The upper house law and justice committee on Monday heard from union representatives and executives from the State Insurance Regulatory Authority (SIRA) and Insurance and Care NSW (icare).
Psychological claimants took longer to return to work, 20 weeks on average, compared to six weeks for physical injuries, SIRA chief executive Adam Dent told the hearing.
Those with a combination of both were off work for an average of 31 weeks.
"An average that's over six months is definitely not a good story for either the claimant or for the scheme and its sustainability," Mr Dent said.
He acknowledged psychological issues can worsen when workers claim compensation, dealing with multiple case managers, investigations into their claims and delayed decisions.
In icare's submission, mental health is cited as "the single greatest challenge to the sustainability of our workers' compensation schemes".
Richard Harding, chief executive of icare, says psychological claims are complex.
"It requires a change in the nature of how employers view the injury itself, how employers manage those injuries," Mr Harding told the hearing.
He said icare "absolutely" needs to change its processes too.
"A broken arm is a broken arm ... that's not the case for a psychological injury," he said.
Specialist claim providers, which Finance Minister Damien Tudehope announced have been appointed last week, will address the complexity, Mr Harding said.
A review of icare, led by Robert McDougall KC, followed allegations aired on the ABC's Four Corners in July 2020 that workers claiming psychological injury were being pushed to return to work.
SIRA said the practice did not appear systemic or widespread.
"It is to be hoped that nothing like this will occur again," the McDougall report noted.
Australian Lawyers Alliance spokesman Shane Butcher says cases Mr McDougall and the committee examined were "a shining example of how not to manage claims".
The handling and disputation of psychological claims and the conduct of investigators led to unnecessary harm, Mr Butcher told the hearing.
If the system is too adversarial people will not recover, making the scheme more expensive, NSW Bar Association common law committee deputy chair Elizabeth Welsh said.
A healthy level of cynicism is required, but claimants deserve respect, Ms Welsh says.
"(Some claimants) have this absolute trauma from feeling that no one believes them, and it creates behaviour which is not conducive with going back to work."
SIRA also noted in its submission the increase in mental health claims, saying a rise in bullying and harassment in the workplace could be behind it.
NSW Teachers Federation senior vice president Amber Flohm says workloads are the biggest factor for teachers, echoing SIRA's submission showing claims in the education and training industry most commonly stemmed from workplace pressure.
Teachers were overloaded with too much administrative work and the heightened pressure caused more conflict, she said.
Recent attempts from the government to free up time for teachers did not go far enough.
"Six minutes per day, if you're lucky," Ms Flohm said.
Government committee member, Nationals MP Wes Fang, said the extra time was one minute per working hour.
"It's actually half an hour in the week when you can collectively get together to focus on a task, now that is significant," Mr Fang said.
"Not when teachers are working between 50 and 60 hours per week," Ms Flohm responded.
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