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The changes will come into effect in 2020 once legislation has gone through a select committee process which will include public consultation.
This follows on from announcement last September to the repeal Funded Family Care, a policy that prevented parents and spouses from being paid to look after their disabled or ill loved ones.
The policy, which was rushed through under urgency in 2013 and has been described as a "shame on society", meant that family members other than spouses were paid minimum wage.
Before 2013, the Ministry of Health had a policy of never paying carers of adults with disabilities if they were related.
Alongside disabled families that have been fighting for this change for years, Ardern and Associate Health Minister Julie Anne Genter made the announcement at Premiere House in Wellington today.
They confirmed that the Government would repeal part 4A of the NZ Public Health and Disability Act, which underpins the policy and also bans families from challenging it in court on the grounds of discrimination.
"We have heard loud and clear from families with disabled members about the need to change Funded Family Care. Today progresses a more compassionate government that addresses the needs of stretched parents and partners," Ardern said.
Genter said it was important to repeal part 4A.
"This will restore people's human rights to be involved in decision making, and have the right to complain about policies that affect them and their families.
"We also heard from families about the need to remove the requirement for an employment relationship between a disabled person and their family member. Health Ministers will consider alternative options which do not place unreasonable expectations on disabled people, their family or whānau."
The current scheme means that the disabled or ill person was the employer, creating a barrier for children to "employ" their parents.
Under the new policy, spouses and family members will be paid between $20.50 to $25.50 an hour, depending on their years of service.
It's the same pay rates that apply following the pay equity settlement for care and support workers in New Zealand's aged and disability residential care and home and community support services.
The new policy would cost $32 million.
Currently, spouses are not entitled to be paid for the care of their disabled or ill loved ones.
The changes will come into effect in 2020 once legislation has gone through a Select Committee process which will include public consultation.In its pre-election manifesto, Labour said it would repeal the legislation, and that it would ensure all family caregivers could "provide and be paid for assessed care for their disabled adult family member".
After Labour was elected, disability groups petitioned for the law to be overturned, and then earlier this year, a group of families known as the King plaintiffs told their stories to the Herald in an effort to hold the Labour Government to its word.