On 9 May 2025, the Minns Labor Government released its Exposure Draft Workers Compensation Legislation Amendment Bill 2025 as part of the broader NSW workers-compensation reform 2025, alongside the Industrial Relations Amendment Bill. These twin proposals represent the most comprehensive reform to NSW’s workers-compensation system in a century. The draft legislation has been referred to a parliamentary inquiry, with public submissions open until 14 June.
The purpose of the NSW workers-compensation reform 2025 is to shift the system from one that predominantly “pays for harm” to one that actively prevents harm and facilitates early intervention. Treasury projections indicate that, without reform, the system will face more than 80,000 additional psychological injury claims over the next five years. icare, the nominal insurer, currently funds only 85% of its liabilities and operates at a daily deficit of approximately $5 million. Without reform, it expects average employer premiums to rise by 36% by 2028.
Why the NSW Workers-Compensation Reform 2025 was Inevitable
The current compensation scheme has proven inadequate in responding to the realities of psychological injury in the workplace. While 95% of physically injured workers return to work within a year, only 50% of those with psychological injuries do the same. The system spends seven times more keeping workers with psychological injuries off work than it does supporting their recovery. Compounding this is a 65% increase in psychological injury claims since 2022.
The Minns Government has positioned early intervention, prevention, and sustainability as core goals. The Exposure Draft aims to modernise the legislation to meet the evolving nature of workplace injury and the rising prevalence of mental health claims.
Eight Key Pillars of the NSW Workers-Compensation Reform 2025
- Clearer Legal Definitions
The draft introduces statutory definitions of psychological injury, distinguishing between primary and secondary injuries, and provides a legal meaning for “reasonable management action”. A list of recognised “relevant events” (such as bullying, assault, and traumatic exposure) helps clarify when psychological harm arises from work.
- Higher Eligibility Thresholds
The draft legislation raises the threshold for accessing lump sum compensation for psychological injuries from 15% to 30% whole-person impairment (WPI), aligning NSW with South Australia. It also ends weekly compensation benefits at 130 weeks unless the worker meets the 30% threshold.
- Two-Week Employer Excess
The draft legislation requires employers to pay wages and coordinate return-to-work plans for the first 14 days of any psychological injury claim. This measure aims to prompt immediate action to support the injured worker and reduce reliance on the insurer during the initial recovery phase.
- New IRC Jurisdiction for Bullying and Harassment
Workers alleging psychological injury due to bullying or harassment must first lodge a complaint with the NSW Industrial Relations Commission. The Commission will be empowered to issue “stop orders”, modelled on the existing Fair Work Commission framework, before a compensation claim can proceed.
- SafeWork NSW Reform
SafeWork NSW will become a standalone regulator with an expanded inspectorate focused on psychosocial risks. A new Psychological Health and Safety Strategy will guide enforcement and improve compliance in mental health-related WHS matters.
- Whole-of-Government Mental Health Programs
A range of new support mechanisms will be rolled out, including dedicated wellbeing units in the public sector, tailored training through the Black Dog Institute, and workplace mental health coaching via iCare for small to medium-sized businesses.
- Modernised Compensation Limits and Indexation
The maximum lump sum for permanent impairment will rise from $510,000 to $654,000, and benefit amounts will be indexed to CPI to preserve their real-world value over time.
- New Compliance and Enforcement Measures
The draft legislation introduces new offences for under-insurance and adopts anti-fraud mechanisms from the National Disability Insurance Scheme (NDIS), aiming to improve scheme integrity and reduce misuse.
Stakeholder Responses
Business NSW has expressed strong support for the reforms, particularly the higher impairment threshold and the introduction of the IRC process. They argue that the scheme has become too easily exploited in performance management contexts.
By contrast, the Australian Lawyers Alliance has criticised the proposed changes as a drastic curtailment of workers’ rights. They warn that few claims will meet the 30% WPI threshold. As a result, many genuinely injured workers will lose access to long-term benefits and lump sums.
Unions NSW has raised concerns about the added burden of the IRC process, fearing it may deter injured workers from reporting psychological harm or delay access to support services.
Rehabilitation specialists have welcomed the shift toward early intervention but cautioned that the 130-week benefit cap could worsen outcomes unless it is matched with robust treatment access.
Potential Advantages of the NSW Workers-Compensation Reform 2025
- Improved financial sustainability by reducing exposure to high-cost psychological claims
- Reinforced culture of prevention through earlier employer engagement
- Greater clarity for employers and workers due to clearer legal definitions
- Focus on return-to-work outcomes, not extended disengagement
Key Risks and Concerns
- Very few psychological injury claims currently meet the 30% WPI threshold under AMA-5, risking widespread ineligibility for lump sums
- Early termination of benefits at 130 weeks could push injured workers toward Centrelink or the public health system
- The 14-day wage excess may create cash flow issues for small businesses
- The requirement to pursue IRC proceedings before a claim may add delay, cost, and stress for vulnerable workers
What Employers Should Do
- Review and update HR and WHS policies to reflect the proposed definition of “reasonable management action”
- Budget for the employer excess and establish modified duties programs
- Conduct updated psychosocial risk assessments
- Prepare a tailored submission to the parliamentary inquiry by 14 June 2025
What Injured Workers Should Know
- Report hazards early and maintain clear documentation of incidents
- Seek medical attention as soon as possible—diagnosis timing will be critical under the new framework
- Understand the new requirement to raise bullying or harassment concerns through the IRC before claiming compensation
- Seek legal advice early to navigate the tightened thresholds and procedural changes
Key Dates
- 14 June 2025 – Submissions to the inquiry close
- July 2025 – Parliamentary hearings begin
- September 2025 – Inquiry report delivered
- Spring 2025 – Government expected to introduce final legislation
- 1 July 2026 (indicative) – Reforms likely to commence by proclamation
Conclusion
The 2025 NSW workers-compensation overhaul represents a significant transformation of the scheme. It aims to reduce costs, strengthen early intervention, and prioritise prevention—particularly for psychological injuries. The reforms promise clearer legal definitions, stronger regulatory oversight, and long-term sustainability. They also introduce higher thresholds, a 14-day employer excess, and a new procedural gateway through the IRC. These changes will have real impacts on both employers and injured workers.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
