The announcement of the proposal to introduce an Income Insurance Scheme was slipped out in February with little prior notice or explanation. The scheme was developed and supported by The Future of Work Tripartite Forum, which is a partnership between the Government, Business New Zealand and the New Zealand Council of Trade Unions.
It is unusual that new employment laws of this nature receive the backing of both employer and employee representatives, so the assumption may be that the introduction of the scheme is both reasonable and necessary. However, on closer examination, there are some issues that need to be carefully thought through, the most immediate being that of timing.
Is this really the right time to be introducing what is essentially an additional tax on both employees and employers, when the cost of living is sky-rocketing, wage costs are escalating, and many businesses are desperately trying to stay afloat?
Let’s start by understanding exactly what is proposed. The purpose of the scheme is to better protect workers and the economy by providing replacement income when people lose their jobs. It would apply to workers who are “displaced” through no fault of their own, including as a result of redundancy or a health condition or disability. Workers who are eligible for support will receive up to 80% of their previous earnings for a maximum period of 6 months (up to a cap equivalent to $130 911 per annum).
The scheme would be funded by all employees and employers through a “levy” of 2.77% of an employee’s earnings, half to be paid by the employee and half by their employer. This is not an insignificant cost. A person working 40 hours per week and earning $1160 weekly, would pay $16.12 in social insurance levies. In addition to contributing the same amount, employers would also need to provide workers with a “bridging” payment of four weeks’ pay after job loss. This is in addition to notice obligations.
Workers participating in the scheme would be required to look for work or take part in training and rehabilitation. Employers would be encouraged to help claimants return to work by keeping their positions open where practicable.
The case for the scheme is reasonably compelling. It is estimated that 115 000 New Zealanders are made redundant each year, or have to stop working due to a health condition or disability. Currently there is no targeted government support for these people and the impact can be profound when income suddenly drops. Interestingly, New Zealand is one of the only countries in the developed world without some form of social insurance for displaced workers.
Overseas experience demonstrates that where workers are financially supported after losing a job, they are more likely to find new jobs that are better matched to their skill set and are higher paid. Conversely where workers are forced to find work quickly, the evidence is that their income drops – a 2017 survey found that displaced workers who regained employment earned 25% less in the first year after job loss, and approximately 15% less five years later. This is described as “wage scarring” and reflects poor skills matching, lost productivity and loss of output.
The Forum describes the broader goal of the scheme as working towards a more productive, sustainable and inclusive economy. It also seeks to iron out the inequity arising from the fact that workers who suffer an accident or injury currently receive ACC support, but those who experience similar impairments as a result of an illness or disability, do not.
It is also anticipated that the changing future of work, including rapid globalisation, technological change, climate change and demographic change, will further contribute to worker displacement. In light of these issues the Forum considered that new policies were required to provide economic security to workers to support them to transition into new work. This flows on to build a more stable economy which is better able to weather downturns and shocks.
Opponents of the scheme focus largely on the cost to both employees and employers and potential inequity in how this is funded. In particular it is recognised that workers who earn less are more likely to experience employment insecurity and lose their jobs. Given that the scheme is funded as a percentage of salary, higher paid employees will therefore pay disproportionately more, and potentially benefit less.
The additional cost will also undoubtedly hurt businesses which are currently just struggling to survive. On top of the extra 1.39% wage bill, the 4 week “bridging payment” may be a bridge too far for some employers who have had to let staff go in order to cut costs.
The scheme can also be “gamed”. Some employers may be more inclined to make employees redundant, knowing that they will be provided for by the scheme. There will also undoubtedly be employees who were going to resign anyway, but instead are made “redundant” by their employer and spend the next six months receiving 80% of their former pay courtesy of the scheme. Through appropriate policing, these issues can be managed, but the scheme will require careful regulation.
Ultimately the arguments in favour of introducing the scheme seem more compelling than those against. However, the key issue is whether now is the right time. In an environment where we have record low unemployment, worker scarcity and consequent wage bidding wars, expectations that employers will increase employee pay to meet cost of living expenses, and businesses crippled by two years of the pandemic, introducing a further business cost right now is problematic.
Assuming the anticipated productivity improvements do eventuate, it may be a case of suffering some short term pain, for longer term gain. However that short term pain may be too much for some employers to bear at this point.