Bona Fide vs. Labour-only sub-contractor - know the differenceIf you’re involved in any kind of contracting, you’ll probably have been asked about payments you make to sub-contractors and whether they are bona fide or labour-only. Brokers are frequently asked about the difference, and as far as your liability insurance is concerned, it is an important distinction. So to help clarify things, here is a simple guide:
A bona fide sub-contractor normally works under their own direction and supplies their own tools and materials. A labour-only sub-contractor normally just supplies their labour and works under the direction of their employer.
How it impacts youFrom an insurers’ perspective, labour-only sub-contractors 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 sub-contractors should have their own insurance, so their payments aren’t normally allowed for, in the same way in calculating premiums.
When it comes to Public and Products Liability, bona fide sub-contractor payments may still be taken into account in the premium calculation. However, the assumption is that they will have their own 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.
So, how can you tell which type of contractor is which?
Some other points that can help decide which category your sub-contractors fall into are:
- How they are paid: Contractors paid by the hour, day or week are more likely to be considered labour-only. Bona fide sub-contractors tend to quote for a job and invoice it, either on completion or in stages.
- Flexibility on the job: If you are able to reassign roles to an individual contractor, they are more likely to be a labour-only sub-contractor
- Responsibility for additional costs: If your contractor is obliged to correct any problems with their work without billing you for the extra time, and if this extra cost or any other situation where they have underquoted would cause adverse risk to their earning, they are most likely to be a bona fide sub-contractor.
This brings us to a very important aspect…
Your responsibilities as an employer
Many contractors’ policies have a sub-contractors clause, which requires you as an employer to ensure that your bona fide sub-contractors 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 sub-contractors with the necessary cover in place.
In order to remain compliant, it’s advisable to consider a diary system which flags up your sub-contractor’s insurance renewal dates. You can then obtain updated details annually and ensure you continue to comply with your own insurers’ requirements. Failing to do this could have serious implications in the event of a claim.