How a steamy night in a motel exposed the cracks in workers' compensation

She was a public servant in her late 30s, passing through a quiet country town for a night on federal government business. He was a local she'd met a few weeks previously. Their steamy rendezvous in a Nowra motel room took place late one November evening in 2007. Five-and-a-half years later, it is heading for an unlikely denouement, most probably in the High Court.

The couple's names have never been released, but it is known from an agreed statement of facts that she contacted her new friend after finishing business for the day, met him for dinner, and they went back to her motel room for what was described as "vigorous" sex. During their tryst, a light fitting was pulled from the wall above the bed, and her evening ended in hospital with injuries to her mouth and nose.

The looming finale in the long battle over her workers' compensation claim (which insurer Comcare is seeking to appeal in the High Court) is now being nervously awaited by every boss around the country with employees who travel for work.

Watching even more intently is the federal government, desperate to stem the rising tide of claims against its compensation scheme.

Last December, the full bench of the Federal Court allowed the claim for the woman's injury. The ruling came after a long line of legal disappointments for Comcare, the government agency which runs the scheme covering federal public servants around the country, as well as some private sector workers who have been brought in under its umbrella. Major setbacks include a court ruling that a middle-ranking officer in the Tax Office should be paid out for a "psychological injury" suffered as a result of "perceived" workplace injustices - even though it was never established the man's perceptions had any reasonable basis.

And a ruling in the Administrative Appeals Tribunal that a clerk with acknowledged difficulties in her personal life should be compensated for stress and "humiliation" caused by being counselled by her supervisor for underperformance.

The tribunal found the supervisor, who had been "sensitive" in some other respects, should not have taken the woman into a private office for counselling sessions because that attracted the attention of fellow workers.

Then there was the Brisbane-based public servant flown to a Buddhist meditation retreat in Alice Springs to treat his "anxiety disorder", the marathon runner allegedly claiming for dodgy knees caused by running to work, and the $30,000 course of massage therapy for an ACT worker that had "no curative effect".

Not surprisingly, the scheme, which is underwritten by taxpayers, is in serious financial strife. Last year, it recorded a loss - for the first time - of half a billion dollars, and it has outstanding claims estimated at more than $2.6 billion, of which a third remains unfunded.

Comcare directly insures 218,000 Commonwealth and ACT government workers, and "licenses" or underpins the self-insurance schemes of 29 private sector companies covering another 164,000 employees.

This allows for sobering comparisons. The cost of injured public sector workers, including pay-outs, medical bills and legal costs, grew to $322 million last year.

By contrast, the cost of private sector Comcare claims was half that, despite compensating a greater number of claims in more physically dangerous industries.

Comcare, unlike many state-based compensation schemes, has no sunset clause and a worker can be paid out at 75 per cent of their usual salary until they hit retirement age and claim medical expenses long past the age of 65. This can generate bills sometimes topping $2 million.

Without pointing the finger at particular cases, Melbourne barrister Peter Hanks, QC, warned recently that the "long tail" of the federal scheme opened it to "significant risk for a substantial level of fraud ... that may not exist in other workers' compensation schemes". (The NSW government savagely hacked at similar "long tails" in its scheme last year.)

Comcare's Achilles heel is psychological injury claims: four times more common in the public service and up by 30 per cent in the past three years. Workers claiming for psychological harm take more than a year to get back to their desks on average, compared with four months for victims of falls, slips and trips.

Psychological injuries account for less than 10 per cent of "compensable" injuries, but more than 35 per cent of the cost of claims. One consequence is government departments being hit with sharp rises in premium bills, and more to come.

Alarmed at the trend, Workplace Relations Minister Bill Shorten asked Hanks and former Defence Department boss Allan Hawke to review the scheme.

Hanks' report, released in March, prescribes tough medicine - 147 recommendations including measures to cut down on dubious claims for psychological injuries, payouts for dodgy therapies, doctor shopping and outright fraud.

Many in the sector hope the report will steer the scheme back towards its original purpose, as a back-to-work rehabilitative program and not one that encourages what the Melbourne silk calls the "passive" receipt of compensation.

There is near-universal support, in particular, for Hanks' call for legislation to reverse the effect of the Federal Court's rulings in the long-running case involving the tax clerk.

There the court found it did not matter if the perceptions the man had formed of incidents at work were reasonable or unreasonable. Regardless, it said, he should be compensated if they had aggravated his depressive disorder.

Investigator Jo Kamira, of Wise Workplace, has worked on "hundreds" of public sector workplace probes and criticises the role played by some Canberra general practitioners in their patients' workplace problems. "We have a lot of Doc Hollidays here in Canberra," she says. "I don't want to tarnish all GPs because they can only deal with what they're presented with, but when they're putting things down on medical certificates like 'get rid of the manager', which we see a lot of, that's not a medical diagnosis."

The former federal police officer is also dismayed by the attitude of some public servants to Comcare benefits.

"One of the things that is happening is the perception that if something happens in the course of work, then it justifies a psych claim," Kamira said. "There is a perception that it's easy to get. What we see a lot of the time is that there's an entitlement culture, and I've had someone say to me that, 'It doesn't matter what happened, if I perceive it to be bullying, then it's bullying'.

"We tend to see a lot of people who are poor performers who will go off on compo; if they sense an investigation is coming, they will go off on compo."

Other private investigators say Comcare has been more reluctant in the past to launch probes than private sector employers.

"I guess they probably felt that investigation was a little bit of a dirty thing, going behind people's backs," said one sleuth, though the agency said it now had a dedicated fraud team in place.

David Stokes, the Australian Psychological Society's executive manager of professional practice, wants savvier management to prevent many workplace disputes escalating into claims for psychological harm.

"There is no question that mental health issues arise in the public service, and some are environmentally prompted," he says. "To that extent Comcare should take responsibility. But other things can be done with earlier and more appropriate intervention in the workplace."

Comcare chief executive Paul O'Connor has thrown his weight behind the reforms urged by Hanks but says his agency has already spent several years putting return-to-work and injury prevention at the centre of the scheme.

"We can keep on pouring cash out onto the bonfire of claims but we've got to tackle the underlying cause, which is preventing harm in the first place," O'Connor said.

"Under our model compared to some states and territories, we're not the rehabilitation authority, that's up to the employer. They've got to do that, we can't do the work for them. But we do understand what Peter Hanks says when he calls for us to be able to step in when an employer can't or won't. In fact, we want to get back into doing that, because that's what we used to do in the early days of the scheme. But the Federal Court, in a decision, gave a view that that wasn't part of our work."

Slater and Gordon lawyer Rachael James also argues for more emphasis on prevention.

"What's caused this blowout for Comcare is likely to be in the realm of psychological conditions," she says. "When a person has a psychological condition, they are less likely to be able to return to work. The answer may be that Comcare and employers under the scheme need to take a more proactive approach [to managing workplace conflict]."

As the minister mulls over Hanks' recommendations, Comcare is waiting for leave to appeal the motel sex case. The outcome is eagerly awaited.

Barrister Rhonda Henderson, who has acted in high-profile Comcare matters, said compensation for injuries and illnesses acquired on work trips was well-established territory until the Nowra case emerged.

"But this one has astonished everyone," she says.