Psychological Injury: New Definitions & Tougher Thresholds for NSW
From 1 July 2026, the NSW Government introduced sweeping workers compensation reforms designed to to curb the escalating volume and cost of psychological injury claims affecting employers and the State’s budget. The reforms aim to restore long‑term sustainability by balancing the needs of both workers and employers.
This blog breaks down the key changes so you can stay compliant and confident.
Key Takeaways
- Most NSW workers will only be able to claim compensation for a primary psychological injury if it stems from a defined “relevant event”.
- Employment must be the main contributing factor to the injury, which is a noticeably higher threshold than the former “substantial contributing factor” test.
- The reasonable management action defence has been broadened well beyond its previous scope.
Psychological Injury Claims
A worker can only be paid compensation for a primary psychological injury if all of the following are true:
the injury was caused by a relevant event or series of relevant events
there is a real and direct connection between the relevant event/s and the worker’s employment, and
employment is the main contributing factor to the injury
“Relevant Event”
A relevant event is a specific type of workplace incident defined in legislation. From 1 July 2026, a worker can only recover compensation for a primary psychological injury if the injury was caused by one or more relevant events.
Some examples of what a relevant event includes:
- Violence or threats — the worker is assaulted or threatened with harm.
- Indictable criminal conduct — being subjected to serious criminal behaviour.
- Witnessing a traumatic incident
- Vicarious trauma — repeated exposure, through work duties, to others’ traumatic experiences arising from traumatic incidents.
- Bullying — repeated unreasonable behaviour directed at the worker or their work group.
- Sexual harassment — unwelcome sexual advances, requests for sexual favours, or other unwelcome sexual conduct.
- Racial harassment — conduct reasonably likely to offend, insult, humiliate or intimidate the worker because of their race, colour, or national/ethnic origin.
- Excessive work demands — demands that are beyond what is reasonably required for the role, repeated or persistent, or not reasonable in all the circumstances
If a psychological injury arises from something not on the list of relevant events, the worker cannot receive compensation under the new rules.
Each conduct‑based relevant event now has its own statutory definition. For employers, the key point is that while the tests for bullying and sexual harassment resemble those in the Fair Work Act 2009 (Cth) and the Sex Discrimination Act 1984 (Cth), they are not identical. As a result, new case law will likely emerge to clarify how these definitions operate in the workers’ compensation context.
Main Contributing Factor
A worker’s psychological condition can have several contributing factors, but under the new rules the worker’s employment must now be the main contributing factor for a primary psychological injury to be compensable. This is a higher threshold than before.
Workers still need to tell their employer about a workplace psychological injury as soon as possible after it happens. Employers must then also notify the insurer within 48 hours after becoming aware that a worker has received a workplace injury.
Reasonable Management Action Changes
The reforms significantly broaden the employer defence for psychological injury claims under section 11A of the Workers Compensation Act 1987.
A psychological injury will not be compensable if the significant cause is reasonable management action; a worker’s expectation of reasonable management action; or a worker’s perception of reasonable management action being taken in relation to the worker.
The legislation now defines reasonable management action as action that is both taken in a reasonable way and reasonable in all the circumstances. It also provides a non‑exhaustive list of what is considered to be reasonable management, including:
· Performance appraisal
· Transfer or redeployment
· Demotion or promotion
· Misconduct investigations
· Disciplinary action
· Redundancy processes
The key takeaway for employers is that:
· The list of what is reasonable management action is no longer closed, meaning everyday management activity not previously captured can now fall within the defence.
· The defence now extends to a worker’s expectation or perception of management action — covering situations where a worker develops a psychological injury in anticipation of a performance process or other management step, even before anything has occurred.
This expanded defence gives employers clearer protection when undertaking legitimate management activities.
Other Key Changes in the New Reforms
The reforms introduce several structural adjustments affecting employers and employees, including:
· Policies, Premiums & Underinsurance Penalties - The reforms introduce tougher consequences for employers who fail to hold a valid workers compensation policy or who provide incorrect premium‑related information
· Higher Penalties & Clearer Expectations - Employers have long been required to support injured workers with suitable duties - but the penalties for failing to do so have now doubled.
· New ‘Reasonable and Necessary’ Test (From 1 October 2026) - The reforms introduce a clearer standard for medical and related treatment expenses compensable through the scheme and dictate that these must be “reasonable and necessary”. There are also several expressly excluded treatments and services from employer liability (like alternative therapies and wellness services).
· Employer Attendance at Treatment - Employers and their representatives cannot attend a worker’s medical treatment or examination unless the worker requests it. Case conferences aimed at supporting return‑to‑work are still permitted.
· SIRA’s Workers Compensation Guidelines (updated 1 July 2026) – Updated guidelines require employers to provide clear information to workers about:
o How to report an injury
o How to make a claim and
o Employer’s insurer details or confirmation of self-insurance.
What Employers Should Do Now
The legislative changes create several practical implications for employers. Key actions to stay compliant and minimise risk include:
1. Reviewing bullying and harassment policies - existing policies may not align with the new statutory definitions of bullying, sexual harassment, racial harassment and excessive work demands. Updating terminology, examples and reporting pathways will help ensure compliance.
2. Strengthening performance management record‑keeping - documentation will be critical where employers rely on the reasonable management action defence. Accurate position descriptions also matter, as “excessive work demands” are assessed against the requirements of the worker’s role. Clear rosters, staffing data and remuneration structures may become evidentiary material in excessive‑work‑demand claims.
3. Focusing on how management action is communicated - the reforms require that management action be both reasonable and taken in a reasonable way. A sound decision delivered poorly can still undermine the defence. Employers should document decisions and communications, and train managers in feedback, performance management and disciplinary processes. Even the wording of an email or a file note may be scrutinised.
4. Training staff in workplace investigations - misconduct investigations are now expressly included as potential reasonable management action, including for workers who are witnesses. Timeliness, procedural fairness and communication practices may be examined.
5. Strengthening WHS compliance - repeated serious contraventions of the Work Health and Safety Act 2011 (NSW) are now a mandatory consideration in excessive‑work‑demand claims. Employers should ensure systems, supervision and workload management are defensible.
6. Preparing for claims to shift into other legal forums - while the compensation scheme has narrowed, WHS duties and Fair Work Act jurisdictions remain unchanged. Workers excluded from compensation may pursue general protections claims, discrimination complaints or take extended sick leave. Employers should review employment contracts and reinforce policies and training around temporary absences due to illness or injury.
We work with organisations to implement proactive injury management strategies that reduce risk, support workers and strengthen return‑to‑work results. Reach out to speak to us about how we can support your organisation - success@elevateconsultingpartners.com.au.
