The Safety Net Has Holes. 2026 Just Made Them Bigger.

Humn
Jan 22
7 min read

The great compensation contraction and why 2026 changes everything for work design

Across Australia in 2026, workers compensation is no longer the safety net many leaders assumed it was. What we are seeing is not incremental reform or administrative fine tuning. It is a deliberate contraction of ac

cess, duration and liability that shifts risk decisively back into workplaces.

Nowhere is this clearer than in New South Wales. Recent reforms have fundamentally reshaped how psychological injury is treated under workers compensation. While other states are taking different approaches, the national picture is now one of fragmentation rather than harmonisation.

For boards and executives, this is no longer an insurance issue. It is a governance, work design and leadership capability issue.

From safety net to gatekeeping system

The New South Wales workers compensation scheme did not stumble. It dropped.

Driven by a projected multi billion dollar deficit and political tolerance for reduced coverage in exchange for premium stability, the system has moved rapidly from broad access to strict gatekeeping.

Administered by the State Insurance Regulatory Authority NSW, the legislative reforms that came fully into force in 2025 have structurally reshaped psychological injury claims. The effect is fewer accepted claims, shorter support horizons, and greater evidentiary and financial pressure on both workers and employers.

This does not remove risk. It re-routes it.

What has changed in New South Wales and why it matters

The State Insurance Regulatory Authority NSW now administers a scheme where psychological injury claims face a significantly higher bar. Employment must be the main contributing factor. Claims must be anchored to objective events rather than generalised stress. Weekly payments are time limited unless a high impairment threshold is met. Medical treatment must satisfy a stricter reasonable and necessary test. Employers carry a greater upfront financial burden through increased excess arrangements.

The practical effect is simple. Fewer claims will be accepted. Claims that are accepted will end sooner. Disputes and workplace conflict will rise where harm is not prevented early.

This does not remove risk. It redirects it.

What is now law and how the bar has materially shifted

The current legal position in New South Wales (Workers Compensation Legislation Amendment (Reform and Modernisation) Bill 2025) materially changes what must be proven, how long support lasts, and where responsibility now sits.

Employment must be the dominant cause

Psychological injury claims now require employment to be the main contributing factor to the injury. It is no longer sufficient for work to be one factor among many.

This distinction matters in practice. Many psychological injuries arise from an interaction between work demands and non work factors such as caring responsibilities, prior mental health conditions, or cumulative life stress. Under the new framework, if employment cannot be demonstrated as the primary driver, the claim is unlikely to succeed.

For employers, this shifts attention squarely onto work design, workload allocation, role clarity and management practices. Where work is poorly designed or demands are unmanaged, employment causation becomes easier to establish. Where hazards are identified, consulted on and controlled, the causal link weakens.

Claims must be anchored to objective workplace events

Generalised stress or pressure narratives are no longer sufficient. Claims must be grounded in identifiable workplace events or behaviours, such as bullying, harassment, or other demonstrable conduct.

This does not mean harm must be dramatic or singular, but it must be specific. Patterns of behaviour, documented incidents, or repeated failures in role design and workload management now carry greater weight than subjective distress alone.

This elevates the importance of proper consultation and reporting systems. If organisations do not capture how work is actually performed, or fail to document hazards raised by workers, they create gaps that cut both ways. Either workers cannot prove harm, or organisations cannot demonstrate that risks were known and controlled.

Weekly payments are time limited

Weekly income support for primary psychological injuries is capped at 130 weeks unless the worker meets a 21 percent Whole Person Impairment threshold. Psychological injury is now treated as time bound except in the most severe cases.

Return to work planning must therefore commence earlier and be more effective. Where organisations lack suitable duties, capability matched roles or realistic workload redesign, the risk of breakdown, dispute and regulatory scrutiny increases sharply once payments cease.

Medical treatment must meet a higher evidentiary threshold

Treatment must now satisfy a higher reasonable and necessary threshold. This is not a wording change. It increases the level of justification required and gives insurers greater discretion to challenge duration, type and intensity of treatment.

The balance of power shifts away from treating practitioners and towards insurers and independent assessors. Evidence of functional improvement, capacity building and connection to work becomes critical.

For employers, unresolved psychosocial hazards undermine treatment effectiveness. If the work environment remains unchanged, treatment is more likely to be questioned or curtailed, increasing the likelihood of conflict and secondary harm.

Whole Person Impairment assessments are constrained

Workers are generally limited to a single principal Whole Person Impairment assessment. This reduces repeated reassessments and limits opportunities to re litigate impairment levels over time.

While this improves scheme efficiency, it raises the stakes of early assessment and documentation. Where injury severity escalates because hazards are left unaddressed, there may be little opportunity for reassessment later.

Employers now carry greater upfront cost

Employers are required to pay an excess equivalent to the first two weeks of weekly payments for new claims. Financial responsibility is pushed closer to the workplace, rather than sitting solely with the insurer.

This reinforces a central policy signal. If injury is harder to compensate and more costly upfront, prevention becomes the most effective cost control mechanism available to employers.

Threshold changes signal future direction

The proposal to immediately lift the psychological injury impairment threshold to 31 percent was not successful. For now, the 15 percent threshold for lump sum benefits remains.

However, this should not be read as stability. It reflects political compromise rather than a shift in intent. The trajectory remains toward higher thresholds and narrower access over time.

The national fracture and why consistency no longer exists

While New South Wales tightens eligibility, other jurisdictions are taking materially different paths.

Western Australia continues to recalibrate after recent legislative change. Tasmania and the Australian Capital Territory are responding primarily to cost pressures rather than access contraction.

Queensland has prioritised premium stability. Victoria is focusing on return to work efficiency following earlier reforms.

The idea of a nationally consistent workers compensation experience is now fiction.

For organisations operating across borders, misunderstanding jurisdictional differences creates immediate financial and compliance risk.

Prevention replaces compensation as the centre of gravity

As access to compensation narrows, prevention becomes the primary control. That is not a philosophical position. It is a legal and economic reality.

Under the Safe Work Australia model Work Health and Safety framework, organisations must identify psychosocial hazards, assess and reduce risks (so far as is reasonably practicable), consult with workers, implement controls and test the controls are working.

Consultation is not optional. It is a statutory duty.

Workers understand how work is actually done, where pressure accumulates, and which controls are realistic.

When psychological injury is harder to compensate, regulators predictably turn their attention upstream. In New South Wales, psychosocial reporting and enforcement activity is increasing, supported by specialist inspectors.

The message is clear. If harm cannot be compensated, it must be prevented.

Role design versus work done where risk hides

One of the most persistent failures in organisations is the gap between role design and role done.

Role design is what appears in position descriptions, policies and workload models. Work done is what actually happens when systems fail, resources are stretched, and people compensate to keep work moving.

Psychosocial risk lives in that gap.

Workers know where demands exceed capacity, where role clarity collapses, where emotional labour accumulates, and where informal controls are carrying formal risk. When consultation is superficial or absent, organisations miss the very controls that would reduce harm.

This is why surveys alone are insufficient. Engagement scores do not identify hazards. Hazard identification requires task analysis, consultation, and an honest examination of how work is actually performed.

What boards and executives must focus on in 2026

If claims management was once the centre of gravity, it no longer is. The focus must shift to work design, leadership capability and governance.

First, audit psychosocial hazards properly

Not climate surveys. Not wellbeing initiatives in isolation. Genuine hazard identification aligned to WHS law and ISO 45003 guidance.

Second, stress test return to work systems

Shorter benefit horizons and tighter eligibility mean weak return to work processes will fail workers and expose officers to regulatory and legal risk.

Third, consult workers early and often

Consultation is both a legal duty and a practical necessity. Workers already understand which controls would reduce risk. What they often lack is influence over how work is structured, resourced and prioritised.

Organisations that treat these reforms as a technical insurance issue will be caught flat footed. Those that treat them as a governance signal will adapt.

The compensation safety net is narrowing. The obligation to design safe work has never been wider.

The question leaders must answer in 2026

As workers compensation contracts, the margin for error in work design disappears.

When psychological injury is harder to compensate, organisations do not become safer by default. Risk does not vanish. It reappears in regulator attention, unresolved workplace conflict, failed return to work outcomes and board level accountability.

The organisations that will navigate 2026 well are not those with the best claims managers. They are the ones that understand how work is actually done, consult meaningfully with their people, and can evidence that psychosocial risks have been identified, assessed and controlled in line with the law.

This is where role design matters. This is where consultation stops being a formality and becomes a critical control.

If you are unsure whether your current approach would stand up to regulatory scrutiny, or whether your role design reflects the reality of work on the ground, this is the moment to test it.

Humn works with boards, executives and leaders to translate psychosocial safety obligations into practical work design, consultation frameworks and governance evidence that actually holds.