Employer’s Liability insurance for Sub-Contractors

Employer’s Liability (EL) insurance: we all know it covers compensation costs for employees who injure themselves or become sick as a result of the job. In construction, the key thing is managing the difference between labour only sub-contractors and bona-fide sub-contractors. Get it wrong and you end up paying for insurance you don’t need – or breaking the law by not having the right insurance in place.

It’s a topical subject at the moment: HM Revenue & Customs (HMRC) is clamping down on main contractors claiming to have self-employed contractors on their books who are, to all intents and purposes, employees. This all takes place within the framework of the Construction Industry Scheme (CIS), which was significantly overhauled in 2007.

CIS sets the rules for payments by industry contractors to sub-contractors – based on each sub-contractor’s HMRC tax status – and covers companies, partnerships and the self-employed. It affects an estimated 200,000 registered contractors and 900,000 sub-contractors in the UK. AGS Payroll Services – 2013.

Against that background there is a need to determine the status of your sub-contractor, so that you have the right insurance in place.

In a nutshell: if you have overall control in directing the working environment then you are responsible for your labour’s health and safety. You should be arranging EL cover for them plus declaring the payments to your insurers so you pay the right insurance premium.

In the event of a loss, it’s the courts that will decide whether or not you should have had cover in place – but this could leave you at risk of fines and penalties for failing to put the right cover in place.

Whether you’re employing sub-contractors or labour only you want to understand the full risk picture, remember your key priorities. Work with your broker to build a firm and clear EL risk foundation:

• DO separate labour only sub-contractors (LOSC), from bona fide sub-contractors (BFSC). LOSCs carry a premium and you’ll be paying too much if you combine LOSCs with BFSCs.
• DO ensure you comply with all your policy requirements for managing sub-contractors and labour-only
• DO be aware that some policies have an endorsement condition: this will stipulate that BFSCs must have the same amount of Public Liability cover as you. If your policy has a higher indemnity limit than that of your BFSCs then your own contingency cover will be compromised.

LOSC or BFSC? Here’s what you need to know

The best rule of thumb is never assume: the better you know the precise make-up of your contracted workforce, the lower your EL insurance premiums will be and the more airtight your protection.

The labour only sub-contractor (LOSC)

• LOSCs work directly under your supervision. They use materials, kit, equipment and even tools that you provide and are paid wages by you (either directly or via an agency).
• Working under your control they are legally treated as employees: you need EL insurance by law! Even if they’re only with you for a short time.
• Remember to include LOSCs under your EL insurance. Your broker will need to know your annual LOSC payroll figure and the maximum number of LOSCs working in your business at a given time.

The bona fide sub-contractor (BFSC)

• BFSCs work under their own supervision and typically use their own materials and kit – the main contractor pays them as if it were a normal customer job.
• BFSCs are usually specialists in a particular construction discipline: piling, mechanical / engineering or roofing for example. No need for EL insurance!
• Even if it’s not a condition of your EL policy, always check in advance that your BFSCs have Public Liability cover with the same indemnity limit as your own.
• Review your BFSCs Public Liability schedule every year just in case – thus you’ll be protected if they are the cause of an incident while working for you.
• Many policies also require that your BFSCs take out EL insurance – so you need to ensure this is complied with.
• It’s important to let your insurers know how much you pay your BFSCs: it means you can include some contingency Public Liability cover on your insurance policy in the event of a claim. This protects you if the BFSCs in question lack the right cover for whatever reason. Safe is always better than sorry.