NSW Workers Compensation Reform: What Boards and CEOs Need to Know (and Where Responsibility Ends)
NSW is in the midst of a major shake-up to its workers compensation system, driven by a surge in psychological injury claims and a multi-billion dollar funding shortfall. With the Workers Compensation Legislation Amendment Bill 2025 passing through the NSW Lower House, the rules around what employers owe their people, particularly when it comes to mental health are shifting fast.
For board members and CEOs, understanding where legal responsibility begins and ends is no longer just a matter of policy; it’s a critical business risk. The stakes are high: get it wrong, and organisations may face financial penalties, reputational damage, or even personal liability for directors.
This article explains what’s changing in NSW workers compensation, breaks down the key elements of the new legislation, and offers practical guidance for boards and executive leaders on where their responsibilities lie and how to future-proof their business and workforce.
I. Overview: What’s Changing in NSW Workers Compensation
The Workers Compensation Legislation Amendment Bill 2025 marks one of the most significant updates to workplace safety and compensation in recent years. The impetus for reform is clear: the NSW workers compensation scheme is facing a massive financial deficit, with rising psychological injury claims threatening its sustainability. Treasury and scheme regulators are under pressure to rein in costs, but without sacrificing support for genuinely injured workers.
What’s changed? Here are the key headlines:
- Temporary lowering of the Whole Person Impairment (WPI) threshold: The threshold for long-term compensation support drops from 31% to 25% (from October 2025) but only for a limited period. While this opens the door for more workers to access long-term benefits, critics argue it’s a short-term fix rather than true reform.
- Faster claims processing for psychological injuries: Claims arising from bullying or harassment must now be processed within eight weeks, speeding up support for affected employees.
- Recognition of “excessive work demands” as a valid cause of psychological injury: For the first time, the system explicitly acknowledges that unreasonable workloads and pressure can lead to legitimate claims.
- Stricter legal support requirements: Scheme-funded lawyers will only act when there is a “reasonable prospect of success,” which may limit access to legal support for complex psychological cases.
The driving forces are financial and social: the scheme’s deficit has reached crisis levels, psychological claims are rising, and there’s a need to balance cost containment with genuine worker support. These changes follow a wave of commentary from workplace and legal experts.
For a detailed breakdown, see:
II. What Boards and CEOs Need to Know: New Risks and Responsibilities
The reforms to NSW workers compensation are more than just paperwork, they represent a significant shift in what boards and CEOs must do to meet their duty of care. Understanding the boundaries of your responsibility is crucial, particularly given the growing recognition that psychological harm is a safety risk under Work Health and Safety (WHS) legislation.
Legal Obligations in Focus:
Under NSW law, boards and CEOs are required to exercise “due diligence” to ensure their organisation complies with WHS duties. This now explicitly includes psychosocial risks, such as stress, burnout, bullying, harassment, and excessive workloads. Failing to identify and control these risks can expose directors and officers to personal liability.
Recent Case Law Matters:
Courts are increasingly holding employers to account for psychological harm. A recent Victorian case (see: Workplace harassment: Victorian Supreme Court ruling) confirmed that even if a sexual harassment policy exists, employers can still be liable if policies are not actively communicated and acknowledged by all employees. In short: a policy that sits unread in a folder won’t protect you.
Practical Scenarios for Boards:
- When is a mental health claim your responsibility? If the harm is triggered by an uncontrolled psychosocial risk (e.g. unchecked bullying, unmanageable workloads, poor change management), it is squarely in your remit.
- How do you protect the board? It’s about more than having policies; it’s about communication, staff training, ongoing monitoring, and documenting what actions have been taken. Evidence of a “living” approach to risk management is your strongest defence.
- When “known but not acknowledged” = liability: If policies exist but are not known or regularly revisited by staff, courts may still find the board responsible for any resulting harm.
SMEs vs Large Employers:
For companies with fewer than 200 employees, the new reforms don’t carry the threat of industrial manslaughter prosecution (reserved for the most serious WHS breaches in larger organisations). However, the obligations for board members and CEOs to manage psychosocial risk remain significant and failure to do so can result in legal, reputational, and financial consequences.
Ultimately, directors and CEOs can’t afford to treat psychosocial risk as a “soft” issue. It is now a board-level compliance matter that demands proactive, ongoing oversight.
III. Where Responsibility Ends (and Where it Doesn’t)
One of the most pressing questions for boards and CEOs is where their responsibility for psychological injury stops and where it continues. Under the NSW Workers Compensation reforms, employers are generally not responsible for degenerative or pre-existing mental health conditions, unless those conditions are triggered or significantly worsened by work-related psychosocial risks.
The “Trigger” Test
Courts and regulators focus on whether the workplace environment triggered or aggravated an employee’s mental health condition. If the injury or illness is wholly unrelated to work, such as a pre-existing or degenerative mental health issue not exacerbated by workplace factors, employers are usually not liable. However, when work stressors like bullying, unmanaged workloads, or poor communication contribute to harm, responsibility falls squarely on the employer.
You can read more at:
The Grey Areas
What if your policies are up-to-date but sit unread in a handbook, or your mental health training is one-off rather than ongoing? Courts have found that having policies “on paper” is not enough, they must be implemented, actively communicated, and acknowledged by staff. In a recent case, an employer was held liable despite having a sexual harassment policy, because it wasn’t properly socialised among employees (expert analysis).
Beyond Tick-Box Compliance
To avoid unnecessary liability, boards and CEOs should take real-world steps:
- Regularly review and update policies
- Train and retrain staff
- Create systems for anonymous reporting and feedback
- Monitor risk indicators and act quickly when issues arise
Genuine, ongoing action, not just policies offers the best protection. The bottom line? Boards are only off the hook if they can show a culture of action, not just compliance.
IV. Gaps in the Reform: What the Bill Gets Right, and Where It Falls Short
While the Workers Compensation Legislation Amendment Bill 2025 is designed to tackle the rising tide of psychological injury claims and financial stress on the NSW scheme, it’s not without serious gaps.
The drop in the Whole Person Impairment (WPI) threshold from 31% to 25% for long-term support is only a temporary fix. For most workers suffering psychological injury, even 25% WPI remains an almost insurmountable barrier; many genuine cases still won’t meet this high bar. This means many who need long-term help will fall through the cracks, especially once the temporary threshold expires. See analysis at HR Leader.
The Bill promises faster claims processing for psychological injuries, especially those caused by bullying or harassment. But without addressing the root causes like poor leadership, excessive workload, or toxic workplace culture. These changes risk being little more than window dressing.
There’s also concern that tightened legal support rules could deny access to justice for workers with complex but valid cases, as legal aid may be harder to secure unless success is virtually guaranteed.
Ultimately, psychological safety isn’t just a compliance issue, it’s a business imperative. Poor mental health drives higher turnover, absenteeism, and lost productivity, costing Australian businesses billions annually (SafeWork Australia). Boards and CEOs can’t afford to rely on minimum legal compliance alone; true protection comes from proactive leadership, a healthy culture, and genuine engagement with workplace risk.
In summary: The new laws offer some steps forward, but don’t fix the system. Forward-thinking boards and CEOs should see this as a baseline, not a finish line.
VI. What Good Practice Looks Like in 2025
With the legal landscape evolving and psychological injury claims on the rise, boards and CEOs can no longer afford a “set and forget” approach to workplace mental health. Best practice in 2025 means building a resilient, compliant organisation, not just ticking boxes.
Visible leadership is essential. Directors and senior executives must be seen to champion psychological safety, sending a clear message that wellbeing is business-critical. This means not just signing off on policies, but modelling the right behaviours every day.
Proactive communication is the next layer. Policies on bullying, harassment, and psychosocial risk need to be up-to-date and understood, not just uploaded to SharePoint and forgotten. Make sure every employee knows how to access support and what steps to take if issues arise.
Move beyond the annual survey: real-time visibility into psychosocial risks is now expected. That means systems for regular check-ins, anonymous feedback, and pulse surveys, ensuring problems are caught early.
Clear reporting and feedback mechanisms empower staff to raise concerns safely and ensure issues are acted on, not just recorded.
Finally, invest in ongoing board education. Directors should regularly refresh their understanding of psychosocial hazards, WHS obligations, and the latest best practices. International standards like ISO 45003 (Occupational health and safety management, psychological health and safety at work) and guidance from SafeWork Australia offer practical frameworks.
The bottom line: In 2025, a defensible approach means visible leadership, open communication, real-time risk visibility, and board-level commitment supported by global standards and best-in-class practices.
VI. How GRACEX Supports Boards and CEOs
For boards and CEOs, knowing what’s happening on the ground right now, is the difference between compliance and costly surprises. That’s where integrated, in-flow tools like GRACEX step in. Rather than being “just another platform,” GRACEX is embedded directly within your existing Microsoft 365 environment (Teams, Outlook, SharePoint), so there’s no new log-in or separate portal for employees.
GRACEX equips leaders with real-time visibility through practical features like pulse checks, risk dashboards, and automated evidence trails. You can spot emerging issues; burnout, bullying, disengagement, before they escalate, and demonstrate due diligence with robust data when regulators or insurers come calling.
Because GRACEX operates entirely inside your own infrastructure, you retain full data sovereignty and control, making it easier to meet strict compliance standards while building a culture of wellbeing.
Want to know if your workplace is truly safe and compliant? Learn more about GRACEX’s Resilience Operating System for Australian SMEs.
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NSW is raising the bar for psychological safety and workers compensation, making it more urgent than ever for boards and CEOs to get proactive. Simply having policies on paper is no longer enough. Culture, transparent communication, and active oversight are now critical to meeting your legal and moral responsibilities.
The bottom line? Know where your responsibility ends, but always aim for best practice to protect both your people and your business.
For further guidance on navigating these changes, explore our resources or book a GRACEX demo to see how real-time insights can keep your workplace safe and compliant.
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