The Labour Government is proposing a new social insurance scheme that would provide widespread financial security to workers who lose their job through either redundancy, illness, or disability.

More than 100,000 Kiwis are made redundant each year. Under the proposed New Zealand Income Insurance Scheme, people would receive 80 percent of their pre-redundancy earnings for up to seven months.

How will this scheme work?

The aim of the scheme is to help support people while they search for work that suits their skills, help them retrain, or rehabilitate, so they can go on to find long term positions. To be eligible, workers must be a New Zealand citizen or resident, live here, and have made contributions to the scheme for at least six months.

Compensation would be capped at $130,191 per annum, the same as is currently the case with Accident Compensation (ACC). Payments would be funded through a levy on wages and the proposed contribution is 2.77 percent for each employee, to be paid 50/50 by the employee and employer.

As any payments would replace the workers' earnings, these are expected to be taxable, and the levy imposed on employers is expected to be tax deductible. So, for employers, this is essentially a tax increase.

On top of the levy, employers will need to provide a 'bridging payment' of 80 percent of wages for four weeks. This would be additional to paying out the notice period, contractually agreed redundancy compensation, and any owed holiday leave payments.

The scheme would consist of two funds: one for displacement, the other for health conditions and disabilities.

The displacement fund would be accessible to people who lose their job on a no-fault, involuntary basis, due to their position becoming redundant. Job loss due to resignation, poor performance, or misconduct would not be included.

The health and disability fund would be accessible to those with reduced medical capacity of 50 percent or more, expected to last for at least four weeks.

Evidence of incapacity and participation in back-to-work activities would be required. Employers will have an obligation to support the employee to return to work and protect their job if it’s expected they will be able to return within six months.

The proposed scheme only covers permanent workers, which means casuals, fixed-termers and independent contractors would be out of luck. This does highlight how increasingly important it is for employers to correctly classify their workers from the outset.

The heightened statutory obligations may well discourage employers from providing redundancy compensation in employment agreements. It may also affect the remedies recoverable by employees for unjustified dismissal claims.

There is also concern about the inequity of compensation if based off workers pre-redundancy earnings. For example, those on minimum wage would receive 80 percent of their minimum wage income, which may not in fact be sustainable, especially for those in single-income households or with dependents.

While the benefits are certainly appealing from an employee perspective, whether the proposal materialises or not, will depend on the economic practicality. At this stage, the scheme is simply a proposal. The initial idea may be implemented in full but, more likely will be in a somewhat diluted form.

Consultation on the proposed scheme closes on 26 April 2022, so why not have your say here?