Subcontractors: Labour Only Subcontractors V Bona Fide Subcontractors

Subcontractor: Labour Only Subcontractors and Bona Fide Subcontractors, determining their Status

One of the most frequently debated subjects in Liability insurance is the status of subcontractors – those engaged by a policyholder to perform work on its behalf.

Policyholders use subcontractors for several reasons:

  1. It may be more cost effective to “employ” people on this basis because it means the policyholder can adapt the size of its workforce
    to meet the demands of its workload – rather than directly employ full time staff and incur the associated costs of doing so.
  2. In particularly busy periods it gives the policyholder the flexibility to quickly expand to handle any increased workload.
  3. It may be that some tasks are outside the policyholders’ core expertise, and the services of a specialist are required to enable the policyholder to offer a more complete service.

Why is the status of Subcontractors so important?

Subcontractors are engaged under a contract of service or under a contract for services. There has been much legal discussion about the characteristics of each, however, we will try and summarise these below:

  • A labour only subcontractor (LOSC) will be treated as if they are working under a contract of service in a similar way to a directly employed person. There will be a master-servant relationship that is recognised in law
  • An independent contractor – or bona fide subcontractor (BFSC) – will work under a contract for services where they will control the whole activity themselves, rather than work under the direct supervision of their employer

There are no standard definitions of the different types of subcontractor, however there is extensive legal case history, and it is of vital of importance that the policyholder as a proper understanding of the basis on which the subcontractor is being engaged, and what their status is:

The nature of this relationship will determine to what extent the policyholder is liable for injury to the subcontractor, and the extent to which the policyholder is liable for the actions of the subcontractor. Insurers will take this into account in their acceptance and pricing of Employers and Public/Products Liability exposure, which mean the policyholder must understand the differences between BFSC and LOSC’s to ensure that the correct insurance cover is in place.

As well as the implication for the policyholders liability insurance, the failure to correctly classify a subcontractor as an employee working under a contract of service, could result in a failure to comply with Employers Liability compulsory insurance regulations, meaning the policyholder could incur fines/penalties.

LOSC – The subcontractor

BFSC – The subcontractor

Is usually an individual (but be aware of labour gangs and individuals working under an umbrella company Is usually a firm (but could be an individual) that employs others and has the freedom to move employees onto other jobs
Works under the direct control/supervision of the policyholder and is told what to do and where and when to do it Works to a job specification provided by the policyholder but decides exactly how, where and when the work is done, and by whom
Works under the policyholders method statements and risk assessments Creates own method statements and risk assessment which employees must follow
Works mainly for one principal Decides who to accept work from and/or regularly works for multiple parties
Paid daily/hourly/weekly Paid a fixed fee for the job and takes the financial risk if costs increase
Provides labour only Provides labour for every job and usually provides materials (some BFSC can provide labour only)
Uses tolls, safety equipment and materials provided by policyholder Provides own tools and safety equipment
Cant subcontract the work given Is free to subcontract work to others
Could carry their own liability insurance Always has their own liability insurance
Have no say in how the business is run and no financial risk in the contract Always has the final say in how the business is run
Is referred to as an employee or as under a contract of service with the insured in any documentation Is referred to as working under a contract for services in any documentation
Entitled to sick/holiday pay if absent from work Is not entitled to sick pay or holiday pay by the policyholder

Why is this important to liability insurers?

Liability insurers usually adopt the following approach:

  • Payments to LOSC are included in wage roll estimates for the purpose of rating
  • Payment to BFSC are excluded from wage roll estimates
  • The Public Liability is rated on turnover excluding payment to BFSC, but a lower rate is applied to the payments to BFSC to reflect the contingent nature of the Public Liability risk.
  • Some insurers may not discount the Public Liability rate for BFSC due to the increased risk of PL claims arising as result of injury to BFSC.

In order to justify the lower level of premium being charged to reflect work undertaken by BFSC, it is common for insurers to add a Bona Fide Subcontractors Condition to the policy. This will require the policyholder to ensure that the BFSC have in full force and effect, throughout the duration of their contract, bot, Employers Liability and Public Liability insurance (with a a specified limit of indemnity).

If the policyholder incorrectly classifies BFSC and LOSC and vice versa, there is a risk that the insurer will charge the wrong premium and/or apply inappropriate terms, which could lead to claims being unpaid, the cover being avoided and/or additional premium becoming payable in order to retrospectively rectify any mistakes.

A breach of the BFSC condition may also result in insurers rejecting a claim, speak to us today if you have any concerns regarding your liability cover.

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