Govt’s proposed Income Insurance Scheme - yet another business cost or a sensible solution?

Wednesday, October 26, 2022

The Government’s proposed New Zealand Income Insurance Scheme (IIS) has been thrust into the media spotlight, and if the scheme proceeds in its current form there will be significant impacts on the employment law landscape.

The idea: Ministers say the proposed IIS fills a gaping hole in New Zealand’s social insurance space, contrasted with the Opposition’s claim that it is an unaffordable “jobs tax”. If implemented, the IIS promises to substantially change how employers will need to treat redundant and medically incapacitated workers.

Why this is important: It’s not mandatory for employees to have income protection insurance, although many choose to through their own insurers. As currently formulated, the IIS would operate like how the Accident Compensation Corporation (ACC) scheme does.

And so: In the case of sickness or disability causing incapacity to work, concerns have been raised that many New Zealanders feel pressured to either remain at work when they have a long-term sickness, or to return to work before they have actually recovered, including for financial reasons. 

For example, in the case of an employer receiving cancer treatment, presently they would not fall within the ambit of the ACC scheme and, assuming they did not have their own income protection insurance, would be unpaid for any period of leave not covered by their existing sick leave entitlements. They might feel pressured to return to work before they are ready to do so.

Who this could help: Many people who are made redundant (including as a result of the rise in technology and automation which might render some roles redundant in the future) do not have an entitlement to redundancy compensation in their employment agreements. If compensation is not expressly provided for in an employee’s employment agreement, then they have no legal right to any compensation from their employer. The scheme’s purpose is to expand the reach of social insurance to a larger group of people.

How it might work: Employers and employees would both contribute compulsory levies (1.39% of an employee’s salary or wages) in order to create a fund enabling employees to access up to seven months’ IIS payments in the event they are:

  • Unable to work due to a redundancy; or
  • Unable to work due to a sickness or disability (note: injuries are covered by the existing ACC regime).

Who’s eligible for the payments?

In order to be eligible to receive payments under the IIS employees would need to:

  • Be NZ residents or citizens;
  • Have worked in New Zealand or been on paid parental leave for at least six out of the last 18 months before accessing payments;
  • Be a permanent, fixed-term or seasonal worker;
  • In the case of a redundancy, have had their entire job actually end (a reduction in hours is not sufficient); and
  • In the case of sickness/disability, experience a reduction in their capacity to work by at least 50% which will last for four weeks or longer (any incapacity less than this would need to be addressed by sick leave or other types of leave).

At this time, independent contractors and self-employed workers would not be able to access the IIS, but widening the scope to include them has not explicitly been ruled out either.

What would eligible employees get?

Eligible employees would be entitled to receive 80% of their usual salary or wages (capped to a maximum of $130,911 for salaries) for up to seven months in the event they are made redundant or cannot work due to sickness or disability.

The payments would be broken down into two parts:

  1. In the case of a termination for redundancy or termination for medical incapacity, the employer would be required to provide four weeks’ notice to the employee and then pay 80% of their usual salary or wages for the first four weeks post-termination (called a “bridging payment”).
  2. The employee is then able to access up to a further six months of IIS payments from the fund, again at the rate of 80% of their usual salary or wages.

Searching for new work while receiving IIS payments

While receiving IIS payments, employees would have obligations to uphold. Redundant workers would need to demonstrate they are searching or preparing for new work and would need to accept any job offer where that job matches their previous income, skills and other terms and conditions (at which point they are no longer eligible for IIS payments). It will be possible for redundant workers to be participating in an approved training program as an alternative to actively searching for work.

Employees with a sickness or illness, understandably, have fewer obligations as their focus is on their recovery. It would be possible for these employees to be participating in an approved rehabilitation programme. If an employee was certified as fit to return to work within the six-month period, then they would not receive IIS payments for the remainder of the period.

Possible impacts and unintended consequences of the proposed scheme

If the IIS proceeds in its current form then there will be significant impacts on the employment law landscape and, potentially, unintended consequences:

  • It may be tempting for employers to use redundancies for non-genuine reasons and for employees to feel pressured into accepting a redundancy in order to access IIS payments, particularly when they do not have any contractual entitlement to redundancy compensation.
  • There is nothing preventing an employee from pursuing an unjustified dismissal personal grievance in relation to a redundancy while receiving IIS payments (including the employer’s four week bridging payment).
  • Some employees already have access to redundancy compensation, particularly in collective employment agreements. It is unclear whether these employees would be able to access IIS payments in addition to the redundancy compensation already available to them.
  • The compulsory nature of the scheme may disadvantage employees who have taken out their own income protection insurance and there will no doubt be a large impact on the private insurance market.
  • It is unclear how officials would monitor whether employees receiving IIS payments are complying with their duties under the scheme.

Is the scheme a good or bad idea?

Unions will argue that the proposed scheme is a sensible solution to reducing the negative impacts of dismissal due to redundancy or medical incapacity. However, employers will no doubt be concerned about facing another compulsory business cost during tough economic times.

The Government has already introduced legislation enabling ACC to administer the scheme, and Ministers have confirmed they intend to introduce legislation through the house in 2023. Given the Opposition’s criticism of the scheme, we expect it will become an election issue next year.

Thank you to Senior Associate Jeremy Ansell for preparing this article. If you would like more information about the proposed Income Insurance Scheme could affect you, please contact a member of our Employment Law team.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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