Insurance considerations when using bona fide or labour-only subcontractors
If you run your own business, understanding your insurance obligations is vital, perhaps even more so if you regularly hire subcontractors. Here, we look at the differences between bona fide and labour-only subcontractors when considering your insurance.
- What is a labour-only subcontractor?
- What is a bona fide subcontractor?
- What industries use subcontractors?
- How does using subcontractors affect employers’ liability insurance?
- How does using subcontractors affect public liability insurance?
- What are my insurance responsibilities?
What is a labour-only subcontractor?
Labour-only subcontractors (LOSC) are self-employed but operate as part of your team. They’ll use the tools and materials you provide and carry out tasks under your instruction. If your client has any issues with their work, you would be responsible; equally, if they are injured when working for you, you would be responsible.
A labour-only sub-contractor would be on your payroll and paid directly by you, either hourly, daily, weekly, or monthly.
An example of a LOSC would be someone contracted as an extra pair of hands to help finish a job by an agreed deadline.
What is a bona fide subcontractor?
A bona fide subcontractor (BFSC) works for themselves (and may operate their own business) and is brought onto a project to carry out a specific task.
Bona fide subcontractors work independently without your supervision and use their tools and materials. When they’ve completed their task, they’ll invoice for their services. They are responsible for the quality of their work and could also hire employees to work on your project.
Examples of bona fide subcontractors include electricians and plumbers hired by a builder to carry out specific work on any given project.
Is there a difference between contractors and subcontractors?
The main difference is that contractors are hired by the client. For example, if a client hired your business to manage a project, you would be considered a contractor.
Subcontractors are people hired by the contractor. Typically, a subcontractor will have skills or expertise in areas the contractor doesn’t. For example, if you were a builder and hired an electrician to rewire a house you were working on for a client.
Summary of key differences between bona fide subcontractors and labour-only subcontractors
Here’s a checklist to help your business quickly differentiate between BFSC and LOSC.
| Bona fide subcontractor (BFSC) | Labour-only subcontractor (LOSC) |
| Does not need supervision to carry out their task | Follows your instructions and may need to be supervised |
| Uses their tools and materials | Uses your business’ tools and the materials you provide |
| Paid a fixed sum for the job or service they carry out | Paid hourly, weekly, or monthly by your business |
| Can employ additional people to help them | Cannot employ anyone else |
| Has their own insurance | Covered under your insurance |
What industries use subcontractors?
Subcontractors are often thought of as construction industry related only, but in reality, subcontractors can be found in all sectors.
With that in mind, if you run a service-based business, don’t assume subcontracting obligations don’t affect you.
How does using subcontractors affect employers’ liability insurance?
Labour-only subcontractors are treated as your employees, so you must have appropriate employers’ liability insurance by law. Their wages will be included in the calculation of your premium.
Employers’ liability policies cover your costs if an employee takes you to court because they’ve been injured while working for you.
If you take on additional LOSC, you should let your business insurance provider know so they can check you have suitable levels of cover.
You don’t need employers’ liability for any bona fide subcontractors you hire, as they are not considered your employees.
What are the penalties for not having correct employers’ liability insurance?
If you should have employers’ liability insurance but don’t, you can be fined £2,500 for every day you are not insured.
You must also clearly display your employers’ liability certificate or store it electronically in a location that is accessible to your employees. You should also be prepared to show the certificate to inspectors from the Health and Safety Executive if they ask for it. If your certificate isn’t displayed or you refuse to show it, you can be fined up to £1,000.
How does using subcontractors affect public liability insurance?
Public liability insurance covers costs if a member of the public is injured or has property damaged because of your business.
If you employ labour-only subcontractors, they should be covered by your public liability insurance. So, if they accidentally dropped something on a member of the public, causing them injury, your policy should compensate the injured person if they decide to make a claim.
Bona fide subcontractors should have their own public liability insurance. However, you should check what your public liability insurance states about using BFSC. Many insurers will have a condition that sets out that any BFSC you hire must have the same level of cover as you (at least).
For example, if you run your own business and have public liability insurance with a £5 million limit of indemnity, any BFSC you hire must also have public liability insurance with a minimum £5 million indemnity.
If this is a condition of your public liability insurance, you must ensure it is met. If not, your insurer could reject your claim. You should also ensure you declare subcontractors’ wages to your insurer to ensure your insurance will act should their insurance not for any reason.
What is an indemnity to principal clause?
If you hire bona fide subcontractors, your insurer may also ask that any BFSC you hire has an indemnity to principal clause in their public liability insurance.
This means that if a claim is made, any compensation is paid to the person who suffered the injury or damage and not the policyholder (the BFSC).
For example, your business hires a BFSC to carry out specialist work for a project for your client. The BFSC caused some damage to your client’s property, and your client decided to sue for compensation. Under the indemnity to principal clause, any compensation will be paid directly to the injured party (your client) instead of the policyholder (your BFSC).
This clause can help resolve conflict and ensure that money is paid directly to the party that has suffered losses.
What are my insurance responsibilities?
If you employ members of staff, your biggest insurance responsibility is ensuring you have appropriate employers’ liability insurance.
If your business regularly employs labour-only contractors, remember to let your insurer know. The number of employees you have, and your wage roll can affect your insurance premiums (both employers’ and public liability). Keeping your provider updated can help ensure you have the cover you need.
If you hire BFSC, they are responsible for their own insurance. However, it’s down to you to ensure their indemnity level is at least equal to yours. BFSCs may also need to show proof that their public liability has an indemnity to principal clause.
To discuss your insurance needs, speak to one of our experts on 01603 218000. We can take you through your options and help tailor an insurance plan to suit all aspects of your business.
