On Friday, 9 May 2025, the NSW Government released an Exposure Draft of the Workers Compensation Legislation Amendment Bill 2025 (opens a new window), proposing significant reforms to the legislation underpinning the state's workers' compensation scheme.
These proposed changes build on the NSW Government's earlier announcement (opens a new window) in March 2025 outlining the need for urgent reform to address the rising incidence and cost of psychological injury claims.
Key implications for employers
Although the exposure draft is still subject to consultation and has not yet been introduced to Parliament, the proposed reforms have the potential to create far-reaching impacts for employers across claims management, dispute resolution, and workplace practices.
If passed, these reforms would mark the most significant overhaul of the NSW workers' compensation scheme in more than a decade.
For NSW employers, the proposed legislation foreshadows significant implications for claims management, dispute resolution frameworks, and organisational workplace practices, particularly regarding psychological injury claims.
The Key Proposed Changes
The reforms introduce a range of measures aimed at narrowing the scope of compensable psychological injuries, refining claim eligibility, and adjusting compensation thresholds.
A significantly narrower definition of compensable psychological injuries.
Under the proposed new legislation, psychological injuries will only be compensable if they arise from a defined "relevant event."
These events are limited to specific, objectively identifiable incidents, including: acts of violence or threats of violence; being subjected to indictable criminal conduct; witnessing incidents that result in death, serious injury, or the threat of either; experiencing vicarious trauma (within a defined scope); or being subjected to conduct that has been formally found by a court, commission, or tribunal to constitute bullying, sexual harassment, or racial harassment.
New statutory definition of 'reasonable management action'
The exposure draft proposes a new legal definition of 'reasonable management action.' Under this definition, if an employer takes actions that are carried out in a ‘reasonable way’ and are ‘reasonable in the circumstances’, those actions will be presumed not to cause a compensable psychological injury.
Tribunal, commission or court finding required for harassment or bullying-related claims
Under the proposed reforms, psychological injury claims that are alleged to result from bullying, sexual harassment, or racial harassment will only be considered compensable where the conduct in question has been the subject of a formal and binding determination by a court, commission, or tribunal.
Exclusion of work pressure claims from compensation with limited medical support
Under the proposed changes, psychological injuries caused solely by work pressure will no longer be eligible for compensation. However, workers will still be entitled to limited support covering reasonable medical and related treatment costs for up to eight weeks after the claim is reported.
Introduction of a 31% whole person impairment threshold for continuation of weekly benefits
The proposed reforms establish a minimum whole person impairment (WPI) threshold of 31% for psychological injury claims to qualify for ongoing weekly benefits beyond 130 weeks. In cases where the assessed impairment falls below this threshold, entitlement to weekly compensation payments will cease upon reaching the 130-week limit.
Introduction of a 31% WPI threshold for permanent impairment claims
Under the proposed amendments, psychological injury claims will be required to meet a heightened whole person impairment (WPI) threshold of 31% or greater before the injured worker becomes eligible to receive lump sum compensation for permanent impairment. Additionally, only those meeting or exceeding this threshold will be entitled to initiate a Work Injury Damages claim. Claims falling below this impairment level will be ineligible for such benefits or legal recourse under the proposed regime.
Shift to 'reasonable and necessary' test for medical expenses
The proposed reforms will replace the current ‘reasonably necessary’ test for approving medical, hospital, and rehabilitation expenses with a ‘reasonable and necessary’ standard, consistent with that used in the NSW Compulsory Third Party (CTP) Scheme. This change is expected to raise the criteria for approving treatment costs, requiring that expenses not only be appropriate but also justified as necessary for the injury sustained, which may result in a more focused and controlled approach to medical and allied health expense reimbursements.
Joint medico-legal process for Whole Person Impairment (WPI) assessments
The Exposure Draft introduces a new process requiring both insurers and injured workers to agree on the choice of medical experts who will assess Whole Person Impairment. This joint approach is designed to improve fairness and transparency in impairment evaluations, reduce conflicts over which experts are appointed, and make the assessment process more efficient by ensuring both parties have a say in selecting the medical assessor.
Annual indexation of pre-injury average weekly earnings (PIAWE)
The Exposure Draft proposes a shift from the current rolling basis to a fixed annual schedule for the indexation of pre-injury average weekly earnings. Under this revised approach, adjustments to PIAWE will be calculated and applied once each calendar year, rather than continuously throughout the year, thereby creating greater predictability and administrative consistency in benefit calculations.
Introduction of a prescribed employer excess on claims
The proposed reforms include the introduction of a fixed employer excess on each workers’ compensation claim, meaning employers will be required to cover a set amount of the claim costs upfront. The exact amount of this excess will be determined later through regulations.
Next steps in the reform process
The exposure draft has been referred to the Legislative Council Standing Committee on Law and Justice, which will hold a public hearing on 16 May 2025.
The Committee will consider feedback and make recommendations before the Government determines the final legislative path.
For more information about the parliamentary inquiry process, including key documents, go to the Parliament of NSW (opens a new window) website.
We are here to help
Our team will work closely with NSW employers throughout the reform process to support a smooth transition.
If you would like to understand more about the exposure draft reforms or how Lockton can assist you in preparing for the changes, please get in touch with your Lockton specialist.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
