What is the difference between labour-only and bona-fide subcontractors?

Knowing the difference between labour-only and bona-fide subcontractors can help protect your business from costly and damaging risks, including fines, penalties and large-scale claims.

The defining characteristics of labour-only subcontractors are as follows:

• They work under your supervision and direction
• They use your materials, kit, equipment and tools
• They must comply with your health and safety policies
• They do not have a guarantee for work done
• They may leave part way through the job

Essentially, labour-only subcontractors are additional employees that you hire to assist with a project that is too large or complex for your full-time staff to handle in a timely manner.

As these subcontractors are employed for the duration of your project, you are required to pay them the same wages as your full-time staff and classify them as employees.

In addition, your firm must cover each labour-only subcontractor under your employers’ liability and public liability insurance.

The defining characteristics of bona-fide subcontractors are as follows:

• They work under their own supervision and direction
• They provide their own materials, kit, equipment and tools
• They are responsible for their own health and safety
• They may have additional employees
• They provide their own method statement and are responsible for their own guarantees and maintenance

Essentially, bona-fide subcontractors are hired to complete a specific job, such as plumbing or electrical work on a build project that your full-time staff isn’t capable of completing on its own.

As your firm would be hiring them for a specific job, you would pay them as if it were a normal separate job, typically via invoice. In addition, because they are working independently of your firm, bona-fide subcontractors should have their own liability insurance.

What are the risks of confusing the two?

Even though both subcontractor classifications are similar, confusing the two can expose your firm to costly and damaging risks. The most common risks include the following:

• A bona-fide subcontractor has insufficient or no employers’ liability or public liability insurance. As a result, after an incident, your firm is liable even though the subcontractor was at fault.
• Your firm had not notified your insurer about hiring labour-only subcontractors so they were not covered under your employers’ liability or public liability insurance. As a result, if they were responsible for an incident or become injured or ill due to their work, you could be wholly accountable for the damages.

Determining Labour-only v Bona-fide status

If you can answer yes to all or most of the following questions, the worker is probably labour-only:

• Are they paid hourly, weekly or monthly?
• Can they receive overtime or bonus pay?
• Do they work a fixed number of hours?
• Can the principal contractor direct them how, when and where to carry out their work?
• Can the principal contractor direct them from task to task?

If you can answer yes to all or most of the following questions, the worker is probably bona-fide:

• Are they paid on a fixed-price contract?
• Do they decide their own schedule?
• Do they decide what, how, when and where to do their work?
• Are they responsible for correcting unsatisfactory work?
• Do they work without supervision?

Labour only subcontractor agreement UK

From an insurers’ perspective, labour-only subcontractors are regarded as employees for the purposes of Employers’ Liability insurance, so payments made to them need to be included in the wage roll figures declared to your insurers each year. Bona fide subcontractors should have their own insurance, so their payments aren’t normally allowed for, in the same way in calculating premiums.

Bona fide subcontractor payments

When it comes to Public and Products’ Liability, bona fide subcontractor payments may still be taken into account in the premium calculation. However, the assumption is that they will have their own contractors’ insurance policy in place, so that any claims for their work can normally be passed back onto their insurers. This not only lowers the risk for the main contractor’s insurers, but also lowers the rate charged by your insurers.

Your responsibilities to subcontractors

Many contractors’ policies have a subcontractors clause, which requires you as an employer to ensure that your bona fide subcontractors have their own cover in force, often to a set indemnity limit. Depending on the type of work this may be Employers’ Liability, Public and Products’ Liability, Contract Works and/or Professional Indemnity cover. As brokers, we are often asked to produce evidence of insurance letters for our clients to pass to larger main contractors. However, even smaller contractors should be checking that they are only employing subcontractors with the necessary cover in place.

In order to remain compliant, it’s advisable to consider a diary system which flags up your subcontractor’s insurance renewal dates. You can then obtain updated details annually and ensure you continue to comply with your own insurer’s requirements. Failing to do this could have serious implications in the event of a claim.

If you would like to find out how CCS Insurance Services Ltd could help with your insurance needs, speak to us on 01483 726777.