Purpose Traumatic injury is a leading cause of work disability. Receiving compensation post-injury has been consistently found to be associated with poorer return to work. This study investigated whether the relationship between receiving compensation and return to work was associated with elevated symptoms of psychological distress (i.e., anxiety, depression, and posttraumatic stress disorder) and perceived injustice. Methods Injured persons, who were employed at the time of injury (n = 364), were recruited from the Victorian State Trauma Registry, and Victorian Orthopaedic Trauma Outcomes Registry. Participants completed the Hospital Anxiety and Depression Scale, Posttraumatic Stress Disorder Checklist, Injustice Experience Questionnaire, and appraisals of pain and work status 12-months following traumatic injury. Results Greater financial worry and indicators of actual/perceived injustice (e.g., consulting a lawyer, attributing fault to another, perceived injustice, sustaining compensable injury), trauma severity (e.g., days in hospital and intensive care, discharge to rehabilitation), and distress symptoms (i.e., anxiety, depression, PTSD) led to a twofold to sevenfold increase in the risk of failing to return to work. Anxiety, post-traumatic stress and perceived injustice were elevated following compensable injury compared with non-compensable injury. Perceived injustice uniquely mediated the association between compensation and return to work after adjusting for age at injury, trauma severity (length of hospital, admission to intensive, and discharge location) and pain severity. Conclusions Given that perceived injustice is associated with poor return to work after compensable injury, we recommend greater attention be given to appropriately addressing psychological distress and perceived injustice in injured workers to facilitate a smoother transition of return to work.