical injury), with the number of psychological injury claims having doubled in the last 6 years (compared to only a 16% rise of other claims), and with broader concerns having been raised as a result as to the overall longer term viability of the system.
The first part of these proposed changes has been released by the NSW government for consultation, in the form of an exposure draft Workers Compensation Legislation Amendment Bill 2025 (Bill). The Bill has been referred to the Standing Committee on Law and Justice for review.
If it becomes law in its current form, the Bill will considerably limit the type of workers compensation claims that NSW based workers will be able to bring in relation to psychological injuries suffered at work.
KEY CHANGES
Psychological Injuries
The Bill proposes to amend NSW workers compensation laws so that 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 substantial connection between the relevant event and the worker’s employment;
- 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 by an employer, or a worker’s expectations or perceptions of such action.
The most significant effect of these changes would be that in order for a worker to make a compensation claim for psychological injury in the context of allegations that they have suffered harassment or bullying, they will be required to first have some form of bullying or harassment claim heard by a court or tribunal and a finding that such conduct has occurred including in a new jurisdiction proposed to be established in the NSW Industrial Relations Commission (NSW IRC) (see below). Workers will only then be able to formally notify their employer of their claim after such a finding.
This could act as a significant deterrent to workers seeking compensation for psychological injuries – while it may lead to unmeritorious compensation claims not being progressed, it could also have the unwanted effect of stifling genuine claims for compensation where workers have suffered serious psychological injury.
More specifically, the Bill provides:
Definition of Psychological Injury: this is a ‘mental or psychiatric disorder that causes significant behavioural, cognitive or psychological dysfunction’.
Primary vs Secondary Psychological Injury: The Bill 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.
Practically, it may be difficult to determine whether a psychological or physical injury has arisen first for a worker, particularly in circumstances where psychosocial hazards can often lead to both psychological injuries such as anxiety, depression, post-traumatic stress disorder (PTSD) and sleep disorders, and physical injuries include musculoskeletal injury, chronic disease, and physical injury following fatigue-related workplace incidents. Where a physical injury arises first for a worker, they may be prevented from receiving compensation for a subsequent psychological injury.
Definition of Relevant Event: Relevant events include acts of violence, indictable criminal conduct, witnessing traumatic incidents, experiencing vicarious trauma, and more controversially, ‘being subjected to conduct that a tribunal, commission or court has found is sexual harassment, … racial harassment, or … bullying’.
Definitions of Sexual Harassment, Racial Harassment and Bullying: Unfortunately, the proposed definitions in the Bill do not fully align with those definitions used in other forums. For example, the definition of ‘sexual harassment’ in the Bill is not fully aligned to the current definition of sexual harassment as contained in the Anti-Discrimination Act 1977 (NSW) or under Federal laws, and the definition of ‘bullying’ is potentially broader than that contained in the Fair Work Act 2009 (Cth) (FW Act), with no reference being made to the requirement for a continuing risk to health and safety. Lastly, the term ‘racial harassment’ is not one which is readily used in other legislation.
A finding?: It is also unclear as to what will be required to constitute a tribunal or court having ‘found’ there to have been some form of harassment or bullying. In any case, the evidence required by a tribunal or court to establish that conduct will generally be higher than may be required by an insurer in dealing with a claim alleging that conduct, and the insurer seeking to determine whether or not to accept such a claim.
While a current employee of a ‘constitutionally covered business’ can commence a claim under the FW Act to seek stop bullying orders or to deal with a sexual harassment dispute, such a claim may not result in the Fair Work Commission making a finding as to whether the alleged conduct has, in fact, occurred. To date, the Fair Work Commission has adopted a largely pragmatic approach to those claims, assessing what may be reasonable management action on a common-sense basis, and very few formal orders have been made by it in those types of claims.
It is clear, however, that the NSW government also intends on creating a new avenue for employees to commence claims in the NSW IRC (see below), although there is no detail on the evidence that may be required by the NSW IRC or the formal processes that the NSW IRC may adopt.
Definition of Reasonable Management Action: No compensation is payable to a worker if a significant cause of the psychological injury was reasonable management action taken or proposed to be taken by an employer, or a worker’s expectation or perception of reasonable management action being taken.
The Bill has adopted a broad definition, consistent with that used in other forums, being management action taken in a reasonable way and that is reasonable in all of the circumstances. That action can include appraisal / feedback of a worker’s performance, disciplinary action, demotion, transfer, investigation of alleged misconduct and dismissal.
Connection to employment: No compensation is payable to a worker unless a relevant event caused the psychological injury, there is a real and substantial connection between the relevant event and the worker’s employment, and employment is the main contributing factor to the psychological injury.
PERMANENT IMPAIRMENT
Threshold for Permanent Impairment: The 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.
Assessing Permanent Impairment: The Bill introduces a process for assessing the degree of permanent impairment. It requires an assessment to be conducted by a qualified ‘permanent impairment assessor’. Impairments from multiple injuries arising from the same incident are assessed together, and the assessor must be satisfied that the impairment is both permanent and fully ascertainable before completing the assessment.
Permanent Assessment Agreements: Once the assessment is complete, the employer and worker may enter into a written permanent impairment agreement to agree on the degree of permanent impairment resulting from the injury and the compensation that the worker is accordingly entitled to.
WORK PRESSURE PAYMENTS
Instead of compensation, workers experiencing ‘work pressure disorders’, being a mental or psychiatric disorder that develops due to pressures placed on a worker in the course of their employment (but only where the job itself is the primary reason for the disorder), will receive a one-off payment covering treatment costs for up to eight weeks, with no entitlement to further compensation from the same employer as a result of any further work pressure disorder.
OTHER CHANGES
Large Employer Offence: The Bill introduces an offence for large employers who recklessly fail to give insurers information relevant to underinsurance.
Employer Excess: The Bill includes provision for employers to be responsible for covering an initial period of compensation for injured workers through an insurance excess.
Modernisation of Benefits: The Bill proposes increases in certain benefits, such as the maximum weekly compensation amount and death benefits lump sum.
FURTHER PLANNED REFORM
A new Industrial Relations Amendment Bill (to amend the Industrial Relations Act 1996 (NSW) (IR Act)) is also planned to accompany the Bill, and together they are ‘designed to shift workplace health and safety laws, and workers’ compensation laws towards [injury] prevention’, according to the NSW government.
The planned reforms include:
- Amending the IR Act to establish a bullying and harassment jurisdiction within the NSW IRC giving them the power to address workplace issues before they escalate into injuries. The NSW IRC will have powers to issue stop workplace bullying or harassment orders, but no further details have been released as yet.
- Enshrining gender equality and the elimination of discrimination, bullying and harassment into the objectives of the IR Act.
- Increasing the capacity of SafeWork NSW to investigate psychological injuries, expanding the number of SafeWork inspectors with industry and psychological specialisation, and putting in place a new Psychological Health and Safety Strategy to improve SafeWork NSW’s capacity to enforce compliance safety.
- New mental health programs for small and medium-sized businesses through the Black Dog Institute and Transitioning Well, together with making available New iCare Workplace Mental Health Coaching and Workplace Mental Health Training.
The details of these further changes, including a draft bill to amend the IR Act, have yet to be released. As always, the devil may be in the detail.
Implications and Next Steps
The Bill, together with the further planned reforms referred to above, if passed, may have significant implications for employers. The specific detailed criteria for compensation eligibility may mean that potential employer liability for psychological injuries ultimately decreases (with fewer claims being commenced), but any new bullying and harassment jurisdiction within the NSW IRC may also lead to employers facing more formal disputes with workers relating to workplace conduct.
According to the NSW government, this proposed modernisation of the workers compensation system is targeting issues with the current system that are failing workers in both prevention and treatment of psychological injuries. Whether these changes will have the intended effect of reducing the number of psychological injury claims and reducing corresponding workers compensation insurance premiums remains to be seen.
At this time, employers should be looking to take proactive steps to in anticipation of future changes:
- Remain vigilant in preventing workplace conditions that could lead to psychological injuries;
- Review and update workplace policies, particularly policies relating to workplace harassment, bullying behaviour and psychosocial hazards/risks;
- Enhance workplace safety and mental health initiatives, including regular training and safe work assessments;
- Update reporting and compliance systems, especially systems relevant for reporting accurate employee data to insurers; and
- Consult with legal and HR professionals to understand the implications of the new laws for your specific workplace to develop further strategies to mitigate risks.
Source: King & Wood Mallesons
