NSW Workers Compensation Changes - What Employers Need to Know

The rules for psychological injury claims in NSW have fundamentally changed, and if you're an employer, you need to understand what's different and what it means for you.

In this Psychosocial Safety Briefing, Institute CEO Nicole Turnbull sits down with David Newey, Partner at Gillis Delaney Lawyers, to break down the significant reforms to NSW workers compensation - new thresholds, new dispute processes, new defences and what employers should be doing right now.

Watch the briefing below:

The following article was written by David Newey, Partner, Gillis Delaney Lawyers.

NSW Workers Compensation Reform Legislation Passed

Sydney, NSW, 5 February 2026

The New South Wales Parliament has passed the Workers Compensation Legislation Amendment (Reform and Modernisation) Act 2026 on 4 February 2026, completing a transformative suite of legal reforms that significantly reshape how psychological injury workers compensation claims are handled in the State.

The Act builds on a series of legislative changes introduced in 2025 and introduces a staged increase in the Whole Person Impairment (WPI) thresholds required for workers to access lump sum work injury damage entitlements and weekly compensation beyond 130 weeks. These adjustments mark a major shift in the workers compensation regime, particularly for psychological injuries.

Key Threshold Changes

Under current legislation, the WPI threshold for all work injury damage claims sits at 15%. The 2026 Act lifts this threshold for psychological injury claims through a phased schedule:

▪ From 1 July 2026: WPI threshold increases to 25%

▪ From 1 July 2027: WPI threshold increases to 26%

▪ From 1 July 2029: WPI threshold increases to 28%

The same staged increases will apply to the minimum WPI threshold required for access to weekly compensation after 130 weeks of payments. Workers whose WPI falls below the relevant threshold will no longer be entitled to weekly compensation beyond 130 weeks.

The thresholds introduced on each change date will apply to claims for injuries after the change date as well as claims for injuries occurring before the change date where is no notification of an injury before the change date or a claim is not made before the change date. However, the first threshold increase will not apply to psychological injury work injury damage claims arising before 30 June 2026, provided the worker has lodged their claim and has either initiated a threshold dispute in the Personal Injury Commission or served a pre-filing statement before that date.

Continuation of Reform Momentum

The 2026 Act augments earlier reforms introduced through:

• The Workers Compensation Legislation Amendment Act 2025, and

• The Industrial Relations and Other Legislation Amendment (Workplace Protections) Act 2025

These prior reforms already laid the groundwork for modernising how psychological injuries are defined, assessed, and resolved under the NSW scheme.

New Psychological Injury Claim Framework

Among the changes introduced in 2025 and now supplemented by the 2026 Act are fundamental shifts to claim definitions and processes:

Redefined Terminology

The legislation now expressly defines:

• Bullying

• Sexual harassment

• Excessive work demands

• Reasonable management action

• Relevant event

These definitions aim to clarify the kinds of workplace experiences that can underpin psychological injury claims.

Fast-Tracked Claim Decisions

The Act imposes strict timelines on psychological injury claims arising from bullying and harassment:

• An insurer must determine a claim within 42 days.

• A worker may request a review of a rejected claim — which must be determined within 14 days.

• If the insurer fails to meet the review timeline, the claim is deemed accepted.

• A new dispute pathway is mandated with disputes managed by the Industrial Relations Commission (IRC) if the insurer rejects the psychological injury claim, there is alleged bullying, harassment or excessive work demands and or a dispute as to whether there was reasonable management action.

Importantly, employers will be directly involved in these new processes — including the IRC dispute pathway — and costs for these disputes will not be borne by workers compensation insurance.

Caps on Weekly Compensation and Simplified Commutations

The reforms cap standard weekly compensation at 130 weeks, except where the worker’s WPI exceeds the relevant threshold allowing access to extended weekly entitlements. The process for commutations — finalising claims in exchange for lump sum settlements — has also been simplified.

Workplace Duty and Digital Work Systems

There are new duties under the Work Health and Safety Act and businesses must comply with Codes of Practice, including the Code of Practice: Managing Psychosocial Hazards at Work.

Businesses that deploy digital work systems — including algorithmic management, platforms, software, automation and AI — must, as far as reasonably practicable, ensure these systems do not expose workers to risks to their health or safety. Specific examples of risks that must be considered and eliminated where possible include:

• Excessive or unreasonable workloads;

• Unreasonable performance metrics;

• Intrusive monitoring or surveillance;

• Discriminatory practices or decision-making.

To enforce these duties, unions will be empowered to access workplaces to investigate potential breaches, including inspecting digital work systems suspected of posing risks. Businesses must provide reasonable assistance during such inspections. Where regulators do not act, unions also retain the right to prosecute employers for breaches of WHS laws.

What Businesses Must Prepare For

The reforms signal a very different landscape for businesses responding to psychological injury claims from 1 July 2026. Employers should be preparing for:

• Faster claim determinations and compressed decision timelines;

• Thorough early investigations into workplace complaints;

• A new IRC dispute process for psychological claim denials, with employers not icare managing the dispute and bearing the cost;

• Greater responsibility for investigating and managing workers compensation disputes where the cause of a psychological injury is disputed;

• Conciliations and hearings in the IRC for psychological injury claim disputes over the cause of injury if bullying, harassment or excessive work demands are alleged and the dispute will include consideration of whether there was reasonable management action;

• Union access and investigations into digital work systems; and

• Potential prosecutions for breaches of the new WHS duties.

Skills Needed in Employer Legal and HR Teams

To navigate this complex regime, employers will need access to expertise that extends beyond traditional workers compensation knowledge. Key capabilities include:

• Employment law acumen, particularly in managing psychological injury claims;

• Understanding union right of entry powers related to WHS investigations;

• Proficiency in psychological injury management, WHS obligations, and the Psychosocial Hazards Code;

• Workplace investigation and evidence presentation skills, including framing and defending decisions under compressed timelines;

• Capability to appear at IRC conciliations and hearings and negotiate resolutions of disputes that could include the exit of a worker;

• Experience engaging with icare and legal panels on disputed claims and negotiated outcomes;

• Knowledge of SafeWork strategies, WHS investigations, and compliance obligations; and

• Competence in managing new IRC dispute pathways involving suitable duties decisions.

Conclusion

From 1 July 2026, businesses confronting psychological injury claims will face a substantially changed legal and administrative landscape. With tightened thresholds, faster resolution timelines, enhanced definitional clarity, new dispute mechanisms, and added WHS obligations — particularly around digital work environments — employers must prepare strategically and operationally to meet the challenges ahead.

Regulations governing the new IRC dispute processes are yet to be finalised and they will form a critical component of operationalising these reforms. So there is still more to come.

David Newey

Partner

Gillis Delaney Lawyers

e: [email protected]

t: +61 2 9394 1111

For legal advice specific to your situation, contact David Newey at Gillis Delaney Lawyers.

02 9394 1111

[email protected]

LinkedIn Profile