Psychological injury claims in NSW: What recent changes to workers’ compensation law mean for employers
Need to know
From 1 July 2026, most NSW workers cannot recover compensation for a primary psychological injury unless it was caused by a defined "relevant event": violence, indictable criminal conduct, witnessing a traumatic incident, vicarious trauma, sexual harassment, racial harassment, bullying or excessive work demands.
Employment must now be the main contributing factor to the injury, a higher bar than the previous "substantial contributing factor" test under s 9A of the Workers Compensation Act 1987 (NSW).
The reasonable management action defence is now considerably broader. It covers a non-exhaustive list of management actions, extends to a worker's expectation or perception of those actions, and applies where the action was the significant cause of the injury.
Read on…
From 1 July 2026, most workers in NSW cannot recover workers' compensation for a primary psychological injury unless the injury was caused by a defined "relevant event". This is a significant change made by the Workers' Compensation Legislation Amendment Act 2025 (NSW)(Amendment Act), which impacts one of the increasingly common claims we see affecting employers in Workable Law & IR’s practice.
The new provisions apply to psychological injuries first notified to the employer on or after 1 July 2026. Claims notified before that date continue under the previous rules. Police officers, paramedics and firefighters are exempt from the psychological injury changes, and coal miners and emergency services volunteers are largely carved out.
We provide some further detail about these changes below and some tips for employers as well.
Psychological injuries must now have a stricter connection to employment to be compensable
The Amendment Act makes a series of changes, some substantial, to the Workers Compensation Act 1987 (NSW) (87 Act). This article focuses on changes made that affect whether a psychological injury sustained by a worker will be eligible for workers’ compensation in NSW.
Under the previous law, a psychological injury was compensable if employment was "a substantial contributing factor" under s 9A of the 87 Act. Employment did not need to be the dominant cause.
New s 8O replaces that test for primary psychological injuries. No compensation is payable for a primary psychological injury unless:
a) a defined relevant event, or a series of relevant events, caused the injury;
b) there is a real and direct connection between the relevant event and the worker's employment; and
c) the worker’s employment is the main contributing factor to the injury.
Section 9A no longer applies to primary psychological injuries at all.
"Main contributing factor" is the same, higher threshold that has applied to disease injuries under s 4(b) of the 87 Act. Where a worker's psychological condition has mixed causes, the worker’s employment must now be the main one. A primary psychological injury is one that does not arise as a consequence of a physical injury. Secondary psychological injuries are dealt with separately.
No relevant event, no claim
A new requirement that a primary psychological injury be caused by a "relevant event" to be compensable is a substantial departure from the existing law. New section 8G sets out an exhaustive list of what relevant events are, being:
a) being subjected to an act of violence or a threat of violence, or
b) being subjected to indictable criminal conduct, or
c) witnessing—
i. a traumatic incident happen, or
ii. a dead or seriously injured person at the scene of a traumatic incident, or
d) experiencing vicarious trauma, or
e) being subjected to sexual harassment, or
f) being subjected to racial harassment, or
g) being subjected to bullying, or
h) being subjected to excessive work demands, or
i) another event prescribed by the regulations.
In a significant narrowing of which injuries are eligible for compensation, general work stress, burnout that doesn’t meet the test for being subjected to excessive work demands, interpersonal friction, dissatisfaction with a restructure, anxiety about job security or a poor relationship with a manager will not found a claim unless the conduct arises from a relevant event as defined above and is not excluded by the reasonable management action test (more on that below).
The statutory definitions and the objective test
Each conduct-based relevant event now has its own statutory definition. It is important for employers to understand that while the tests for bullying and sexual harassment in the Amendment Act are similar to the existing tests in the Fair Work Act 2009 (Cth) and the Sex Discrimination Act 1984 (Cth) (SDA) as examples, they are not identical, meaning new jurisprudence as to the scope and application of these tests may be developed. ‘Racial harassment’ appears to borrow from the test for offensive behaviour because of race, colour or national or ethnic origin in 18C of the Racial Discrimination Act 1975 (Cth) (RDA). However, ‘excessive work demands’ is a new legal concept which suffers from some broad and ambiguous drafting, and so we will have to await the development of case law in relation to these conduct tests to understand their full scope and application.
Bullying (s 8A) is defined as an individual or group repeatedly behaving unreasonably towards the worker, or towards a group of workers of which the worker is a member. The repetition requirement means a single incident, however serious, is not bullying, though it may qualify under another category such as an act of violence. Differences between this test from the Amendment Act and the test in s 789FD of the FW Act are that the test under the Amendment Act does not:
(a) require the conduct to occur while the “worker isat work” – albeit the worker’s employment is still required to be the main contributing factor to the worker’s injury; and
(b) does not require that the relevant behaviour creates a risk to health and safety, albeit presumably this will be self-evident by the worker sustaining a psychological injury for which they are seeking compensation.
Sexual harassment (s 8I) means an unwelcome sexual advance, an unwelcome request for sexual favours, or other unwelcome conduct of a sexual nature in relation to the worker. This test, however, is missing the objective element that appears in s 28A of the SDA, namely that the unwelcome conduct occurs in circumstances in which a reasonable person, having regard to all the circumstances, would have anticipated the possibility that the person harassed would be offended, humiliated or intimidated.
Racial harassment (s 8E) means an act reasonably likely in all the circumstances to offend, insult, humiliate or intimidate the worker, done because of the worker's race, colour or national or ethnic origin. The drafting borrows directly from s 18C of the RDA; however, it misses the element that the conduct does not relate to an act done “in private”, as required by s 18C of the RDA.
Excessive work demands (s 8B) are demands that are beyond the requirements expected of the worker's role, repeated or persistent, and not reasonable in all the circumstances. It requires specific consideration of the work the worker was employed to do, industry standards and the employee’s remuneration/compensation. Section 8M prescribes a long list of mandatory (and in some cases, ill-defined) factors that must be considered when assessing whether work demands made of a worker are ‘excessive’. These are:
a) the usual patterns of work in the industry, or part of the industry, in which the worker is employed,
b) supervision of the worker, including—
i. level of control over the worker’s tasks, and
ii. whether there is unreasonable surveillance of the worker,
c) the nature of the worker’s role, the worker’s level of responsibility and the nature of the worker’s employment arrangement,
d) whether the worker is entitled to receive—
i. overtime payments, penalty rates, an on-call allowance or other compensation for working additional hours, or
ii. a level of remuneration that reflects an expectation of working additional hours,
e) the needs of the workplace in which the worker is employed,
f) staffing levels in the workplace, including the mix of qualifications and skills of employees, as the levels and mix relate to the worker’s workload,
g) industrial agreements and arrangements relevant to the worker,
h) repeated and serious contraventions of the Work Health and Safety Act 2011 and the regulations made under that Act and any other relevant work health and safety requirements,
i) any other relevant matter.
Overlaying all four categories is s 8L, which requires an objective (‘reasonable person’) test to be applied when considering whether an act or omission amounted to a worker being subjected to bullying, excessive work demands, racial harassment or sexual harassment that caused a primary psychological injury. Despite requiring that an objective test be applied, the Amendment Act also provides that a worker's perception of the event is relevant, but only to the extent that perception is “reasonable”. It is very difficult to understand how this will be applied in practice.
This should change the position under the existing case law, where a worker's genuinely held but mistaken perception of real events could support a claim. Under the new provisions, an honest belief that conduct was bullying is not enough. The conduct must objectively meet the definition, albeit the worker's perception, if reasonable, will be considered.
Reasonable management action: a broader defence
The reasonable management action exclusion in section 11A has been amended. The old defence applied only to reasonable action taken with respect to a closed list of seven matters: transfer, demotion, promotion, performance appraisal, discipline, retrenchment, dismissal, or the provision of employment benefits.
The new defence is considerably wider. No compensation is payable where the psychological injury was caused by reasonable management action taken or proposed to be taken, by the worker's expectation of reasonable management action, or by the worker's perception of it. Following further amendment by the Workers Compensation Legislation Amendment (Reform and Modernisation) Act 2026, the defence applies where the management action was the “significant cause” of the injury. That is a lower causal bar for employers than the previous "wholly or predominantly caused" formulation.
"Reasonable management action" is now defined in s 8F as management action taken in a reasonable way and which is reasonable in all the circumstances. The section then gives a non-exhaustive list of examples of what can constitute reasonable management action. This includes but is not limited to: performance appraisal and feedback, counselling, demotion, redeployment, retrenchment, disciplinary action, dismissal, investigations of alleged misconduct (including investigations in which the worker was merely involved or a witness), promotion including unsuccessful promotion, leave decisions, benefits, reclassification, suspension and stand-down, training, transfer, and communications in connection with any of those actions.
Two expansions deserve particular attention. The list or what can be reasonable management action is no longer closed, so day-to-day management activity not previously covered can now attract the defence. And extending the defence to a worker's expectation or perception of management action addresses scenarios where, for example, a worker sustains a psychological injury in anticipation of a performance management process rather than because of anything that has actually occurred.
What employers should do now:
There are a number of actions employers could consider in light of these changes. These include:
Considering whether bullying and harassment policies need to be changed in relation to the new definitions of bullying, sexual and racial harassment and excessive work demands in the Amendment Act
Looking at business record keeping for performance management processes. Performance management records may be decisive in claims where the reasonable management action exclusion is relied on. Similarly, position/job descriptions matter because excessive work demands are measured against "the requirements expected of the worker's role". As such, employers should ensure PDs accurately describe work responsibilities and workload requirements. Rosters, staffing data and remuneration structures could now all be relevant to claims regarding injuries arising out of excessive work demands, so businesses will assist themselves if such records are clear, defensive, accurate and available.
The reasonable management action defence turns on manner as much as substance. A defensible decision communicated badly can still lose the defence, because s 8F requires that not only is the action itself reasonable, but that the action is taken in a reasonable way. Businesses should consider documenting both the decisions that are made and how they are communicated, and train managers in providing feedback, managing performance and taking disciplinary action in a reasonable, fair and effective way. Communications connected with management action may themselves be relevant to the defence, which means, for example, that the wording of an email conveying an outcome, or a file note of a discussion had as part of a performance improvement process, may be relevant to the assessment of whether management action is reasonable.
Training staff in workplace investigations. Misconduct investigations warrant specific attention as they are now specifically listed as a form of action which can be ‘reasonable management action’. This includes for workers who are witnesses (in addition to respondents), but only if run reasonably. Timeliness, procedural fairness and communication with participants could all be scrutinised.
Staying on top of WHS. WHS compliance now explicitly feeds into compensation liability when excessive work demands are alleged. Repeated serious contraventions of the Work Health and Safety Act 2011 (NSW) are a mandatory consideration in assessing excessive work demands claims. Note too now that the NSW Code of Practice: Managing Psychosocial Hazards at Work now has statutory force (along with other codes of practice approved by SafeWork NSW).
The narrowing of the compensation scheme does not narrow anything else. WHS duties, the Fair Work Act jurisdictions all remain, and claims displaced from the compensation scheme may now surface in those forums instead. Employees who are unwell but who are now excluded from the workers’ compensation scheme may seek to agitate other workplace claims in order to seek compensation and/or take extended sick leave. Employers should review their employment contracts and consider whether they do, or should, contain terms permitting them to direct employees to attend independent medical examinations where necessary and appropriate, and also their policies, procedures, and staff awareness around general protections, including temporary absences due to illness or injury.
Contact us if you have any questions or would like to find out more: admin@workablelaw.com.au