The NSW workers compensation law changes, initially set to take effect from 1 July 2025, have now been delayed after the bill was referred to a parliamentary inquiry.
The Workers Compensation Legislation Amendment Bill 2025 will alter how psychological injury claims are assessed, making it harder for many injured workers to access support and compensation. These reforms represent the most substantial overhaul of the system in more than a decade, and if you’re working in New South Wales, they could directly affect your rights and entitlements.
Understanding Workers Compensation and Its Importance
Workers compensation is a mandatory insurance system that provides financial assistance to employees who have become ill or physically or psychologically injured due to their job. It covers:
- Weekly payments to replace lost income
- Medical and rehabilitation expenses
- Lump-sum payouts for permanent impairment
- Support for returning to work
The system operates on a no-fault basis, meaning you don’t have to prove employer negligence to receive benefits. Its core purpose is to ensure workers aren’t left financially stranded due to a workplace incident.
Why the NSW Workers Compensation System Is Changing
The main driver behind these reforms is financial sustainability. According to a ministerial release, while psychological injury claims only make up 12% of total claims, they consume 38% of total scheme costs. That imbalance has triggered a financial strain, with the state’s main scheme now covering just 85 cents per dollar of future liabilities.
Other key reasons for reform:
- Mental health-related claims are rising: According to SIRA, psychological injury claims increased by 64%, jumping from 5,616 in 2019–20 to 9,195 in 2023–24. This uptake in psychological injury claims have caused the average cost per psychological injury claim to nearly double from $146,000 in 2020 to $288,000 in 2025. In a parliamentary inquiry held on 17 June 2025, Treasurer Daniel Mookhey told Parliament that iCare’s deficit could blow out to $6 billion without reforms by 1 July 2025, as reported in News.com.au.
- Low return-to-work rates: Only 50% of workers with psychological injuries return to work within a year, compared to 95% for physical injuries.
- Escalating mental health trends have increased long-term system reliance.
Yes, if left unchanged, the NSW workers compensation scheme faces collapse.
However, Unions NSW believes that if the reforms leave many workers without support, they risk shifting the burden onto families, welfare, and charity.
Worse, if mental health conditions are left untreated, this could trigger a harmful cycle— injuries worsen, recovery slows, and long-term costs rise, putting even more strain on the system.
Key Workers Compensation Law Changes in NSW
1. Increased Whole Person Impairment (WPI) Threshold From 15% to 31%
The threshold for lump sum compensation will rise from 15% to 25% in October 2025, then to 30% from July 2026.
This means workers will need to prove a much more serious level of psychological impairment to access lump sum compensation or extended weekly payments. This can leave many genuine claims ineligible under the stricter threshold. Only a handful of injured workers are currently assessed in this range.
2. Narrower Definition of Psychological Injuries
The reforms make it clear that the incident must be closely tied to the person’s job—and that work needs to be the main reason the injury happened. These include:
- Exposure to violence or threats
- Witnessing a traumatic fatality or severe injury
- Vicarious trauma (in defined roles)
- Court-confirmed bullying or harassment
- Criminal workplace conduct
- Excessive work demands
Excluded: Claims based solely on general workplace stress or interpersonal conflict not deemed “excessive.”
3. Stronger Employer Defences
The reforms give more power to employers through the “reasonable management action” defence. If an employer acts reasonably during standard procedures (e.g., performance reviews, restructures), any resulting psychological injury may not be compensable.
As a result, claims tied to typical workplace operations are more likely to be rejected.
4. New 42-Day Claim Assessment Period
Psychological injury claims related to bullying or harassment must be assessed within 42 days. During this window, the injured worker may receive:
- Up to $7,500 for medical treatment
- Weekly income support
- This aims to reduce delays but adds a strict timeline for decisions.
5. Introduction of Employer Excess
Under the reforms, a fixed cost will apply per claim, requiring employers to pay a set amount upfront before insurance kicks in. The goal is to reduce psychological harm in workplaces before it leads to formal claims.
What These Changes Mean for Injured Workers
The Upside
- Faster Decisions: The 42-day claim window speeds up initial responses for certain psychological injury claims.
- More Clarity: Definitions of psychological injuries and employer actions may create less room for dispute.
- System Sustainability: By targeting cost blowouts, the scheme may become more stable and long-lasting.
- Extra Prevention Support: $344 million has been allocated for mental health support and prevention programs across NSW workplaces.
The Downside
- High Bar for Compensation: The 31% WPI threshold makes it nearly impossible for most workers to qualify for lump-sum payouts. But what does 31% WPI look like?
A 31% WPI for a psychological injury means the worker has a severe, permanent mental health condition that affects nearly every part of daily life. Under the NSW Psychiatric Impairment Rating Scale (PIRS), this level of impairment can involve:
- Significant difficulty managing daily tasks, such as showering, preparing meals, or remembering to eat without regular support.
- Severe social withdrawal, often remaining at home and feeling unsafe or overwhelmed in public spaces, even with assistance.
- Breakdown of personal relationships, with an inability to care for dependants or maintain close social connections.
- Impaired concentration and memory, making it hard to follow even simple instructions or focus for more than brief periods.
- Unfitness for work, with capacity limited to a few hours a fortnight, if any at all.
To reach 31% WPI, a psychiatrist must assess the worker using PIRS across six areas. Each is scored from 1 (no impact) to 5 (total impairment). A 31% rating usually reflects multiple Class 4 scores, showing serious impairment across most areas.
This level of injury is rare. It means the person’s condition is stable but unlikely to improve, even with further treatment.
Raising the WPI threshold to 31% will cut off access to compensation for most psychological injuries, leaving many without support. This risks a cycle of untreated conditions, delayed recovery, and rising long-term costs, undermining the system’s goal of sustainability.
- Unfair Disparity: Physical injury claims keep a 15% threshold—why is mental health valued less?
- Ongoing Financial Pressure: Once your weekly benefits stop after 130 weeks (around 2.5 years), you’re on your own unless you hit the 31% mark.
- Discouragement to Report: Complex eligibility rules and restrictive definitions may lead workers to hide or delay reporting injuries.
- Frontline Workers at Risk: Teachers, police, paramedics, nurses—those exposed to trauma daily—may now struggle to access support, despite the high-risk nature of their roles.
| Group | Position | Reason |
| Business NSW | Support | Focus on cost containment, reduced premiums |
| Legal Bodies | Oppose | Say 31% threshold is too harsh and unrealistic |
| Unions | Oppose | Concerned about access to justice for mental health claims |
| Mental Health Experts | Oppose | Argue mental conditions can’t be easily quantified like physical ones |
Getting Ready for the 2025 Changes
- Act Now: If you’re experiencing work-related mental health issues, seek medical and legal advice immediately. Talk to one of our Sydney Workers Compensation Lawyers or get a FREE claim evaluation now.
- Lodge Early: Claims lodged before 1 July 2026 (or the final date that will be set) may still be assessed under the current, more accessible rules.
- Understand Your Rights: Learn how the new thresholds and definitions affect your situation.
What’s Next for NSW Workers?
The NSW workers compensation reforms are now on hold, pending a parliamentary inquiry after strong opposition from unions and political parties. At issue is the proposed increase to the psychological injury WPI threshold, which experts warn could deny support to nearly all affected workers.
With growing political pressure and key details still under review, both the timing and final shape of the reforms remain uncertain. What should be clear, though, is that any changes must strike a fair balance between financial sustainability and genuine support for the workers who need it most.
Conclusion
Major reforms to NSW’s workers compensation laws are coming, with significant impacts for workers experiencing mental health issues tied to their employment. With tighter definitions, higher thresholds, and stronger employer defences, accessing compensation will become much harder—even for those with genuine, debilitating mental health issues.
We Can Help You Navigate These Changes
At BPC Lawyers, we understand how life-changing psychological injury can be. As multi-award-winning Sydney Compensation Lawyers, we offer personalised guidance to ensure your rights are protected. We stand by you amidst these reforms, and we will fight for fair outcomes and the maximum compensation you’re entitled to.
Get in touch with one of our expert Workers Compensation Lawyers Sydney for tailored legal advice.