NSW Workers Compensation Changes for Employers

‍How does workers compensation work in NSW?

Workers compensation in NSW is a compulsory insurance system that protects both employees and employers when workplace injuries or illnesses occur. Operating under a "no-fault" principle, the scheme provides financial support and benefits to workers who suffer job-related injuries or illnesses without requiring them to prove employer negligence.

The system ensures injured workers receive support including weekly payments to replace lost income, coverage for medical and hospital expenses, rehabilitation services, and in some cases, lump sum payments for permanent impairment. All employers in NSW must maintain valid workers compensation insurance for their employees, including full-time, part-time, and casual workers.

In NSW, workers compensation is primarily administered by the State Insurance Regulatory Authority (SIRA), which oversees the regulatory framework, and icare (Insurance & Care NSW), which manages insurance for most employers. The claims process begins when an injured worker reports their injury to their employer, seeks medical attention, and obtains a Certificate of Capacity from their doctor. The employer must then notify their insurer, who assesses the claim and determines appropriate benefits.

What are the proposed changes?

It's important to stay up to date with workers compensation changes in NSW, recently, on 8 May 2025, the NSW Government released an Exposure Draft Amendment Bill outlining proposed changes to the NSW workers compensation legislation. This marks a significant step in reforming how psychological injuries, especially those arising from bullying, sexual harassment and racial harassment, are handled under the scheme.

A New Definition of Psychological Injury

The Draft Bill proposes a single, clarified definition of ‘psychological injury’ as: “a mental or psychiatric disorder that causes significant behavioural, cognitive or psychological dysfunction.” This aims to streamline assessments and remove inconsistencies across the current legislation.

Stricter Criteria for Compensation Eligibility

To claim for psychological injury, employees would need to demonstrate:

• The injury was caused by a ‘relevant event’ (e.g. violence, vicarious trauma, or harassment); and
• A ‘real and substantial connection’ to their employment; and
• That employment was the main contributing factor to the injury.

The introduction of a defined list of “relevant events” may help employers better understand their risk exposure and response obligations.

‍Added Threshold for Bullying, Sexual Harassment & Racial Harassment

Where psychological injury arises from bullying, racial harassment or sexual harassment, employees must also provide a formal finding from a tribunal, commission or court to support their claim. While these matters remain subject to further legislative clarification, this addition introduces a more structured approach to claims and may reduce uncertainty for employers managing complex complaints.

Clarifying ‘Reasonable Management Action’

A revised definition of ‘reasonable management action’ is proposed, which includes actions such as performance feedback, disciplinary procedures or termination, provided they are carried out in a “reasonable way” and are “reasonable in all the circumstances”. This change is significant for employers looking to safeguard legitimate people management practices while still supporting employee wellbeing.

How to calculate workers compensation NSW?

Workers compensation in NSW is calculated by multiplying the employer's total wages by their industry-specific tariff rate, then adjusting this figure based on claims history. This formula (Wages × Industry Rate × Performance Rating) accounts for business size, risk level, and safety performance. Small businesses often qualify for discounts, while effective safety programmes and return-to-work initiatives can reduce premiums over time. Maintaining accurate wage records and minimising workplace incidents are key strategies for controlling premium costs. To get more support on policy management, and navigating the complex workers compensation models, contact HumanX HR for assistance today.

What does this mean for employers right now?

While these reforms are still in draft form, they signal a clear shift toward greater clarity in definitions and thresholds, potentially stricter evidentiary requirements for certain claims, and, a more structured and defensible claims management processes.

For employers, now is the time to review current workplace policies and procedures around psychological injury, performance management and complaint handling. Ensuring your approach is consistent, fair and well-documented will be key.

At HumanX HR, we support organisations navigating complex legislative change through strategic advisory, policy review, “HR HealthChecks” and independent investigations. If you need guidance on managing psychological injury claims, workplace complaints, or understanding how these reforms may affect your people practices, we are here to help!