The difference between a bona fide and a labour only sub-contractor

In my previous blogs we discussed the compulsory nature of the Employers Liability (Compulsory Insurance) Act 1969 and whether it was necessary for a business to take out Employers Liability Insuranceif the only employee was a spouse or a close relative. Many businesses also employ the services of sub-contractors to assist them with part or all of their operations. There are two distinct types of sub-contractor and it is important that your business is able to distinguish between these different types of sub-contractor. The nature of the contract and your working relationship with the sub-contractor (whether they be a bona fide sub-contractor or a labour only sub-contractor) will have ramifications for the responsibilities you will be assuming and consequently the type of Liability Insurance you require to cover your potential liability.

The following should help you to determine between the different types of sub-contractor and whether Employers Liability Insurance is required.

Labour Only Sub-Contractors

Labour only sub-contractors generally work under the direction of the employer and they do not provide their own materials or tools or than small hand tools. They would be considered as employees for the purposes of an |Employers Liability Insurance policy.

Bona Fide Sub-Contractors

Bona fide sub-contractors generally work under their own direction and provide their own materials and tools. They should also take out their own Public Liability Insurance. Provided they are not working under your direction, have their own legal liabilities which they insure themselves, there is no need to include these in the count of employees.

In the event of an accident caused by the the sub-contractor in the course of executing their contract with you, the injured third party could take legal action against both the bona fide sub-contractor for causing the accident and you as the main contractor. The bona fide sub-contractor's own Public Liability insurance policy would cover them for their own legal liability, and your own Public Liability insurance would cover you in the event that you were found to be legally liable. Please note that your Public Liability policy would only cover you for your own legal liability arising from the incident. It would not cover the bona fide sub-contractor's liability, (hence the need for the bona fide sub-contractor to have their own insurance in force). If, for whatever reason, the bona fide sub-contractor's policy is inoperative or has insufficient cover then the liklihood of the claim being directed against you is greatly increased. (From the third party's perspective their would be little point in suing the bona fide sub-contractor in those circumstances because the chances of them having sufficient funds to pay any significant compensation would be slim. Those with the insurance in force, and therefore the deepest pockets, would be drawn in to any action). It is for this reason that most Public Liability insurers make it a condition of their cover that whenever you enter in to a contract with a bona fide sub-contractor you must check that they have Public Liability insurance in force with cover up to an indemnity limit at least equivalent to the limit provided under your own policy.

It is therefore imperative that whenever you enter in to a contract with a bona fide sub-contractor, you must check that they have Public Liability cover in force for the type of activities they will be undertaking for you and that it will be in force for the duration of the period for which they will be undertaking the work. You must also check that the indemnity limit provided under their policy is at least as much as the limit provided under your own policy. If you do not do this, your own policy would be invalidated and you would therefore have to meet your own legal liability and associated legal costs out of your own coffers.

How to distinguish between a Bona Fide Sub-Contractor and a Labour Only Sub-Contractor

There are a number of factors to take into account when determining the status of a sub-contractor.

A worker would be regarded as a Labour Only Sub-Contractor (and would need to be covered for Employers Liability Insurance) they meet the following criteria
(1) They are paid by the hour, week or month
(2) They are entitled to receive overtime pay or a bonus payment
(3) They only supply their own small hand tools
(4) They always have to do the work themselves
(5) The main contractor can tell them at any time what to do, where to carry out the work or when and how to do it
(6) They work a set amount of hours
(7) The main contractor can move them from task to task

A worker would be regarded as a bona fide sub-contractor if they meet the following criteria
(1) They undertake a job for a fixed price regardless of how long the job may take
(2)They have a contract for the provision of services as opposed to a contract of employment
(3) Within an overall deaddline, they are able to decide what work to do, how and when to do the work and where to provide the services
(4) They regularly work for a number of different people other than the main contractor
(5) They have to correct unsatisfactory work in their own time and at their own expense
(6) They hold their own Public Liability insurance in their own name. (Public Liability insurance is not a statutory compulsory form of insurance so it is possible that a sub-contractor may not have this form of insurance)
(7) They pay the cost of all materials or supplies required for the work without being reimbursed
(8) They are free to hire someone else to do the work or engage helpers at their own expense
(9) They risk their own money
(10) They provide or hire in the main items of equipment they need to do their job, not just the small tools that many employees provide for themselves.

Depending upon the size of the business, Liability Insurers, calculate the premium they will charge for the business in one of two ways:

Small Business (generally up to 10 employees) - Per Capita basis (i.e. on the number of principals/directors/employees in the company)

Larger Businesses - Wageroll and Turnover basis (i.e. they charge a rate per cent to the wageroll of the company, the rate charged being determined  by the nature of the activities being undertaken by the company).

For the larger businesses rated on wageroll and turnover, the wageroll/earnings are split into various categories based on the earnings of the director/principal/sole trader, the wageroll of the employees and payments made to labour only and bona fide sub-contractors. If it is a limited company the director's earnings will be included under the Employers Liability section for rating purposes. Partners' or sole traders' earnings are not included in the calculation of the Employers Liability premium. Under the Employers Liability Section payments to labour only sub-contractors are included, but payments to bona fide sub-contrators are not.

Under the public Liability Section payments to all of the categories are included for rating purposes (although they only charge a much smaller rate for payments made to bone fide sub-contractors. Payments made to labour only sub-contrators are charged the same rate as if they were direct employees because the policyholder is directly responsible for their actions and has greater control over their supervision. Tthe various categories are therefore as follows:  

Employers Liability
Limited companies:
Directors
Employees
Labour Only Sub-Contractors

Partnerships or sole-traders:
Employees
Labour Only Sub-Contractors

Public Liability
Limited Companies:
Directors
Employees
Labour Only Sub-Contractors
Bona Fide Sub-Contractors

Partnerships or Sole traders:
Partners (or Sole Trader)
Employee
Labour Only Sub-Contractors
Bona Fide Sub-Contractors

Further distinctions are then made to the calculation of the premium rate being charged depending on the nature of the work being undertaken. For example, clerical/sales, manual work depending upon the trade, work at height, work at depth, work involving the application of heat etc.

Further factors can be taken into account to fine tune the rating of the policy to take into account their comapny's claims history, attitude to risk, what health and safety procedures are in place to name but a few.

If you have any queries regarding this article or would like advice regarding any aspect of your own company's Liability Insurance requirements please do not hesitate to contact me for a free, impartial and independent review.

david.wilson65@hotmail.com
07970 304169