A New Zealand Income Insurance Scheme – What does this mean?

Tax Alert - March 2022

Author:

Robyn Walker

By Robyn Walker

The Labour Party has had an interest in reforming redundancy laws for a number of years, and the latest step toward this is a proposal to introduce a compulsory national insurance scheme. If implemented, the scheme will provide workers with an income substitute if they are made redundant or are unable to work on medical grounds. Comments on the proposals are open until 26 April 2022 and it’s important that all workers (including contractors and self-employed persons) and employers understand the breadth of proposals and take the opportunity to provide input.

Indications are that the scheme could take effect from 2023, which is an ambitious timetable considering the fundamental changes to employment relations that are proposed.

A copy of the discussion document summary is available here and the detailed discussion document is available here.

What is the proposal?

At its simplest, the proposal is for employees and employers to both contribute 1.39% (or 2.77% total, noting there is some rounding) of all earnings from employment to the income insurance scheme. In return, employees will receive:

A requirement to have 4-weeks’ notice of redundancy;
An additional 4-weeks’ pay, at 80% from the employer (this is called a ‘bridging payment’);
Up to 6 months’ pay, on up to 80% of normal earnings (subject to a cap). There is the possibility of the 6 months being extended. However, there is an expectation that the individual will be actively seeking work and must take any suitable job offered on equal or better terms from the position they were made redundant from.

Employees will be insured against displacement (i.e. redundancy) and also loss of work for health conditions or disabilities. Of the 2.77% total levy, displacement makes up 1.42% and health conditions and disability make up 1.36% (again, there is a rounding issue).

The levy will have a maximum earnings cap, initially set at $130,911. This means that employees and employers will both potentially be contributing up to $1,819.66 annually to the scheme. The level of contributions could quickly add up to a large amount over a worker’s life. For employers, having up to 1.39% added to the existing wage bill may sound immaterial, but could put a strain on businesses facing a range of increasing costs. To put this in perspective, the discussion document notes:

“New Zealand has around 135,000 businesses with 1 to 19 employees (which are classed as small businesses). The median annual earnings for each worker of businesses of this size are $51,561. Assuming a business has 19 workers who are each earning $51,561, the levy cost to that business would be $13,617 per year (before deductions e.g. GST). The cost of a four-week bridging payment for a business making a medium income earner redundant would be around $3,400.”

The scheme will be administered by the Accident Compensation Corporation (ACC) given the similarities with the existing ACC scheme and the efficiencies that can create. Employee levies are expected to be collected by Inland Revenue as an additional deduction in PAYE returns.

Where did this come from?

The proposals have come from The Future of Work Tripartite Forum, which is a partnership between the Government, Business New Zealand and the New Zealand Council of Trade Unions. The proposals are essentially an alternative option to wider reforms of redundancy laws proposed in a 2008 report which recommended compulsory redundancy payments based on length of service. Budget 2021 made reference to the work being undertaken, with the Minister of Finance’s Budget Speech noting:

"We have also learned lessons from COVID-19. One of those is that, just as occurred after the Canterbury Earthquakes and GFC, the Government found itself having to put in place ad-hoc measures to protect the incomes of New Zealanders who had lost their jobs. We did this with the COVID-19 Income Relief Payment. At the urging of Business NZ and the Council of Trade Unions we have committed to the development of a Social Unemployment Insurance scheme. Many countries around the world have such a scheme. We are investigating an ACC-style scheme that would provide 80 percent of income for a fixed period of time, with minimum and maximum caps, linked to training opportunities. This proposal is being developed by a tripartite working group with Business NZ and the CTU, and public consultation will occur later in the year.”

Since Budget 2021, the proposal has developed and expanded in its breadth to incorporate medical cover.

Part of the rationale for the proposals is that providing insurance cover to displaced workers will ensure they have the opportunity to consider what they want for their next role without the financial pressure which might otherwise lead them to take the first available job, even if it pays less (this is a concept referred to as “wage scarring”).

Most other OECD countries operate some form of insurance scheme, with New Zealand being an outlier, along with Australia. It is noted in the discussion document that Governments can provide insurance more efficiently than the private insurance market.

The detail

The proposals are set out in a 178-page discussion document, the length provides an indication of the complexity within its pages. The terms for each type of cover are similar but slightly different. Set out below are some of the key proposals:

Displacement insurance

Displacement insurance
Who is required to contribute	All full time and part-time employees. Most casual, fixed-term and seasonal workers. Self-employed workers who “most resemble employees” will need to contribute. It is intended that contributions are made by as many types of workers as possible (including working holidaymakers, international students and other temporary work visa holders) to ensure there are no incentives to convert workforces to contractors or non-residents to avoid the levy.
Who is eligible to claim	New Zealand citizens and residents who have been made redundant.
What is received	Income insurance is received based on 80% of the workers' previous earnings, subject to a maximum prior earning level of $130,911.
What do employers need to pay	If an employer makes an employee redundant, they are required to provide 4-weeks’ notice of the redundancy. A further 4-week “bridging payment” is also required, based on 80% of the employee’s ordinary earnings. The employer may be able to get the bridging payment refunded if they assist former employees to find new work. If the employer is insolvent this payment may be covered by the scheme and later recovered from the employer or liquidator.
What are the criteria to claim	New Zealand citizens and residents will be eligible to claim if they are displaced from their employment. An employee will not be eligible if they are dismissed for poor performance or misconduct, or they resign. A job must be lost in full rather than a reduction in hours. A worker with multiple jobs can claim if displaced from a position while continuing to work in other jobs. For non-standard workers, eligibility will be based on a “loss of reasonably anticipated income” based on an “established pattern of work”. A fixed-term employee may be eligible if their employment term finishes earlier than the planned end (any payments under the scheme will only run to the planned end date).
What is the maximum claim period	The insurance scheme will pay out for up to 6-months (ceasing when alternative employment is found), so employees will receive close to 8-months of income (incorporating the 4-week redundancy period and 4-week bridging period). The 6-month claim period can be extended to up to 12-months where there is a need for approved training or vocational rehabilitation.
What requirements are there for claimants	Claimants will be assessed whether they can self-manage finding a new job or whether direct support is required (e.g. a case manager can be appointed). Claimants would be expected to be based in New Zealand, to show effort to search for suitable employment and to prepare for employment .Claimants would not be required to accept non-suitable offers of employment, such as those that do not offer pre-displacement wages and conditions. Claimants would be expected to accept suitable offers of employment.
Can a claimant earn other income	Yes, a claimant can earn up to 20% of prior income from personal exertion before having the insurance payments abate at 100%. This enables the employee to ‘top themselves up’ to their previous level of income. Only personal exertion income will be counted (i.e. any investment income is ignored).
Other points to be aware of	Contributions must have been made for 6-months in the 18-months preceding the claim. This includes any time on Paid Parental Leave. It is proposed to only allow one 6-month entitlement every 18-months. Insurance payments will be treated as income for welfare and tax purposes. Payments are not means-tested or linked to other household income. Paid Parental Leave can be received sequentially with the income insurance payments. A claimant will be able to spend up to 28 days outside New Zealand.

Health conditions and disability insurance

Health conditions and disability insurance
Who is required to contribute	All full-time and part-time employees. Most casual, fixed-term and seasonable workers. All forms of self-employed workers would also fully contribute.
Who is eligible to claim	New Zealand citizens and residents who have at least a 50% reduction in work capacity that is expected to last for at least 4-weeks.
What is received	Income insurance is received based on 80% of the workers' previous earnings, subject to a maximum prior earning level of $130,911. It is not clear in the document, but if an employee is still able to work part-time (up to 50%), the payment would be adjusted to reflect this.
What do employers need to pay	Employers are expected to take reasonable steps to support employees continuing to work. An employer will need to provide 4-weeks notice and make a 4-week bridging payment if an employee is dismissed on medical grounds. If the employer agrees to hold a job open for the employee then the bridging payment is not required.
What are the criteria to claim	The claimant would need to provide a work capacity assessment, and where required, supporting evidence from the employer of the claimant’s capacity to undertake their job. Ongoing reviews would be guided by advice from the claimant’s health practitioner. There will be no restrictions on the types of conditions covered by the insurance scheme, other than they are expected to persist for at least 4-weeks.
What is the maximum claim period	The insurance scheme will pay out for up to 6-months.
What requirements are there for claimants	Claimants would provide subsequent work capacity medical certificates, if required. Claimants would engage in return-to-work activities (for example, rehabilitation, training, job search) where relevant and required. Any job search obligations could be deferred based on guidance from a health practitioner.
Other points to be aware of	Employees must have used all available paid sick leave before claiming under the scheme. Self-employed workers who are not eligible for the displacement insurance should only expect to have to pay for the health condition or disability insurance (being a levy of 1.36%).

Questions

Most people are likely to agree that dealing with COVID-19 and the ubiquitous concept of the “future of work” makes it clear that there is a need to do something to ensure New Zealand continues to have a productive workforce. The question is, is the proposed New Zealand Insurance Scheme the right answer? The discussion document poses 94 questions for submitters to provide feedback on. Given the impact such a scheme could have, we think as many people as possible should provide feedback so that informed decisions can be made on the way forward.

Additional questions not included in the discussion document which possibly warrant consideration in the design of any scheme include:

Should the insurance be compulsory for those employees and employers who have already opted to have private insurance cover
How will different types of insurance cover interact with one another (e.g. will private income protection insurance preclude some from claiming under this scheme or vice versa)?
Should the scheme be covering both displacement and health risks
Should the health coverage be wider, for example to cover workers who are unable to work because they need to care for a family member?
Is the one size fits all approach to the rate of levies appropriate?
How are levies and claims calculated, should this include all forms of employment income such as bonuses, share schemes and fringe benefits?
How should self-employed workers sensibly be included in the scheme
How should the scheme work if a displaced worker wants to start a new business rather than find new employment?
Can alternative incentives be used to adapt to the “future of work”, for example rewarding employers and employees who proactively retrain to avoid displacement occurring in the first place?

What practical options could help reduce any moral hazards arising from such a scheme?

What impacts could the scheme have on employment contracts going forward, particularly for employers currently offering redundancy packages and sick leave above the statutory minimum level?

If the scheme isn’t implemented in line with a standard tax year (1 April – 31 March), how will income and levies be calculated in year 1?

Finally, bearing in mind that there are several really difficult issues to grapple with in creating a scheme that is widely supported and sustainable, are the timeframes for implementing a New Zealand Income Insurance Scheme long enough? It is proposed that legislation is introduced in 2022, with the scheme applying from late 2023, a potential 23-month window from discussion document to application. A more generous timeline for the New Zealand Income Insurance Scheme may allow more time for upfront policy design and robust scrutiny of the legislation through Parliamentary processes, and of course ensure there is adequate time for employers, employees and the government itself to get ready once legislative processes are completed.

Submissions can be made online, and there is an option to complete an anonymous online survey that seeks to gauge the level of agreement with a range of statements.

If you’d like to discuss how the New Zealand Income Insurance Scheme could impact your business, please get in touch with your usual Deloitte advisor.