Psychological injury, psychosocial safety and workers compensation sit at the centre of one of the most contested conversations in Australian workplaces today.
It’s a space shaped by strong views, evolving regulation and very real human impact, both for employees and for the businesses responsible for supporting them.
Hi, I’m Esther, Director of Seed HR. With more than 20 years’ experience supporting businesses through workers compensation claims, investigations and complex people matters, I have seen firsthand how policy intent can diverge from outcomes on the ground. That experience shapes how we support clients navigating psychosocial risk and psychological injury.
This article offers a snapshot of how these issues are currently playing out in practice, particularly for small and medium sized employers navigating psychological injury claims within an increasingly demanding system. It reflects one perspective shaped by decades of practical experience working alongside businesses, employees and regulators.
At Seed HR, psychosocial safety is a core part of how we think about workplaces, leadership and risk. Closing the gap between policy and practice is essential if workplaces are to become safer, fairer and more sustainable for everyone involved.
Psychosocial Safety Is Essential - Yet the Practical Reality Is More Complex
Over recent years, workplaces have been asked to lift their focus on mental health, workload, behaviour, culture and leadership and in many cases, this has driven positive change.
As expectations around psychosocial safety continue to rise, employers are being asked to apply increasingly nuanced standards in fast-moving, imperfect workplace environments. For many, the challenge lies in how those standards are applied day to day.
For many employers, particularly small and medium-sized businesses, the expectations are layered onto an already dense web of legal, operational and people management responsibilities. Unlike physical safety risks, psychosocial hazards are often subjective, situational and deeply influenced by individual perception and context.
This creates a challenging environment where employers are expected to act decisively, fairly and compassionately, while also navigating uncertainty about where their obligations begin and end.
Most business owners genuinely want to do the right thing by their people, but the gap between policy intent and day-to-day application can feel wide. It’s within this gap that uncertainty grows, decisions are second-guessed, and risk becomes harder to manage. These unresolved tensions are where the system is most tested, and where the next phase of reform is now turning its attention.
Reasonable Management, Psychological Injury and The Limits of the Current System
In theory, the framework allows employers to manage performance, address conduct issues, restructure roles and make operational decisions, so long as those actions are undertaken reasonably.
Many psychological injury claims arise during performance management, workplace change, complaints handling or disciplinary processes. As a result, these situations often involve difficult conversations, heightened emotion, and unfold quickly and under pressure. Even where employers have sought professional advice and acted in good faith, claims are often accepted before the full context is tested.
Investigations may later confirm that management action was appropriate, but by that stage the claim is often already well progressed with weekly payments commenced and decisions locked in regardless of the eventual findings.
For small businesses in particular, this creates significant exposure.
Unlike larger organisations, SMEs rarely have internal legal teams, specialist HR resources or the capacity to absorb prolonged claims processes. The financial cost, time burden and emotional toll can be substantial, regardless of the eventual outcome.
The system can have difficulty distinguishing between psychological harm caused by unsafe work environments and distress arising from lawful, reasonable management.
Reform on Paper vs Reality on the Ground
In response to growing concern about the sustainability and fairness of the workers compensation system, NSW has now moved into a formal period of reform. Recent legislative changes imply an intention to address the rising volume and cost of psychological injury claims, improve consistency in decision-making, and create a more workable framework for all parties involved. On paper, many of these changes appear measured and necessary.
As with any reform, the real test lies not in the legislation itself, but in how it is implemented, interpreted and applied in practice. Much of the detail that will shape outcomes for employers and workers alike will sit within regulations, guidelines and decision-making processes that are still evolving.
We’ve seen this before, where legislative change is introduced with the promise of clarity, yet businesses operate for months without practical guidance on how those changes will be applied day to day.
This often means employers are left making critical decisions in real time, such as managing underperformance, responding to complaints, or implementing necessary workplace change without knowing how those actions may later be assessed by an insurer or regulator. In some cases, businesses have taken early, well-intentioned steps to address issues, only to find that those same actions become central to a psychological injury claim months later.
From decades working inside this system, my advice is that waiting for “perfect process and direction” is rarely an option. Employers who document decisions carefully, seek professional advice early, and focus on fairness and process rather than outcome are better positioned when claims arise, regardless of how reforms ultimately settle.
This raises a broader question about what success actually looks like for employers, employees and the system as a whole.
If the goal is safer workplaces, fairer outcomes and a more sustainable system, reform needs to change how decisions are made in practice, not just the rules that sit behind them.
That means clearer thresholds for psychological injury, greater weight given to evidence gathered through proper process, and more consistent treatment of reasonable management action across claims. Without this, reform risks shifting responsibility without resolving the uncertainty employers and employees experience on the ground.
What a More Balanced System Could Actually Look Like
A balanced system supports both employee wellbeing and employer responsibility, and both can exist together without compromise.
Years of working alongside businesses through claims, investigations and recovery show that the most effective outcomes occur when prevention, process and accountability are treated as equally important.
This involves employers taking early, deliberate action to address concerns before they escalate.
Some businesses have done this by investing in early-intervention frameworks that equip leaders to identify psychosocial risk indicators early, hold consistent and respectful conversations, and respond before matters become formalised.
Seed HR’s leadership workshops show that when managers are supported with clear guidance, shared trauma informed language and practical tools, concerns are addressed earlier, trust improves, and escalation into formal claims becomes far less likely.
Larger companies, such as Atlassian, apply similar principles at scale by embedding psychological safety into everyday leadership and performance conversations.
While SMEs may not have the same resources as large organisations, the lessons are transferable. Clear expectations, consistent processes, early feedback and proper documentation reduce uncertainty for everyone involved. Importantly, documentation is used to support fairness and transparency, not just to defend decisions after the fact.
Creating healthier, more resilient workplaces requires more than responding to issues as they arise. It means building the structures, confidence and capability to identify risks proactively, act early, lead well and prevent problems before they escalate. When businesses move away from being consumed by legislation, systems and claims, they create space to focus on people, culture and meaningful growth.
If you are ready to shift toward a proactive, preventative approach that supports your people and strengthens your workplace, Seed HR can help you put the proper foundations in place to truly thrive.