A proposed public ‘Income Insurance Scheme’ for no-fault termination

Employment | Print Article

November 2022

This article outlines and considers the implications of proposed and potentially transformative legislation around ‘no-fault termination’ that, if implemented, will have an impact on every business and worker in New Zealand.

The Future of Work Tripartite Forum (the Forum) is a partnership between the Government, Business New Zealand, and the New Zealand Council of Trade Unions. The Forum is focused on supporting both businesses and workers, amidst the inevitable change in the ‘future of work’ for New Zealand – as a result of increased automation, emerging technologies, and the climate crisis requiring a move to low-emissions economies. In time, entire industries may become obsolete, and so too, their associated workforces.

There is a notable absence within New Zealand employment law as to mandatory ‘support’ for employees who are displaced from their employment through redundancy. Almost alone in the developed world, with no specific state administered fund, nor a requirement for an employer to pay tenure-based compensation in the event of no-fault termination, which impacts both individuals and the economy.

In the majority of workplaces in New Zealand, an employee experiencing a ‘no-fault’ termination is provided the standard notice period in their employment agreement. Some companies (and often those with union negotiated collective agreements) may be provided additional support, but there is otherwise little recourse. Welfare support may be accessed, but this can still result in a significant drop in income, or a person may be ineligible (based on household income). Many of the 100,000 workers who are made redundant every year in New Zealand will not have private income insurance. The Forum seeks to reduce the ‘wage scarring’ that can occur in these situations; statistically displaced workers will earn an average 25% less income as they look to obtain new work as quickly as possible, inevitably accepting a lower rate of pay.

The Forum widened its scope in 2021 to include resource for termination of a worker due to a health condition or disability. This is now also included within the proposed Scheme.

The Forum also seeks to address the existing inequity between the above displaced workers, and a person who injures themselves through an ‘accident’ and is able to access ACC’s compensation scheme (and in turn 80% of their income, while they rehabilitate). It has long been on the current Government’s agenda to attend to this imbalance.

Lessons have also been learned from past government support packages that have sought to keep employees with their employers (for example the Wage Subsidy Scheme as a response to the Covid-19 lockdowns and its impact on workplaces). Instead of keeping an employee tied to a role with questionable viability, the Scheme proposes that employee should have access to adequate time and support (including training and upskilling if appropriate) to find good, new work on at least the same terms.

What will the Scheme provide and where will the money come from?

A 187-page discussion document outlining the Scheme was issued in February 2022. The document details it’s considerations in arriving at the recommendations and poses questions as to how the Scheme can best be finalised.

The key elements of the Scheme are:

  • employees and employers will create a fund through the charging of levies on earnings from employment – each contributing 1.39% (or 2.77% total) – capped at $130,911.00; and
  • the fund will resource temporary income cover to ‘displaced’ employees, and be administered by ACC, given the similarities with the existing ACC scheme

In return for their payment of levies, an employee will receive:

Displacement Insurance

  • a minimum 4-week notice period for redundancy;
  • an additional 4-week ‘bridging payment’ by the employer at 80% of normal earnings; and
  • a further 6 months’ pay at 80% of normal earnings (capped at $130,911).


  • an employee must have been contributing levies for 6 of the preceding 18 months;
  • the job must be lost in full, not just a reduction in hours;
  • an expectation that the employee is based in NZ and actively seeking work;
  • must take any suitable job offered on equal or better terms from their last role;
  • a possible extension of support up to 12 months for approved training or vocational rehabilitation; and
  • applicable to as many employees as possible (self-employed, fixed term, casual, multiple jobs).

Health Conditions and Disability Insurance

  • a minimum 4-week notice period for termination;
  • an additional ‘bridging payment’ by the employer – 4 weeks at 80% of normal earnings (not required if employer agrees to hold job open for recovery); and
  • a further 6 months’ pay at 80% of normal earnings (capped), paid by the Scheme.


  • must have at least a 50% reduction in work capacity that is expected to last 4 weeks or more;
  • must first use all available sick leave;
  • ‘work capacity assessments’ may be required; and
  • engage in return-to-work activities.

The Forum rationalises employers bearing the cost of the notice period and bridging payments, as an encouragement for employers to make reasonable attempts to either avoid redundancy or accommodate the employee’s health condition or disability.

Whilst the Scheme aims to support workers, benefits may also result for employers, for example, by sharing the ‘costs’ with employees, and having a clear, prescriptive process (with more predictable costs) in the event of redundancy or medical termination.

From an employment law perspective, it certainly raises questions about the impact on litigation for unjustified dismissal in these circumstances, and how it might affect existing employment agreements containing redundancy compensation.

There are other questions too (above the 94 questions posed within the discussion document), as to:

  • the interplay between the Scheme and those with private insurance cover;
  • how to ensure performance/disciplinary issues will not be construed as redundancy; and
  • 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.

Whilst only at discussion document stage, there does appear to be an impetus by the Government to progress the Scheme without delay (noting it is opposed by the major opposition party). Consultation was open for submissions until the end of April 2022, and we now await the outcome and likely progression to Parliament.