NSW Workers Compensation reforms: what they mean for small business in 2026

Changes to the NSW Workers Compensation scheme are set to reshape employer obligations, claims management processes, and premium trajectories across the state. The reforms, passed in late 2025 and early 2026, represent the most significant overhaul of the system in more than a decade. 

Why the reforms were introduced 

According to icare, the workers compensation system has been under pressure due to rising psychological injury claims and the need for financial sustainability and modernised processes. Without intervention, employers were facing projected premium increases of up to 36% over three years. The reforms aim to align workers compensation, industrial relations and WHS systems to create fairer, faster, and more consistent outcomes. 

Summary of key reforms passed 

• Clearer and more objective definitions for psychological injuries, including bullying, excessive work demands, racial harassment and sexual harassment.
• A higher "reasonable and necessary" test for medical and treatment expenses.
• Referral of disputed psychological injury claims to the Industrial Relations Commission.
• Revised impairment assessment processes allowing only one principal Whole Person Impairment assessment.
• An 18‑month freeze on average premium increases to ease cost pressures for small businesses.
• New intensive return-to-work programs offering extended medical benefits and income replacement. 

Impacts on small business 

Small businesses are set to benefit from short-term premium stability but will face increased responsibility in managing psychological safety and workplace behaviour. Clearer definitions reduce uncertainty in managing staff performance and interpersonal issues, but greater documentation and proactive HR practices will be essential. 

How small businesses should prepare 

1. Review and update HR and WHS policies 

Ensure workplace behaviour, bullying, performance management, and psychosocial safety policies comply with the clarified definitions and requirements under the new laws. Safework NSW provides resources to support risk mitigation of unsafe work practices: SafeWork NSW | NSW Government. 

2. Train managers in “reasonable management action” 

Managers must understand what constitutes fair and lawful management behaviour to reduce risk of psychological injury claims. This includes documentation, clear communication, and early intervention. 

3. Strengthen early intervention practices 

Adopt proactive support strategies for staff showing signs of stress or injury to minimise claim severity and duration. 

4. Prepare for new dispute pathways 

Small businesses should be aware of the IRC’s role in resolving psychological injury disputes and ensure they seek early legal or insurance advice if and when claims are made. 

5. Monitor updates from SIRA and icare 

Regulations and guidelines are still being updated into 2026, and employers should continue checking icare and NSW Government channels for implementation details. 

Support and resources 

• Visit the State Insurance Regulatory Authority (SIRA) website for regulatory information on Workers Compensation: Workers compensation - SIRA  

Learn more about Workers Compensation reform from the NSW Government: 

• Protecting workers compensation for future generations | NSW Government 
• Next steps for workers compensation reform | NSW Government 
• Agreement reached on workers compensation reforms | NSW Government