Editorial note: Premium rates cited in this article reflect published averages and recent reporting. Rates vary significantly by industry, claims history and insurer. Small business owners should confirm current rates and obligations directly with their state or territory workers compensation authority or a licensed insurance broker before making any decisions.
What’s happening: Workers compensation costs are rising across Australia, driven primarily by a surge in mental health and psychological injury claims. New South Wales has passed landmark reforms in late 2025 and early 2026 designed to stabilise the scheme and prevent projected premium increases of up to 36% over three years.
Why this matters: For small business owners in every state, understanding how the system works, what is changing, and how to manage costs is increasingly important.
Workers compensation has always been one of the more complex forms of business insurance to manage. It sits across industrial relations, healthcare and legal systems simultaneously, and the rules differ significantly between states and territories. For small business owners without a dedicated HR or legal function, keeping up with changes can feel like a full-time job on top of an already full-time job.
In 2026, the pressure on the system has intensified. Medical costs have risen, mental health claims have increased dramatically, and several states are in the middle of significant legislative reform. The financial stakes for small businesses are real. Without intervention in NSW alone, employers were facing projected premium increases of up to 36% over three years, according to the NSW Small Business Commissioner.
Note: premium rates and legislative details vary by state and territory and are subject to change. The figures in this article reflect published averages and recent reporting. Owners should verify current rates and obligations with their state regulator or a licensed insurance broker.
The mental health claims surge
The most significant driver of cost and complexity in Australia’s workers compensation system right now is psychological injury claims. Analysis of Safe Work Australia data by workplace safety research firm Safetysure found a 161% increase in mental health workplace claims over the past ten years, with a median of 35.7 weeks off work and $67,400 in compensation per successful claim.
These claims are typically more expensive and more time-consuming to resolve than physical injury claims. They involve medical assessment, psychiatric review and often disputed liability, particularly around whether employment was the primary contributing factor to the injury.
The threshold for proving that connection differs by state. In NSW, employment must be the main contributing factor to a psychological injury, which is the toughest standard in the country following 2023 amendments. In Victoria, employment must be the predominant cause. In Queensland, it must be the major significant contributing factor. In South Australia, employment must be the significant contributing cause. In Western Australia and Tasmania, employment must be a significant contributing factor. Each state sets its own standard, and small business owners operating across multiple states face navigating different requirements.
For small businesses in customer-facing, healthcare, education and emergency services sectors, the risk is particularly elevated. Research from the Workplace Mental Health Institute indicates these sectors show consistently higher rates of psychological distress compared to national averages, which flows directly into claims frequency and premium calculations.
What is changing in NSW
NSW has passed the most significant overhaul of its workers compensation scheme in more than a decade, with two pieces of legislation passing in November 2025 and February 2026 respectively. The reforms, reported by the NSW Small Business Commissioner, aim to align workers compensation, industrial relations and work health and safety systems to create fairer, faster and more consistent outcomes, with clearer and more objective definitions for psychological injuries including bullying, excessive work demands, racial harassment and sexual harassment.
The practical changes for NSW employers, as confirmed by Herbert Smith Freehills Kramer in its February 2026 analysis, include clearer definitions of compensable psychological injuries with a claim only succeeding if employment is the main contributing factor, weekly payments for primary psychological injuries capped at 130 weeks unless whole person impairment is assessed at 21% or higher, and changes to the test for medical and treatment costs from reasonably necessary to the higher threshold of reasonable and necessary.
For NSW small business owners, the February 2026 reforms also prevent increases to premium rates until 30 June 2028, providing two years of premium stability while the broader system adjusts. The reforms are expected to progressively take effect from July 2026.
Premium rates by state
The following figures reflect recently published average premium rates and should be confirmed with your state regulator or broker as rates vary by industry and claims history.
NSW average rates sit at approximately 1.8% of wages, up around 8% from the previous year, overseen by icare. Victoria rates range from approximately 1.3% to 1.8% depending on industry, administered by WorkSafe Victoria. Queensland’s WorkCover rate sits at approximately 1.34% per $100 of wages, with safety discounts available. South Australia’s ReturnToWorkSA average is approximately 1.85%. Western Australia’s WorkCover WA rates range from approximately 1.0% to 2.5% depending on industry.
These rates are applied to the total wages bill and adjusted for claims history. A business with a poor claims record will pay more than the industry average. A business with a strong safety record and low claims history may qualify for discounts.
What small business owners can do now
The practical response to rising costs and greater complexity is not complicated, but it does require proactive attention rather than leaving workers compensation on autopilot.
Understanding your current premium and how it is calculated is the starting point. Premiums are calculated on wages multiplied by the industry rate, adjusted for claims history. Accurate wage reporting, neither over nor under, directly affects what you pay.
Investing in workplace safety and mental health support reduces claims frequency over time and directly affects your experience modifier. Research from the Workplace Mental Health Institute suggests organisations that implement comprehensive wellbeing strategies typically see a return on investment within 18 to 24 months through reduced absenteeism and improved retention rates.
For NSW employers, reviewing how psychological injury claims are managed is particularly important given the reforms taking effect from July 2026. The NSW Small Business Commissioner recommends that small businesses seek early legal or insurance advice if and when claims are made, particularly for psychological injuries, and continue checking icare and NSW Government channels for implementation details as regulations and guidelines are updated throughout 2026.
If you use contractors, it is worth checking whether any meet the definition of a deemed worker under your state’s legislation. Whether a contractor is covered typically depends on factors such as whether they work solely for you, use your tools, are paid hourly or do not operate an independent business with their own ABN. Getting this wrong creates unexpected premium and liability exposure. If you are unsure, check with your state or territory workers compensation authority.
Workers compensation is not a set-and-forget insurance. In 2026, with premiums moving, legislation changing and mental health claims continuing to grow, it deserves a proper annual review. Your state regulator is the most reliable starting point for current obligations and rates.
State regulator contacts for small business owners
- NSW: icare and the State Insurance Regulatory Authority at sira.nsw.gov.au
- Victoria: WorkSafe Victoria at worksafe.vic.gov.au
- Queensland: WorkCover Queensland at worksafe.qld.gov.au
- South Australia: ReturnToWorkSA at rtwsa.com
- Western Australia: WorkCover WA at workcover.wa.gov.au
- Tasmania: WorkSafe Tasmania at worksafe.tas.gov.au
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