Australia's proposed reforms for preventing psychological injuries

The New South Wales (NSW) government has introduced the Workers Compensation Legislation Amendment Bill 2025, aimed at addressing the rising number of psychological injury claims in the workplace. The proposed reforms focus on prevention, reducing reliance on the workers' compensation system by introducing new requirements for workers to substantiate claims before proceeding with compensation.

Psychological Injury Claims and Bullying Orders

Under the new bill, workers will need to secure an order from the NSW Industrial Relations Commission confirming that bullying or harassment has occurred before lodging a workers' compensation claim for a related psychological injury. This change marks a significant shift from the current system, where workers can file compensation claims for psychological injuries without prior evidence.

Psychological injuries, such as mental health disorders caused by workplace bullying, harassment, or witnessing traumatic events, have been increasingly common. In March, NSW Treasurer Daniel Mookhey revealed that the workers’ compensation scheme, iCare, expected an additional 80,000 psychological injury claims over the next five years. Mookhey also warned that premiums for businesses would rise by 36% in the same period.

The proposed changes are expected to ease the strain on iCare by filtering out frivolous claims. However, they may increase litigation costs for employers, as workers must wait for the Industrial Relations Commission to review claims before moving forward with compensation. Although the government aims to prevent psychological injuries by addressing their root causes, whether these reforms will achieve this goal is yet to be seen.

Impact on Employers

While the bill may reduce the number of psychological injury claims, it could create legal uncertainties for employers. Workers will now have to meet stricter requirements to file for compensation, which may make it harder for them to succeed in their claims. Employers will also face increased scrutiny over their workplace management practices, as they will be expected to demonstrate that they acted reasonably in relation to claims.

Employers should prepare for more detailed reviews of their operations, particularly when bullying or harassment claims are brought before the Industrial Relations Commission. The reforms will likely shift the focus to more preventative measures, putting greater responsibility on employers to maintain healthy and respectful workplace environments.

Narrowing the Path to Workers’ Compensation

The bill also introduces stricter criteria for accessing workers' compensation for psychological injuries. Workers must now be assessed as at least 31% impaired by their psychological injury in order to claim lump sum payments or damages. Under the current system, the threshold is just 15%. This change aligns NSW with the standards set by other states like South Australia and Queensland.

The bill also limits the circumstances under which workers can make claims. For example, compensation can only be sought for injuries resulting from violence, criminal conduct, witnessing traumatic events, or conduct found by the Industrial Relations Commission to be bullying, sexual harassment, or racial harassment. These tighter restrictions aim to reduce the overall number of claims.

Defining Reasonable Management Action

One of the key changes in the bill is the definition of “reasonable management action,” which refers to actions taken by employers that are fair and appropriate in the circumstances. The bill provides a list of actions that could be considered reasonable, such as providing feedback, offering counselling, suspending or standing down a worker, or investigating misconduct.

By clarifying what counts as reasonable management action, the bill helps employers understand their obligations and reduces the risk of litigation. Employers who can demonstrate they took reasonable steps to address a worker’s psychological injury will be better positioned to defend themselves against workers' compensation claims. This new definition aims to make the system clearer and fairer for employers, while also reducing the number of baseless claims.

Next Steps and Industry Responses

The government has referred the exposure draft bill to a parliamentary inquiry for further review. If the bill passes, it will come into effect on 1 July 2025, although amendments may occur based on feedback. Unions NSW have strongly opposed the changes, arguing that they will make it harder for workers to seek justice. On the other hand, Business NSW has supported the reforms, calling the current system “fundamentally broken.”

Overall, the NSW Workers Compensation Legislation Amendment Bill 2025 seeks to address the increasing number of psychological injury claims by shifting the focus towards prevention and requiring workers to substantiate their claims before lodging compensation applications. While these changes may reduce the burden on the workers' compensation system and benefit employers in the long run, they could also introduce new legal complexities. The success of the reforms will depend on their ability to prevent injuries while ensuring that workers who genuinely need support are not left behind.