What NSW's reforms tell us about the future direction of workers compensation in Australia

A scheme under pressure

Workers compensation is undergoing one of its most significant periods of reform in more than a decade. Rising claim costs, rapid growth in psychological injury claims and changes to premium settings are reshaping how employers manage workplace risk. Workers compensation can no longer be viewed as a once-a-year insurance renewal exercise. It now demands ongoing attention across safety, people management, claims handling and premium strategy.

Psychological injury claims are changing the landscape

One of the biggest drivers of change is the rapid rise in psychological injury claims. In NSW, the Treasurer noted that psychological injury claims represented around 12% of total workers compensation claims but 38% of total scheme costs, with the average cost of a psychological injury claim increasing from $146,000 in 2019 – 2020 to $288,542 in 2024 – 2025. Nationally, Safe Work Australia reports that mental health conditions now account for 12% of all serious workers compensation claims, increasing 14.7% in the past year and 161% over the past decade.

What has changed for psychological injury claims?

The NSW reforms introduce a narrower and more structured approach to psychological injury claims. Primary psychological injury claims are now assessed against a more defined set of workplace events and conduct, such as bullying, sexual harassment, racial harassment, excessive work demands, workplace violence, threats of violence, traumatic incidents or vicarious trauma. The reforms also increase the Whole Person Impairment (WPI) threshold for some psychological injury entitlements, introduce new claim pathways and place greater emphasis on evidence, incident particulars and the distinction between compensable workplace conduct and reasonable management action.

“Rate freeze” does not mean “premium freeze”

Premiums are also front of mind for employers. The NSW Government has introduced a temporary workers compensation premium rate freeze for the 2026 – 2027 and 2027 – 2028 policy years, with Workers Compensation Industry Classification rates maintained at 2025 – 2026 levels. However, employers should not assume their own premium will remain unchanged. An individual employer’s premium may still increase or decrease depending on wages, business activity, claims experience, incentive eligibility and classification accuracy. This makes accurate wage declarations, correct industry classification, proactive claims management and strong return-to-work performance more important than ever.

Return-to-work performance is now a critical lever

Return-to-work management remains one of the most practical areas employers can control. Workers with psychological injuries generally experience poorer return-to-work outcomes than those with physical injuries, and Safe Work Australia data shows national return-to-work rates have fallen in recent years. The data also reinforces the value of early intervention: workers with a return-to-work plan achieve significantly better outcomes than those without one, while workers who receive support from their employer before a formal claim is lodged are nearly twice as likely to successfully return to work. For employers, this highlights the importance of having an effective return-to-work policy, a trained return-to-work coordinator where required (or trusted external advisor), suitable duties processes and clear communication between the worker, employer, treating practitioners, insurer and broker.

Medical treatment decisions will receive greater scrutiny

The reforms also change how medical and related treatment is assessed, shifting the scheme towards a “reasonable and necessary” test rather than the previous “reasonably necessary” standard. While this may sound like a technical change, it is expected to place greater emphasis on evidence, appropriateness, treatment planning and whether proposed treatment is genuinely required to support recovery. For employers and injury management teams, the early stages of a claim are becoming increasingly important, particularly around provider selection, treatment pathways, documentation and the alignment between medical treatment and return-to-work planning.

What employers should do now

The reforms reinforce that workers compensation, workplace safety and people management are now more closely connected than ever. Employers should be reviewing their psychosocial risk management frameworks, strengthening incident reporting and documentation, training managers on workplace conduct and early escalation, and ensuring return-to-work arrangements are more than just a compliance exercise. In a changing scheme, the employers that are best placed to manage cost and risk will be those that act early, keep accurate records, understand their premium drivers and seek advice before claims become complex. Strong prevention, early intervention and disciplined claims management remain the best tools for protecting both workers and business performance.

While many of these legislative changes are specific to NSW, the underlying trends are being felt across Australia. At Omnisure, we help businesses navigate workers compensation with practical advice on premium strategy, claims management and return-to-work outcomes. If you’d like to discuss how these developments may impact your business, we’d love to chat.

What NSW’s reforms tell us about the future direction of workers compensation in Australia