A significant expansion to the New Zealand social security net  

Earlier this year, the government set out its proposal to provide income protection for those who lose their job as a result of redundancy or health issues. The proposal was open for public consultation until 26 April 2022 with the government planning to introduce legislation by the end of this year.

While we wait with anticipation for the draft legalisation to be released, we explore some of the benefits, challenges and issues we see with the current proposal which, if implemented, would constitute a significant expansion of New Zealand's social safety net.


The Proposed Scheme

Similar to ACC, the proposed scheme would see employees who qualify receiving 80% of their wages for 6 months after their employment is terminated.  It would apply to two broad categories of workers - those who have been displaced and those who have their work capacity reduced due to health conditions.

Employees who have been 'displaced'

New Zealand citizens and residents will be eligible to claim if they are 'displaced' (made redundant) from their employment.

A job must be lost in full rather than just a reduction in hours. The scheme does not extend to employees who resign (including constructive dismissals) or employees who are dismissed on grounds of poor performance or misconduct. Workers who experience the latter will still have the usual avenue of raising a personal grievance to challenge a wrongful dismissal.

To be eligible, the worker must have been contributing to the scheme for at least 6 months, over the previous 18 months prior to the termination. If eligible, an employee will be entitled to receive:

  • A minimum four week notice of termination from their employer;
  • A 'bridging payment' of 4 weeks at 80% of their usual wages which is met by the employer; and
  • 6-month claim period at 80% of their usual wages which can be extended to up to 12-months where there is a need for approved training or vocational rehabilitation.

During the claim period, an employee would be expected to be based in New Zealand, to show effort to search for suitable employment and to prepare for employment. Claimants would also be expected to accept suitable offers of employment.

Health conditions and disability insurance

New Zealand citizens and residents who experience at least a 50% reduction in work capacity which is expected to last for at least 4-weeks will be eligible for income insurance under the scheme in the event their employment is terminated for medical incapacity or their hours of work are reduced. The reduction in work capacity must be due to a non-accident-related health condition or disability. Injuries or disabilities caused by accidents will continue to be covered under the current ACC regime.

A significant aspect of the proposal is that "health condition" would be interpreted widely to include mental health conditions. The government's view is that it would be arbitrary to apply the scheme only to physical health conditions but acknowledges the difficulties that may arise in diagnosing mental health conditions.

Employers will be encouraged to make reasonable efforts to hold the position open if the worker is likely to recover within six months. Doctors will be required to certify a person’s capacity to work and, where appropriate, employers will provide supporting information. If the worker can remain in part-time work with the employer, the scheme will top them up to 80 percent of their usual salary.

If the worker cannot remain in the role and are terminated by reason of medical incapacity, the employer must pay the four week 'bridging' payment and the scheme will cover the employee for up to 6 months. If the employer agrees to hold open the employee's position, they are not required to make the four-week bridging payment.

Finance and Administration

The scheme will be administered by the Accident Compensation Corporation. The income insurance scheme would provide a replacement rate of 80 percent of prior income (up to a cap of $130,911, adjusted annually).

To fund the scheme, the government has proposed an initial levy of 2.77% of salary and wages. This will be split between firms and workers, with each paying 1.39 percent. The government anticipates a total annual cost of $3.54 billion.


Policy Considerations 

The current pandemic and the government's costly wage subsidy schemes have highlighted the fact New Zealand's social safety net currently provides very limited support for individuals who have their employment terminated and struggle to find alternative employment.

Aside from Covid-19, the proposed scheme recognises New Zealand and other developed countries are on the cusp of a revolution in the way we work, with significant changes likely to come as a result of automation and robotics. In this respect, New Zealand lags behind most OECD countries in the support it offers to workers who are displaced.

The proposed scheme would also partially fill a gap in the coverage offered by ACC for injuries which have been caused by a "gradual process," rather than an accident. The proposed scheme would ensure people, whose health conditions are caused by something other than an accident, are financially supported.

The government has suggested it may be fair to include self-employed workers who have a high degree of dependence (20 percent or more of their income) on one client and have no more than five counterparties in any one year. This would generally include contractors such as Uber drivers, courier drivers, contract cleaners and many labour hire workers. The government is seeking feedback on this option without providing a clear statement on its preference, but the inclusion of some contractors would significantly increase the coverage and also the complexity of the scheme. This arrangement aligns with the government trying to grapple with the wider issues associated with 'dependent' contractors and the possibility of introducing quasi-employment protections for them.


Implications for Employers 

The scheme creates an obvious incentive for employers to use redundancy as an opportunity to exit troublesome or underperforming staff. Employers will know they are far less likely to face resistance from an employee if they have the security of receiving 80% of their wages for a period of up to 6 months.

While the legislation can include fines for employees/employers who use a disingenuous redundancy process to access the scheme, the difficulty in policing this behaviour is obvious. We predict it will also mean workers who are made redundant will be less motivated to challenge the legality of the dismissal due to the financial security offered by the scheme.

The scheme would also arguably create a mismatch between the entitlements of a claimant under the scheme verses the remedies for an employee who is unlawfully dismissed. A successful personal grievance claim for unjustified dismissal generally results in 3 months' lost wages (as opposed to the 6 months at 80% the scheme provides) and compensation for hurt & humiliation (typically between $10,000 - $20,000). The financial outcome could therefore potentially be more favourable to those that can claim under the scheme as opposed to those that have been unlawfully dismissed.


Where to from here? 

The proposal contains a number of unanswered questions, particularly in relation to how it will treat technical redundancies, existing redundancy compensation in employment agreements and employees who are unlawfully terminated.

We presume these questions will be addressed following MBIE's review of public feedback in the coming months with draft legislation to be released by the end of 2022.

If you would like to discuss this article or any other employment law matter, contact our team.