On 2 February the Government announced the details of a proposed nation-wide Income Insurance Scheme (IIS).

The implementation of such a scheme in New Zealand is a significant reform, potentially the largest since the adoption of the ACC scheme in 1974. While the concept itself is not a novel one, with countries such as Germany, Canada, Japan and the Netherlands having some form of compulsory income insurance scheme, for most New Zealanders such a concept is unfamiliar territory, and employers will likely have questions about how the scheme will affect them.

The scheme is pitched to support the wider economy though maintaining consumer spending through economic shocks and reducing the risks of business closure but it will come at a significant cost to employers at a time when many are struggling to keep their heads above water.

What is it?

Under the proposed scheme, individuals who are unable to work through no fault of their own due to redundancy or poor health or disability, and who qualify for insurance under the scheme, will receive 80 per cent of their prior income (capped at $130,911 subject to annual adjustment) for up to 6 months.

The scheme will be administered by ACC using a pool of funding obtained through levies. Both employers and employees will contribute to the pool equally. The proposed starting levy will be 2.77 per cent of an employee’s salary and wages. The amount will be split equally between employers and employees – so 1.39 percent each.

In addition, employers will be required to:

• give employees 4 weeks’ notice and pay the first 4 weeks’ of compensation at 80% of the employee’s salary in the event of redundancy (on top of any contractual redundancy compensation); and
• make reasonable efforts to hold open the position of a medically incapacitated worker if he worker is likely to return within 6 months.

The compulsory employer redundancy payment is intended to encourage employers to take reasonable steps to ensure the employee can continue working and to avoid inappropriate claiming.

Employees must have worked, or been on statutory parental leave, for at least 6 months out of the past 18 months to be eligible.  Employees who resign or are terminated for poor performance or misconduct won’t qualify.

The insurance payments will not include asset-testing or a partner income assessment. The scheme will only cover complete job loss, not simply a reduction in hours. However, it will operate on a per-job basis, meaning that if a person holds multiple jobs, and loses one, they can still recover based on the role they have lost.

How will it affect employers?

The Government expects employers to benefit from the scheme with access to skilled workers, through the employee’s ability to seek employment in their previous field, without significant time pressure to take on a new, and potentially less skilled role in order to meet financial commitments. It hopes that it will give displaced workers more time to retain and upskill, which will again contribute to a more skilled and productive workforce. The scheme is also envisioned to benefit employers in emerging industries and businesses, as workers will likely be more willing to leave secure employment to take on a risker start-up role if they have six months income security operating as a redundancy back-up.

However, the scheme will come at a significant cost to employers (and employees) at a time when they are trying to recover from the ongoing impacts of Covid.  It is also likely that employees who would otherwise have been terminated for poor performance or misconduct will seek to pressure their employers to agree that their role is redundant in order to access that scheme as a form of settling any potential dispute they might have, resulting in the employer incurring further costs to terminate such employees and the cost of the scheme increasing due to misuse.

Some employers though may welcome the change as employees will have a cushion of income if made redundant or are unable to work for medical reasons (not covered by ACC), that they might otherwise pay themselves as a lump sum, either on a discretionary basis or as a result of a personal grievance having been raised.

Feedback

The scheme is still in its early stages, and the public is able to make submissions on the proposal up until 5pm on 26 April 2022. We would love to hear your views or, if you want to draft a formal submission to MBIE, we can assist.