A landmark new law in New South Wales has fundamentally changed how small business owners must approach AI at work..The law recognises that digital systems, including algorithms and AI, can cause workplace harm. As a result, SMEs must manage these risks and consider the psychosocial impact of technology on workers, opening the door to a national conversation about psychosocial hazards.
While other states are relying on existing legislation to protect workers from technological threats, these developments highlight a growing expectation that businesses will treat the prevention of mental health risks and physical slips and trips with equal priority.
An eye-opening study late last year found more than 1 in 5 small business owners were unaware they were legally responsible for non-physical hazards. But as James True, who heads the Employment Law team at LegalVision, points out, SMEs have the same obligations as larger players. “Any size business in any industry is now in the sights of the safety regulator,” True says. But, he adds, there are simple yet effective ways an owner can protect their staff and their business.
Protect Workers From Physical, Human and Digital Threats
The most significant change for NSW businesses is the Work Health and Safety Amendment (Digital Work Systems) Act 2026. This legislation spells out that a person conducting a business has a primary duty of care to ensure workers are not put at risk by algorithms, artificial intelligence, automation or online platforms.
In practice, this means that if task allocation is delegated to an algorithm that creates an impossible workload, responsibility ultimately sits with the employer rather than the software provider.
The law now requires businesses to consider whether digital systems result in:
- Excessive or unreasonable workloads
- The use of excessive metrics to track performance
- Unlawful discriminatory decision-making by biased algorithms
Beyond NSW, regulators are paying closer attention, despite other states not following suit with AI-specific laws. In December, Victoria joined the rest of Australia in implementing psychosocial regulations, creating a harmonised national environment. Regulators are no longer just issuing guidance; they are beginning to intervene.
An example occurred recently when SafeWork NSW issued a prohibition notice to pause a major restructure at the University of Technology Sydney. The regulator intervened due to the “serious and imminent risk of psychological harm” posed by the change process and a lack of meaningful consultation.
“Historically, businesses didn’t pay much attention to their safety obligations unless they were in a safety-critical industry, maybe construction, mining, or oil and gas,” True says. “Now there have been legislative changes which have brought psychosocial hazards expressly into the hazards that a business must control.”
Policies And Training Are Not Enough On Their Own
SMEs that manage workplace stress with written policies or training sessions may now find they fall short of legal obligations, particularly in Victoria. “Telling people to be safe is not enough,” True explains. “Whereas historically a business might have said, ‘Look, we’ve got a WHS policy, we’ve got grievance policies’, that approach really isn’t viable anymore. Employers are now required to make changes to the way that work is performed.”
This focus on work design means examining the structural causes of stress. For many businesses, the risk lies in how AI and digital tools are integrated into daily workflows. SafeWork NSW’s AI WHS Scorecard highlights several specific design risks:
- Fragmented Design: Productivity tools that bombard workers with automated feedback without accounting for personal circumstances, such as childcare commitments or family emergencies, can have psychological impacts.
- Low Job Control: When a workflow management system requires workers to strictly follow machine directions, it restricts personal autonomy and the ability to apply individual skill and judgment.
- Machine-Paced Work: Systems that set a relentless rhythm of work, leaving no room for natural pauses or recovery, are viewed as fundamental design flaws.
The Australian Institute of Health & Safety emphasises that the hazard is rarely the technology itself, but rather poorly-designed workflows. While businesses are now required to root out risks at the source, owners may not understand what constitutes a hazard.
“It can lead to things like unnecessary surveillance,” True explains. “Surveilling an employee in circumstances where you might be going a little bit further than you need to, that poses a risk to that employee’s health and safety, and those things can happen unintentionally when you start letting AI run riot in the business.”
Traditional Management Styles May Now Pose A Risk
Old-school management styles, characterised by aggressive feedback or unreasonable metrics, are now also being treated as regulated hazards.
“When we look at psychosocial hazards, they’re not just things like traumatic events or bullying and conflict between employees,” True says. “They can be things like poor reward and recognition. They can be job demands – even low job demands can create a risk to health and safety.”
This is particularly relevant when leaders rely on automated systems to oversee staff. “For example, if you’ve got a system where managers are not really aware of people’s workload, and don’t have a meaningful way to interrogate it and change it, you might be exposing your employees to psychosocial hazards,” True explains. “If you don’t have anything structurally which looks at acknowledging or rewarding employees for the good work they’re doing, then you’re exposing yourself in relation to safety obligations.”
Addressing poor-quality work requires more care than ever before. “If your approach to feedback is rooted in 1950s philosophy, then it’s something the law is going to have limited sympathy for you on, and you’re going to expose your business,” True says. He adds that consequences are possible, and no SME wants to be made an example to others. “This is where regulators are interested in taking up these cases. They’re interested in prosecuting businesses for not keeping people safe at work.”
Non-Compliance Can Come At A Cost
In 2024-25, the average cost of a psychological injury claim in NSW reached $288,542, accounting for 38 per cent of the total cost of all workers’ compensation claims in Australia. That’s despite psychological injuries making up only 12 per cent of compensation claims.
Penalties if prosecuted can be substantial – $11.8m for a company and $2.37m plus jail time for an individual in the most grievous cases.
Other costs are hidden but still highly relevant, says True. “You’ve got the risk of people leaving. You will find new generations of employees really value the environment they’re working in and have a limited tolerance to being subjected to anything other than a reasonable cultural environment, and won’t stay,” he says. Low morale also threatens productivity. “The reality is, it’s very hard. There’s so much compliance for small businesses,” he says.
But True adds that compliance need not be expensive. “It’s important when it comes to safety obligations that they’re not absolute,” he explains. While effort is required, the process doesn’t need to be exhaustive. “You’ve ultimately got to take reasonable steps to keep people safe.”
True says that while physical risk assessments in industries like construction and mining are generally written, risk assessments for psychosocial hazards can be less formal. “Compliance can be as limited here as occasionally surveying your employee, taking an interest in your workers to ask how they are, giving them an opportunity to raise issues that they might be facing at work,” he explains. ”I think we have some psychosocial hazards in the business when we see trends of employees responding negatively to those questions.” Owners should also be able to demonstrate an interest in how work is designed and AI is implemented. “The critical thing for any small business is to just make sure you’re doing something at a minimum,” he says. “Because then you’ve always got an argument that you have actually taken some reasonable steps.”
