Commonwealth government departments could be sidelined from managing public servants on workers' compensation in a massive overhaul of the Comcare scheme announced on Thursday.
The federal workplace insurer will have powers to take over injury management from public service bosses in sweeping reforms that will also see big changes to the laws governing psychological injuries.
Workplace Relations Minister Bill Shorten also said he would establish a national framework for rehabilitation aimed at putting the focus on returning to work rather than compensation.
Comcare's chief executive welcomed the minister's announcement and the main public sector union, the CPSU, was broadly positive - although it cautioned against changes that might reduce injured workers' entitlements.
The minister said he would prioritise 21 of the 147 recommendations of a review of Comcare and its legislative framework by Melbourne barrister Peter Hanks and former Defence Department boss Allan Hawke.
Among "priority recommendations" were changes to the legal landscape on mental injuries and bullying. The definition of "reasonable administrative action", the subject of much legal wrangling in bullying cases, will be clarified to give clearer guidelines on dealing with troubled employees. Legislative changes will also be made so that claims for mental injuries resulting from an employee's perception of their treatment will not be paid out unless they have a basis in reality.
"The government's priority is to improve Comcare's early engagement of injured workers and the effective provision of rehabilitation by employers," Mr Shorten said.
"The government will require Comcare to be more vigilant with assessing mental injury claim. This will better protect the Commonwealth, and therefore taxpayers, and make sure mental injury claims are actually linked to employment."
Comcare chief executive Paul O'Connor said powers to step into a compensation case to rehabilitate a worker were "protection" rather than making Comcare a "first responder".
"We don't want anyone to be left behind because their employer can't or won't get in and do it," he said.
"If there's an employer who doesn't get the rehabilitation and return-to-work message, these stronger regulatory powers means we can step in and do something about it. We can hold that employer to account."
Mr O'Connor said he was excited that the minister had asked Comcare to take the lead in developing a national rehabilitation framework.
He said he would work with medical groups, including the Royal Australian College of General Practitioners, to end reliance on "prescribing time off work".
"We need to change attitudes and practices because it is the building block: get this right and we'll start to reap benefits."
CPSU national general secretary Nadine Flood welcomed the minister's announcement but said her union would oppose changes that diminished entitlements.
"These proposed changes are a welcome addition to the Comcare scheme and provide an improved framework for both workers and employers, and a clear pathway to getting people back to work. These are positive changes that are of benefit to our members, and as such we welcome them, but there are many more recommendations that were made in the Hanks review and we would oppose any that reduce a worker's entitlement."