Significant Reforms to the NSW Workers Compensation Scheme

Written by Amelia Palazzo – Law Clerk

Following the NSW Government’s push for amendments to the NSW Workers Compensation Scheme, the NSW Government passed two reform Bills:

1. The Workers Compensation Legislation Amendment Bill 2025 – passed on 18 November 2025 (“the November 2025 Bill”).
2. The Workers Compensation Legislation Amendment (Reform and Modernisation) Bill passed on 4 February 2026 (currently awaiting royal assent) (“the February 2026 Bill”).

The NSW Government have proposed these amendments, to reduce the running costs and number of compensable psychological injuries, as well as to improve the operative efficiency and eligibility requirements of the Scheme.

It is important to understand the implications of both Bills, particularly as the proposed changes are likely to significantly impact: the way that legal professionals operate in this area of law; and, the entitlements of injured workers.  

What Changes Are Being Made?

Psychological Injuries

The amendments passed in November 2025 primarily relate to how psychological injuries in the workplace, will be assessed and compensated under the Scheme moving forward.

Pursuant to the reforms, the following changes have been proposed:

1. Psychological injuries will be narrowly defined, particularly, there is an intention to limit compensation to injured workers who sustained injury from a ‘relevant event’. For the purposes of the proposed changes, a ‘relevant event’ refers to any of the following:
   1. being subjected to an act of violence or a threat of violence;
   2. being subjected to indictable criminal conduct;
   3. witnessing a traumatic incident happen or a dead or seriously injured person at the scene of a traumatic incident;
   4. experiencing vicarious trauma (within a limited definition);
   5. being subjected to sexual harassment, racial harassment or bullying;
   6. being subjected to excessive work demands (meaning, work demands that are: (a) beyond the requirements expected of the worker’s role; (b) repeated or persistent; and (c) not reasonable in all the circumstances); or
   7. any other event as may be prescribed by the regulations.
2. Clearly defining the concept of “reasonable management or administrative action” under the Scheme.
3. Limiting weekly payments for primary psychological injuries at 130 weeks (2 and a half years), unless the worker’s whole person impairment (WPI) has been assessed at 21% or higher.

Changes to Workers Entitlements

The February 2026 Bill has proposed gradual increases to the WPI thresholds, required to be satisfied by an injured worker, prior to making a lump sum claim and accessing weekly compensation benefits beyond 130 weeks.

Further entitlement thresholds are also expected to change over time, as follows:

• The whole person impairment (“WPI”) threshold for weekly payments beyond 130 weeks will increase to 25% from 1 July 2026, and 28% from 1 July 2029.
• Workers with a WPI above 21% will be eligible for an additional 52 weeks of benefits from 1 July 2026, increasing to 27% WPI from 1 July 2027.
• Work Injury Damages (“WID”) thresholds will gradually increase for injuries occurring from 1 July 2026.

Further, the changes also seek to amend the legal test required for medical treatment costs. The change includes raising the threshold test from “reasonably necessary”, to an assessment of whether the treatment is “reasonable and necessary”.

Disputing Liability

Where an insurer disputes a claim on the basis that the alleged bullying, excessive work demands, racial harassment, and / or sexual harassment did not occur, the worker will be required to seek the assistance of the Industrial Relations Commission (“IRC”), to determine whether or not the alleged bullying, excessive work demands, racial harassment, and / or sexual harassment did occur.

Where the IRC is not satisfied that the alleged bullying, excessive work demands, racial harassment, and / or sexual harassment occurred, then the injured worker is not entitled to compensation.

This reflects a new function of the IRC in respect of the Workers Compensation Scheme, and injured workers, one which it did not previously have.

Changes to Timeframes and Premiums

The proposed changes also include additional timeframes which ought to be imposed on insurers, this specifically relates to psychological claims which are brough on by ‘conduct events’ (i.e. bullying or unreasonable work demands, as opposed to traumatic events such as violence or serious workplace accidents). These timeframes include:

1. 42 days for an insurer to determine liability. If a decision is not made in that time, it may result in a ‘deemed’ acceptance of the claim.
2. Once liability is accepted or deemed, a back payment of benefits must occur within 21 days.

The proposed changes also seek to freeze premium rates from 30 June 2026 to 30 June 2028.

Key Takeaways for Clients and Legal Professionals

While both bills have been passed by Parliament, neither have taken effect, particularly with the November Bill taking effect from a date yet to be proclaimed. It is advised that the February Bill is awaiting royal assent and is expected to take effect from in or around July 2026.

It is important to note that these proposed changes are still undergoing review and are yet to be confirmed. That said, these proposed changes may or may not reflect the final legislative amendments.

Important Disclaimer

The contents of this publication are for reference purposes only. This publication does not constitute legal advice and should not be relied upon as legal advice. Specific legal advice should always be sought separately before taking any action based on this publication.