Restructuring and redundancy processes can expose organisations to significant legal liability – even where the underlying commercial decision is entirely justified.
A growing area of concern is workers’ compensation claims arising from psychological injury arising not from the redundancy decision itself, but from the manner in which that decision is communicated and implemented.
This risk is sharpening. As regulatory frameworks increasingly recognise psychological harm, and awareness of psychosocial hazards grows, organisations are being held to a higher standard of care in how they manage people through periods of change.
In New South Wales, reforms are currently being implemented to narrow eligibility for psychological injury claims. Even so, restructure and redundancies remain a high-risk area – as a recent decision illustrates, the consequences for employers can be both significant and costly.
The message for employers is clear: psychosocial risk management must be built into restructuring processes from the outset. We set out below what that looks like in practice.
A national trend employers cannot ignore
Psychological injury claims are one of the fastest-growing categories of workers’ compensation claims in Australia. In Queensland, accepted psychological injury claims in 2024-2025 saw an 8% increase (3,633 claims)¹, while in NSW psychological injury claims increased from 7,289 claims in 2021/2022, to 13,648 claims in 2024/2025, an increase of 87%.² Similar trends have emerged across other jurisdictions.
These claims have a material and often underestimated impact on employers and the workforce. The median time off work for an employee with a psychological injury is almost 36 weeks – five times longer than physical injuries.³ Each claim also carries the potential for substantial weekly compensation payments, ongoing medical expense obligations, cultural disruption, increased premiums, and the operational and reputational cost of disputed proceedings.
The rapid growth and escalating costs of psychological injury claims has been a central driver of the recent New South Wales reforms, with the State Government citing the doubling of claims since 2018 and unsustainable cost pressures as evidence that the existing system had become financially unsustainable and required structural change.4
The “reasonable action” defence – and its limits
Employers navigating this landscape are not without protection. Workers’ compensation schemes across Australia differ in their detail, but each contains a defence to a psychological injury claim where the injury was caused by the employer taking “reasonable action”.
In NSW, this defence sits in section 11A(1) of the Workers Compensation Act 1987, which provides that compensation is not payable for a psychological injury if it was “wholly or predominantly caused by reasonable action taken or proposed to be taken by or on behalf of the employer with respect to transfer, demotion, promotion, performance appraisal, discipline, retrenchment or dismissal of workers or provision of employment benefits to workers” (Reasonable Action Defence).
The burden of proving the Reasonable Action Defence rests entirely on the employer and, importantly, requires evidence that both the action itself (such as a redundancy) and the manner in which it is carried out, were reasonable.
While the incoming NSW reforms are primarily aimed at narrowing eligibility for a psychological injury claim (see our article explaining the reforms here), they do not reduce the need for employers to manage psychosocial risk effectively, nor do they insulate them from disputes about workplace conduct or the reasonableness of management action. If anything, they place greater emphasis on employers being able to demonstrate robust systems, sound decision-making, and well-executed risk management.
What happened in Dawson v Inner West Council
In Dawson v Inner West Council [2026] NSWPIC 314, the Commission found in favour of a worker who claimed psychological injury arising from years of job insecurity, culminating in a redundancy conversation which was raised without warning, during his annual performance review.
The employer argued that the predominant cause of the injury was a discussion about a proposed redundancy in October 2024, and that this constituted “reasonable action” with respect to retrenchment, relying on the Reasonable Action Defence.
The Commission rejected the employer’s argument, finding:
- The injury was significantly contributed to by the worker’s concern and anxiety over job security for many years before the October 2024 meeting. He had been experiencing work-related anxiety since at least 2021, driven by the gradual and inadequately managed removal of core parts of his role, with the redundancy conversation being the “final chapter in a years-long deterioration”.
- Even if the injury had arisen from the October 2024 meeting, the way the redundancy was raised was not “reasonable”. Rather than being advised in a formal, planned meeting covering the proposed redundancy, consultation options, potential redeployment, financial aspects, and giving the worker an opportunity to prepare and have support, the worker was told in an ad hoc fashion during his annual review.
This follows a similar 2025 finding in Kaur v Virgin Australia Airlines Pty Ltd [2025] NSWPIC, in which a worker informed of his redundancy during an informal coffee meeting on a public street was awarded workers’ compensation. The Commission found the process “defied belief” as a reasonable redundancy consultation procedure – no prior notice had been given, no support person was available, and the employer had failed to follow its own internal redundancy policies.
What this means for your business
Employers undertaking (or planning to undertake) restructures or redundancies should assess the associated psychosocial risks ahead of time, and ensure their processes are designed to manage them appropriately, prior to implementation. This includes by:
- Assessing the risks associated with role redesign. For example, risks may arise from changes to the volume or nature of an employee’s duties, reporting structure, or job demands.
- Providing employees with adequate advance notice of meetings of meetings and their purpose.
- Offering employees the opportunity to have a support person present.
- Conducting discussions in a formal, private setting.
- Providing employees with sufficient information, and engaging in genuine, documented consultation.
- Remaining alert to, and managing, any signs of distress throughout the process.
- Complying with any requirements in policies, procedures, or applicable award or enterprise agreements.
Employers should also be aware that, as Dawson illustrates, the risk does not begin and end at the redundancy meeting itself. Progressively changing or removing an employee’s duties throughout their employment can give rise to psychological injury if the associated psychological risks are not identified and managed along the way.
If you’re planning a future redundancy or currently managing a restructure and need support, the Source team is here to help. Our team of employment law and safety specialists have extensive experience managing all aspects of workplace law including psychological safety and workers’ compensation claims.
Authors:
Riley Anastasio, Senior Legal Counsel – Workplace legal, Safety & HR
Ashleigh Discipio, Managing Legal Counsel – Workplace legal, Safety & HR
