Whether you are using subcontractors to scale the size of your workforce in line with demand, or because you need to bring in specialist expertise on an ad hoc basis, it is of vital importance that you are clear on whether your subcontractors are labour only or bona fide. Getting it wrong could have serious repercussions in an insurance sense, which could potentially lead to fines or penalties, void cover, or rejected claims.
Why is it so important to determine the correct status of a subcontractor?
If you are engaging subcontractors, it is essential that you have a proper understanding of the basis upon which they are being engaged, and what their status is: labour only or bona fide subcontractor.
This is because the nature of the relationship will determine to what extent you are liable for injury to the subcontractor, and the extent to which you will be liable for their actions. When an insurer calculates liability exposures, they will take all of this into account. This is why you need to be clear on the status so that you can be sure the correct insurance cover is in place.
If you incorrectly classify a subcontractor, then there is a risk that the insurer will charge the wrong premium and/or apply inappropriate terms. This could result in claims not being paid, cover being void, and/or additional premiums becoming due so as to retrospectively resolve any errors. What’s more, a breach of the bona fide subcontractor condition may also result in the rejection of a claim.
As well as ramifications for product and public liability insurance, failure to correctly classify a subcontractor as an employee working under a contract of service could lead to non-compliance with The Employers’ Liability (Compulsory Insurance) Regulations 1998, which could result in fines or penalties.
How to correctly classify a subcontractor?
Whilst there is no standard definition of the different types of subcontractor, there is vast legal case history to help you determine which type you are engaging.
The nature of the contract you have with your subcontractor, which could be in writing but may also include verbal agreements or implied terms, will determine your relationship.
However, should a legal dispute arise, the courts will look at the individual facts of the case and, crucially, consider how the relationship worked in practice. They may even ignore the contractual intention of the two parties. This is precisely why it is so important to look beyond any contractual agreement, and consider how you are controlling and supervising your subcontractors in practice.
What are the different types of subcontractor?
There are two key types of subcontractor:
Labour only subcontractor (LOSC)
A labour only subcontractor works under the direct supervision and control of the principal contractor. They work under a contract of service, and will not usually provide their own materials or tools.
Whilst an LOSC may have their own insurances, they will usually be inseparable from your own employees. This means that they will be treated as such for the purposes of liability insurance and their wage roll should therefore be included in any estimates provided for the purposes of rating employers’ liability cover.
Because under health and safety law you have a statutory duty to protect labour only subcontractors in the same way as PAYE employees, if an LOSC is injured whilst working for you, they would be likely to make a claim. This would need to go through your employers’ liability insurance. You would probably also have a vicarious liability for any loss or damage the LOSC causes during the course of their work for you.
Bona fide subcontractor (BFSC)
A bona fide subcontractor is usually a separate entity, a company or individual, engaged to provide a specialist service or additional assistance for a particular contract.
A BFSC works under a contract for services, and is deemed to be an independent contractor working without your direct supervision and control. They will hold their own insurance and provide their own materials and tools, although occasionally they may provide labour in isolation too.
You will not need to include a BFSC on your employers’ liability cover, and you will not usually have a vicarious liability for their actions. Insurers may, however, provide contingency cover under product or public liability insurance, and it is important to be aware that claims are often made against the principal contractor initially.
Should a BFSC suffer injury whilst working for you, this will be handled under your product or public liability cover, providing the nature of the subcontractor’s engagement is such that the court would not consider them an employee.
LOSC vs BFSC Quick Comparison Guide
The following factors may assist you in determining whether a subcontractor is labour only or bona fide:
|Labour only subcontractor||Bona fide contractor|
|Works under your direct control and supervision||Works to a job specification provided by you but they decide how, when and where the work is done and by whom|
|Works under your method statements and risk assessments||Creates their own method statements and risk assessments|
|Works mainly for a single principal contractor||Regularly works for multiple parties|
|Paid by the hour, day or week||Paid a fixed fee for the entire project and accepts financial risk should costs increase|
|Provides labour only||Provides labour for each project and usually supplies their own materials (although some may only supply labour)|
|Uses your tools, safety equipment and materials||Provides their own tools and safety equipment|
|Must complete the work themselves||Is free to subcontract the work out to others|
|May carry their own liability insurance||Will always have their own liability insurance|
|Has no say in how the business run and no financial risk in the contract||Always has the final say in how the business is run|
|Is considered an employee or as under a contract of service in any documentation, regardless of whether they are employed or self-employed||Is considered as working under a contract for services in any documentation|
|Is entitled to paid sick and holiday leave from you||Is not entitled to sick pay or holiday pay from you|
Do you have the correct liability cover for your subcontractors?
When ascertaining whether a subcontractor is labour only or bona fide, the key consideration is the level of supervision, direction and control you have over them. You may well have a written, verbal or implied contract, but ultimately the unique circumstances of each relationship, and the facts of each case, will be what influence the courts to determine the subcontractor’s status should an issue arise.
It is therefore vital to ensure that you always make sufficient checks when engaging a subcontractor, and seek appropriate advice if you are unsure.
If you have any doubt over the status of your subcontractors, you are welcome to discuss the situation with the team here at Robert Gerrard, who will always ensure you have appropriate cover for your needs and to sufficiently protect your interests.