Proposed Reforms to Psychological Injury Compensation in NSW
The NSW Government has released a draft bill—the Workers Compensation Legislation Amendment Bill 2025—aimed at reshaping how psychological injuries are assessed and compensated in the state. The proposed changes come in response to a growing number of psychological injury claims, which are placing financial pressure on the public workers’ compensation system managed by icare NSW.
Supporters argue these reforms are essential to restore system sustainability. Critics, however, warn that the changes could significantly restrict access to support for workers suffering real psychological trauma.
Mandatory IRC Findings for Psychological Claims
One of the most controversial proposed reforms is the requirement that workers must first obtain a formal finding from the NSW Industrial Relations Commission (IRC) before submitting a compensation claim for psychological injury due to bullying, harassment, or similar workplace conduct.
Under the current law, workers can make claims directly through their employer or insurer. The new requirement adds a legal step, which could create delays and discourage claims—particularly from workers in high-stress environments such as healthcare, policing, and emergency services.
This change has been welcomed by business advocacy groups such as Business NSW but condemned by unions, who argue it will have a chilling effect on vulnerable workers.
Raising the WPI Threshold for Psychological Injuries
Currently, a worker who suffers a psychological injury must meet a 15% Whole Person Impairment (WPI) threshold to access lump sum compensation. The proposed reforms will increase this threshold to 31%—a figure that many medical experts and legal groups claim is excessively high and virtually impossible to reach.
For comparison, the WPI threshold for physical injuries will remain at 15%. According to the Law Society of NSW and Australian Lawyers Alliance, this change will effectively remove access to lump sum compensation for the vast majority of psychologically injured workers.
The Unions NSW has launched a campaign stating that more than 95% of current psychological injury claimants would fall below this new threshold.
Impact on First Responders and Essential Workers
One of the strongest arguments against the reform comes from representatives of frontline workers. Nurses, police officers, firefighters, and paramedics are routinely exposed to traumatic incidents—and the new process could make it harder for them to access support.
Under the proposed system, a paramedic suffering PTSD after responding to a fatal car crash would first need to go through the IRC process before being eligible to lodge a claim. Mental health advocacy groups such as Beyond Blue argue this extra step is counterproductive and could worsen mental health outcomes.
Business Support vs Union Resistance
While workers’ advocates have largely opposed the bill, many business and employer organisations have welcomed it as a necessary fix. Business NSW notes that psychological injury claims have grown 40% in the past five years, contributing to a projected $2.6 billion shortfall in the state’s workers’ compensation fund.
By raising thresholds and adding legal filters, the government hopes to deter frivolous or exaggerated claims. However, the burden may shift too far onto genuine victims, raising serious ethical and legal concerns.
The parliamentary debate is ongoing, with a formal inquiry expected to table findings before 30 June 2025. For now, it is critical that both employees and employers stay informed and prepare for potential changes.
Legal and Practical Implications for Workers
These proposed changes are complex and carry wide-reaching implications for both employers and employees. If you’re navigating the potential impact of the reforms—whether as a business owner reviewing your obligations or a worker concerned about your rights—our team at Jameson Law is ready to support you with practical guidance and informed legal care.
In real-world terms, this means that many workers who previously had access to mental health compensation may now find themselves excluded. The administrative and legal hurdles, such as the IRC ruling requirement, could lead to procedural delays and significantly lower the number of approved psychological claims.
Many mental health professionals are also speaking out. In submissions to the parliamentary inquiry, representatives from the Australian Psychological Society expressed concern that the reforms fail to consider the episodic and fluctuating nature of psychological injury, making it nearly impossible to meet a strict WPI percentage threshold at any one moment in time.
In contrast to physical injuries, where long-term damage is often observable and measurable, mental health conditions may not manifest in the same linear way. Delays in treatment and additional barriers to care can cause setbacks that worsen the injury over time, particularly if legal delays or stigma discourage early intervention.
The Double Burden on Frontline Workers
The current reform proposal places a double burden on essential service workers. First, they endure the trauma of frontline exposure to violence, tragedy, and emotional extremes. Then, when attempting to recover through legal channels, they face administrative obstacles that may feel dehumanising or invalidating. Many believe this contradicts the broader goal of public mental health resilience and workforce retention.
The NSW Council for Civil Liberties also raised concerns over how these reforms could disproportionately impact marginalised or culturally diverse workers, who already face language barriers, social stigma, or limited access to workplace advocacy. Without tailored support mechanisms, many may be excluded from the legal process entirely.
What Employers Must Know
Employers should start preparing now. These changes, if passed, will affect not only how claims are handled but also how workplace policies are drafted, complaints are investigated, and mental health incidents are recorded and responded to.
Human resources and legal teams must ensure that bullying and harassment complaints are meticulously documented and responded to promptly. Should a claim later reach the IRC, failure to show due process could affect its outcome. Employers are advised to review their internal dispute resolution processes and provide clear mental health pathways in line with guidelines from SafeWork NSW.
Additionally, companies may need to budget for legal representation in IRC matters, which could become a standard part of managing workplace disputes involving psychological claims. Legal fees, procedural timelines, and reputational risks should be factored into operational planning from now until the legislation is finalised and enacted.
Timelines and What to Expect Next
The proposed reforms are currently under parliamentary inquiry, with a final decision expected before 30 June 2025. If passed, they will come into effect on 1 July 2025. That leaves a narrow window for stakeholders to provide feedback and adapt to the coming legal landscape.
Submissions can be made via the NSW Legislative Council Standing Committee on Law and Justice. Workers, unions, medical professionals and employers are encouraged to participate in the inquiry to shape a fair and functional final bill.
Given the high volume of feedback already received, some amendments are likely. However, business groups continue to lobby strongly for stricter eligibility criteria, while unions remain equally vocal in defence of psychological care access.
As the legal landscape evolves, staying informed will be crucial. Legal advice from an experienced workplace injury lawyer can make the difference between a rejected claim and a well-documented, approved application. We recommend booking a consultation as early as possible if you think the new laws may affect your case.
Our Role: Legal Support That Makes a Difference
Jameson Law supports both employees and employers navigating psychological injury claims. We’ve helped frontline workers, healthcare staff, retail employees, educators, and public servants understand their rights, document their experiences, and pursue appropriate compensation under NSW law.
Our team can guide you through:
Preparing for IRC proceedings
Reviewing your WPI medical assessment
Challenging unfair rejections or delayed claims
Ensuring employer compliance with mental health protections
Whether you’re an employer reviewing your policies or a worker unsure about your future, our team is available to provide the legal clarity you need.
Call 1800 324 324 today or visit JamesonLaw.com.au to speak with a compensation law expert in NSW.
