The Proposed Income Insurance Scheme

Last week the New Zealand Government, supported by Business New Zealand and the Council of Trade Unions ("NZCTU"), released a proposal on an income insurance scheme ("the scheme") – one of its biggest reforms since the introduction of ACC in the 1970s. McVeagh Fleming's employment team have summarised the 'need to know' information.

The identified objectives of the scheme are to:

• Minimise the immediate financial impact of losing income and work for workers and their families.

• Support workers back to good jobs.

• Support the economy to adjust more rapidly to shocks or downturns which may be caused by situations such as widespread illness from a pandemic, natural disaster or rapid technological development.

What is it?

Essentially, the scheme provides eligible workers up to 80% of their usual salary for up to six months (capped at $130,911.00) if they lose their job through no fault of their own (ie they are laid off, their role is redundant) or they have a health condition or disability, that means they have to reduce their work hours or stop working entirely. It does not cover job loss due to poor employee performance, gross misconduct, or resignation.

In addition, an employer would be required to:

• Give employees four weeks' notice.

• Pay the first four weeks of compensation at 80% of the employee's salary.

• Make reasonable efforts to hold open a position of a medically incapacitated worker if the worker is likely to return within six months.

The above is on top of any contractual redundancy compensation.

To be eligible for the scheme, workers must have worked (contributed to the scheme) or been on statutory parental leave for at least six months over an 18 month period. The scheme may allow for some to claim 80% of their salary for up to a year where they are undertaking "appropriate training or vocational rehabilitation programmes".

What Does it Cost?

The cost of the scheme is funded by an insurance levy on wages and salary, with both the employer and employees paying an estimated 1.39 percent each. In the linked discussion document, examples of the cost of the levy to workers has been provided (for people who usually work 40 hours per week), these are set out below.

• A person working 40 hours per week, earning $880 (before tax), would pay $12.23 a week in social insurance levies.

• A person working 40 hours per week, earning $1,160 (before tax), would pay $16.12 a week in social insurance levies.

• A person working 40 hours per week, earning $2,000 (before tax), would pay $27.80 a week in social insurance levies.

Employer levies would be matched by the employee's levies.

So, Good News or Bad News?

So far the reaction to the scheme has been mixed. Christopher Luxon described the scheme a "jobs tax" and a "solution looking for a problem". The Child Poverty Action Group said the plan is "likely to be regressive and would bake-in existing inequities." Whatever your view, the scheme will come at significant cost to employers and employees.

As employment lawyers, we can see there will be a number of scenarios that could play out, some beneficial to employers and some to employees, either way both parties are paying for the system.

Whenever there is an employment dispute, employees may pressure employers to disguise the ending of their employment as a redundancy rather than dismissal or performance. This would result in the employer incurring further costs. On the other hand, it doesn't appear that employers will be charged a higher premium if they regularly make workers redundant, and employers may be happy to make the payments knowing the employee will be covered for a significant period of time while looking for a new role.

There is no consideration for those that are already covered by income insurance or are eligible for redundancy compensation in their employment agreement. So far there is no suggestion that there will be a litigation bar, so potentially an employee could still raise a personal grievance. It also doesn't appear that any consideration has been given to allow employees to 'opt in' similar to that of the current KiwiSaver scheme.

The scheme may also affect the way unemployed persons approach the labour market. People may be more selective when job hunting due to a release of pressure on those in-between jobs to commence work as soon as possible in order to have income once again. This may see employers change the way in which they recruit employees.

Have Your say

Legislation is scheduled to be introduced in 2022 and the scheme shall commence operating in 2023. If you feel this scheme will affect your business and you would like to have your say, consultation closes on 26 April 2022. See the link below.

New Zealand Income Insurance Scheme - A Discussion Document

Please direct any enquiries to:

Melissa Johnston (Partner) on (09) 306 6729 (mjohnston@mcveaghfleming.co.nz)

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Employment Law

‍Written by Melissa Johnston