What’s the difference between bona fide and labour only sub-contractors?
As an employer in regular need of contractors, you will almost certainly have been asked the question: are your sub-contractors bona fide or labour-only? Many employers don’t understand the difference between these two types of contractors. However, when it comes to liability insurance, you’d be surprised just how important the differences are.
Here is a simple guide to help you understand the difference between bona fide and labour only subcontractors, including how to spot them:
Knowing the difference
In simple terms, a bona fide sub-contractor is one that normally works under their own direction and supplies their own tools and materials. Meanwhile, a labour only sub-contractor supplies their labour and works under the direction of their employer.
So, why does it matter?
These key differences can be very important when it comes to insurance. For the purposes of Employers’ Liability insurance, labour only sub-contractors are regarded as employees, so any payments made to them need to be included in the wage roll figures declared by the employer. Bona fide sub-contractors however, should have their own insurance.
This means that their payments aren’t allowed for in the same way when 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, it is still assumed that they will have their own policy in place, meaning any claims for their work are passed back to their insurers as opposed to being covered by the employer’s insurance policy. This should result in a lower insurance rate for the employer.
How to tell if a sub-contractor is bona fide or labour only
Some key points that can help identify these types of contractor in practice are:
- How they’re paid
Those 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.
- Whether or not their jobs can be reassigned
If you are able to reassign jobs to your contractor, they are more likely to be labour only.
- If they are financially responsible, are they obliged to correct problems with their work without billing for extra work and are their earnings likely to be at risk if they’ve underquoted?
If your contractor is obliged to correct problems with their work without billing for extra time, they are most likely to be a bona fide sub-contractor.
What action do you need to take?
This brings us to the most important point:
Many contractors’ policies have a sub-contractor clause requiring the employer to ensure that bona fide sub-contractors have their own cover - often to a set indemnity limit.
Depending on the type of work this cover may come in the form of Employers’ Liability, Public and Products Liability, Contract Works and/or Professional Indemnity insurance. It is advisable to produce evidence of insurance letters for clients to pass to larger main contractors. However, employers should always make it their responsibility to know that their sub-contractors have the necessary cover in place.
The best method of doing this, is to set up a diary system to flag up sub-contractor’s insurance renewal dates. By storing details and updating annually, employers can be confident that they are complying with insurance requirements. Failing to do so could have serious implications in the event of a claim.
If you have any questions or queries regarding your business insurance, contact us on 03455 646173 to speak to one of our friendly advisors.
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