Videos shows hundreds of attendees at a summer camp in Newcastle maskless, singing and dancing inside a large tent while a band performed onstage.
The camp came days after changes to public health orders took effect, banning singing and dancing at music festivals and forcing the cancellation of music events like the Tamworth Country Music Festival and the Grapevine Gathering in the Hunter Valley.
In a statement on Thursday night, NSW Health said it had demanded Hillsong immediately stop singing and dancing at the event.
"While the order does not apply to religious services, it does apply to major recreation facilities and this event is clearly in breach of both the spirit and intent of the order," Health Minister Brad Hazzard said.
Singing and dancing at large events presents a high risk of COVID-19 transmission, Chief Health Officer Dr Kerry Chant said, amidst an outbreak which has seen the state record tens of thousands of cases a day.
However NSW Police have confirmed that the church will not be fined for what Mr Hazzard described as a "breach".
"NSW Police will liaise with organisers... to ensure future compliance with the Public Health Orders after NSW Health deemed the location to be a major recreational facility," a spokesperson said.
However NSW Health said the event was always bound by rules for recreational facilities.
In a statement, Hillsong said the summer camp event is "not similar to a musical festival in any way".
The camps involve primarily outdoor recreational activities, with outdoor Christian services only a "small part" of the program and singing an even smaller part of each service.
"A video circulating on social media (on Thursday) reflects a few minutes of this part of the program," it said.
"We follow strict COVID procedures and adhere to government guidelines."
But Newcastle MP Tim Crakanthorp accused organisers of "pure arrogance", the ABC reports.
"This is the exact behaviour that health experts have deemed too risky at the moment, yet the organisers of this event seem to feel it's absolutely fine for them to do so," he said.
"This is an absolute slap in the face to the people that have lost work as a result of the current rules."
That's a sentiment echoed by artists on social media.
"There are rules in place that just aren't right," Sydney pop rock duo Lime Cordiale wrote on social media.
"Festivals, clubs and pubs are closed whilst Hillsong are getting close and sweaty... confusing?"
Australian acts including Jack River, Illy and Odette also criticised the event as demonstrating a double standard, with Brisbane band Ball Park Music describing it as "just heartbreaking for everyone in our industry".