In brief
From 1 July 2026, a major shake-up to the New South Wales workers' compensation system will come into full effect. The changes follow the passing of two tranches of legislation1 and aim to address the growing burden of psychological injury claims on employers, and the New South Wales Government's budget.
Key takeaways
- Workers will need to particularise allegations to demonstrate that they have suffered a primary psychological injury as a result of a limited number of "relevant events" – such as bullying, sexual or racial harassment, violence, or excessive work demands. Generalised allegations will not suffice.
- The event must be the main contributing factor to the psychological injury.
- The defence of reasonable management action will be expanded to align more closely with the concept that already exists under the anti-bullying provisions of the Fair Work Act 2009 (Cth).
- The Industrial Relations Commission will be empowered to determine disputes about whether the alleged "relevant event" actually occurred. Liability will turn more on objective facts than the workers' perception.
- Employers should be aware of their work health and safety obligations, which operate in tandem with the workers' compensation system. Psychosocial risks remain a high priority for safety regulators across the country and we are seeing increasing enforcement, including on-site audits.
In depth
Set out below is a summary of the key changes and what they mean for employers. These changes have been introduced progressively, with some having commenced on 27 March 2026, and others effective from 1 July 2026.
| Change |
Summary |
What does this mean for employers?
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Psychological injury
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- Introduction of definitions for "primary psychological injury", "bullying", "excessive work demands", "racial harassment", and "sexual harassment".
- Claims must now meet objective standards, requiring consideration of whether a reasonable person would have anticipated the conduct to be harmful.
- Weekly payments for primary psychological injuries are capped at 130 weeks unless the worker's permanent impairment is assessed at 21% or higher.
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- More certainty for employers as to the matters that may give rise to a claim for psychological injury. Employers should focus policies and training in those areas to appropriately manage risk and ensure the health and safety of workers.
- Employers should ensure their policies and training align with the new statutory definitions (particularly around bullying, harassment, workload expectations and psychological safety).
- Robust investigation processes are essential, particularly in cases of bullying and harassment.
- Managers must be trained to carefully handle and document conversations around performance, workplace change, and workload management.
- Prioritise early intervention and return‑to‑work programs for psychological injuries, as the 130‑week cap increases pressure to stabilise injuries earlier.
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Expanded exclusions for reasonable management action
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- Psychological injury claims will be excluded where the injury is wholly or predominantly caused by reasonable management action taken or proposed to be taken by the employer, including where the worker's injury arises from their reaction to or perception of that action.
- Reasonable management action will be defined to mean management action that is taken in a reasonable way and that is reasonable in the circumstances. Examples will include performance management processes, disciplinary action, counselling or warnings, appraisal and feedback, restructuring and allocation of work.
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- These changes increase the scope of the defence.
- Employers should ensure that management action is clearly explained, consistently applied, and supported by written documentation.
- They should also ensure that managers are appropriately trained to carry out management action in a reasonable way.
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Front-loaded provision of information
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- For conduct‑based psychological injury claims, the worker must provide details of each alleged incident, including people involved, dates and times, and a description of the conduct.
- A claim will not be considered complete until those details are provided, and payments will not commence until the claim is complete.
- If the New South Wales Industrial Relations Commission (IRC) finds the conduct did not occur, the claim cannot proceed at all.
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- This process means that generalised allegations of stress (for example) and provision of a medical certificate will not on their own be enough for a claim to succeed.
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Role of the Industrial Relations Commission
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- In the event liability is disputed, the worker must take the matter to the IRC, so it may determine whether the alleged workplace conduct did in fact occur.
- Unless the IRC makes that determination, the worker cannot proceed down the compensation pathway.
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- Employers may find themselves in the IRC. Given most employment matters are dealt with by the Fair Work Commission, for many it will be the first time.
- While this will require upfront engagement with a dispute resolution procedure, it is anticipated that this mechanism will make spurious claims less common, and less likely to succeed.
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1 Workers' Compensation Legislation Amendment Act 2025 (NSW); Workers' Compensation Legislation Amendment (Reform and Modernisation) Act 2026 (NSW).
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Sophia Herd, Associate, has contributed to this legal update.
