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9 February 20225 minute read

New Zealand Government Announce Income Insurance Scheme Consultation

The Labour Government have announced their intention to introduce a new scheme to fund redundancy compensation. There are a number of details that will need to be determined, including the extent to which contractors, self-employed or shareholder employees will be included in the proposals, and how the scheme will be taxed. However, the scheme has a number of supporters and we consider it is likely to be implemented in some form. 

Figures provided by the Ministry of Business, Innovation and Employment indicate that each year more than 100,000 New Zealanders are made redundant or have to stop working because of a health condition or disability. To help mitigate the resulting financial impacts, the Government is proposing an insurance scheme called the New Zealand Income Insurance scheme (NZIIS).  

In essence, it is proposed that eligible workers would receive 80% of their usual salary for up to seven months if they lose their job through no fault of their own. In the same way that New Zealand's ACC scheme covers accidents, the NZIIS would be funded by levies on wages and salaries, with both workers and employers contributing. Like ACC, income payments would be calculated without asset testing or partner income assessment.  The currently proposed contribution for each employee is 2.77%, half of which would be paid by the employer and half of which would be paid by the employee. Compensation rates would also be based on the same cap as the ACC maximum salary level of $130,191 per annum.

At this stage, it is expected that any compensation payment made to an employee under the NZIIS would be subject to tax. Given the compensation payment is essentially a replacement of earnings this seems sensible.  It is also expected that the levy imposed on the employer will be tax deductible.  Many will consider the levy to be the equivalent of a tax increase, which will draw some criticism. 

NZIIS would operate two funds: one for displacement claims and another for health condition and disability claims.  The scheme will be administered by ACC and funded to meet its annual liabilities, with a small reserve fund in the event of poor economic conditions.  If required, the Crown would act as funder and / or lender.  

Whilst the consultation document mentions that by spreading costs across the whole workforce, NZIIS and the concept of ‘social insurance’ ensures much lower individual costs and better coverage and support than private insurance, no indication on how NZIIS would be reconciled with existing private income protection schemes has been provided.

The key features of the proposed NZIIS are:
  • Broad coverage for different working arrangements
  • Coverage for job losses due to redundancy, layoffs and health conditions and disabilities
  • A four-week notice period and four-week payment, at 80% of salary, from employers
  • A further six months of financial support from the scheme, including support for training at 80% of wages or a salary
  • A case management service to support people’s return to work
  • Administered by ACC (but with the employee component collected by Inland Revenue)
  • Funded by levies on wages and salaries, with both workers and employers paying an estimated 1.39%1 each
  • Workers will only be eligible after six months of levy contributions in the 18 months prior to the redundancy
Significantly, the NZIIS has the backing of both Business New Zealand and the New Zealand Council of Trade Unions.  

Despite the benefits for impacted workers, the initial response to the NZIIS has not been universally positive.  The National Party has stated that the NZIIS is a "solution in search of a problem" that would negatively impact the cost of living.  The Green Party has raised concerns that the NZIIS would provide lower levels of support for those who have been earning less, including those in casual or seasonal work, and/or those with caring responsibilities.  Concerns have also been raised that for those on the average hourly wage of $35.61, the NZIIS subsidy would reduce their weekly pay by $19.80, which may not be sustainable for low income workers.

The implementation of the NZIIS would have a number of impacts on employment relations issues in New Zealand.  By way of example, when determining remedies for an unjustified dismissal, the Employment Relations Authority and Court take into account income received after termination, including from income protection insurance.  Any payments under the NZIIS for any unjustified redundancy dismissal would therefore impact on the remedies that may be awarded.  Further, when employment claims over redundancies are being resolved by way of settlement, employers will likely  be less willing to offer extended salary payments when entitlements will be forthcoming under the NZIIS.  We may also see more litigation from workers described as independent contractors seeking to challenge their status and claim the real nature of the relationship is that of employment, if this will gain them access to the NZIIS payments upon termination.

Consultation on the proposed NZIIS closes on 26 April 2022. DLA Piper will we be making a submission on the changes and would be happy to discuss any of the aspects in more detail.
1Employers and employees are expected to contribute half each of the 2.77% contribution, which would result in contributions of 1.385% each. We questioned Inland Revenue why the discussion document refers to contributions of 1.39% and they indicated this may be a mistake.