And, Why Does It Matter?
The categorisation of Bona Fide and Labour Only subcontractors can cause great confusion! However, correctly classifying your subcontractors is of paramount importance. Failure to do so could result in claims being repudiated.
Labour Only Subcontractors
Labour Only Subcontractors (LOSCs) are treated as if they are working under a contract of service. This is in a similar way to directly employed individuals. There will be a master-servant relationship that is recognised in law.
Labour only subcontractors generally work under the direct supervision and control of the policyholder. They do not usually provide their own materials or tools. Whilst they may have their own insurance, they’re almost inseparable from the policyholder’s own employees. Additionally, they are treated as one and the same for the purpose of liability insurance.
Labour Only Subcontractors are usually individuals (often self-employed). They may however be part of a labour gang, or individuals working under an umbrella company. If a labour only subcontractor is injured in the course of their employment, there is likely to be an Employers Liability claim against the policyholder. The policyholder is also likely to be vicariously liable for any injury or damage caused by one of their labour subcontractors.
Bona Fide Subcontractors (BFSCs) are independent contractors. They work under a contract of services where they control the whole activity themselves. In comparison, to working under the direct supervision of their employer.
Bona fide subcontractors are usually separate companies, although they can be individuals. They are engaged by the policyholder for the purpose of providing a specialist service, or simply to provide additional resource. Bona Fide subcontractors work without any direct supervision and control from the policyholder. They hold their own insurance and usually provide their own materials and tools. However, they can provide labour in isolation as well.
What Are The Risks Of Incorrectly Classifying?
Insurers take Labour Only and Bona Fide Subcontractor payments into account in their acceptance and pricing of Employers and Public/Products Liability insurance covers. It is therefore essential that the differences are understood. This is to ensure cover is arranged correctly and that policyholder liability is clear.
- Some insurers will only permit a certain level of payments to Labour Only and Bona Fide Subcontractors.
- Failure to correctly classify a subcontractor as Labour Only, could result in a failure to comply with Employers’ Liability compulsory insurance regulations.
If a policyholder incorrectly classifies subcontractors there is a risk that the insurer:
- Would charge the wrong premium and/or
- Would apply inappropriate terms and/or
- Mmay inadvertently go on cover for a risk that wouldn’t actually be acceptable to them
This could lead to:
- Claims being unpaid.
- Policy cover being avoided.
- Additional premiums becoming payable in order to retrospectively rectify the mistakes.
- A breach of a Bona Fide Subcontractor condition may also result in insurers rejecting a claim.
What Is A Bona Fide Subcontractor Insurance Condition?
Where the services of Bona Fide Subcontractors are used, it is common for insurers to include a ‘Bona Fide Subcontractor Condition’. This would be either within the policy wording or by endorsement. A ‘Bona Fide Subcontractor Condition’ requires the policyholder to ensure that Bona Fide Subcontractors have adequate insurance covers in place, such as Employers’ and Public/Products Liability. The insurance must cover the full scope of activities undertaken by the Bona Fide Subcontractor. Most insurers specify minimum limits and/or require equivalent limits of indemnity to the policy holding company.
The condition usually also requires Bona Fide Subcontractors insurance policies to contain an ‘Indemnity to Principal’ clause. This benefits the policyholder in the event that a loss caused by the Bona Fide Subcontractor results in a claim against the policyholder.
It is usually a requirement that written evidence of Bona Fide Subcontractors’ insurances is obtained and retained.
Why Is Contingency Cover Important?
Where payments to Bona Fide Subcontractors are disclosed, most insurers provide contingent cover for the actions of these Bona Fide Subcontractor. The need for contingent cover arises where a loss is caused by a Bona Fide Subcontractor and:
(i) it is decided that the policyholder is vicariously liable for the actions of the Bona Fide Subcontractor.
(ii) the Bona Fide Subcontractor’s insurance fails for some reason.
There are a number of reasons why a Bona Fide Subcontractor’s insurance may fail, such as a:
- Failure to pay their premiums.
- Non disclosure of material facts (such as a CCJ).
- Failure to correctly categorise their employees.
- Failure to comply with policy terms, warranties and conditions etc.
As long as the Bona Fide Subcontractors Condition has been complied with, contingency cover will be operational subject the policyholder fulfilling all other policy terms, conditions and warranties.
What Is An Indemnity To Principals Clause?
Rather than have joint or co-insured on policy schedules, some insurers rely on an ‘Indemnity to Principal’ clause. As noted above, most Bona Fide Subcontractors Conditions require evidence of insurance including an ‘Indemnity to Principal’ clause. Such clauses are often stipulated as a requirement in contracts. Most contractors liability insurance policies include an ‘Indemnity to Principal’ clause. However, it is important to never just assume that this will be the case.
The ‘Indemnity to Principal’ clause protects the principal (the end customer, usually) or the principal contractor. By establishing that if a claim is made, the beneficiary of the policy will not necessarily be the policyholder. But, instead the third party who has suffered the damage or injury. This means that although the policyholder is buying the policy and paying the premium, it is not necessarily the policyholder who stands to be indemnified. The policyholder is purely buying protection to pay for liability that they may incur.
For example: A Plumber undertakes work on behalf of a Builder (the principal). The Builder’s client is a Property Owner. The Builder is sued by the Property Owner for negligent work undertaken by the Plumber, which has resulted in a flood. The Indemnity to Principals clause means that the Plumber’s insurers will indemnify the Builder’s client’s losses. This is subject to negligence being proven and compliance with policy terms, warranties and conditions.
Bona Fide And Labour Only Subcontractor Check Lists
Although there is no standard definition, there is much case law that helps determine what factors are important in determining the classification of Subcontractors. If you are unsure as to whether a Subcontractor is Labour Only, the following Check Lists may assist:
Does The Subcontractor:
- Work under your direction, control and supervision?
- Follow your instructions in terms of what to do, when to do it and where to do it?
- Use your tools, safety equipment and materials?
- Work under your method statements and risk assessments?
- Receive payment daily, hourly or weekly; can’t subcontract the work given; and has no financial risk in the contract?
If you have answered Yes to any of the above, it is likely that your Subcontractor is a Labour Only Subcontractor.
Does The Subcontractor:
- Employs others and have the freedom to move employees onto other jobs?
- Work to a job specification provided, but decides how, where and when the work is done and by whom?
- Create their own method statements and risk assessments which employees must follow?
- Decide who to accept work from and/or regularly work for multiple parties?
- Get paid a fixed fee for the job and has a financial risk if costs increase?
- Usually provide materials in addition to labour?
- Provide their own tools and safety equipment?
If you have answered Yes to any of the above, it is likely that your Subcontractor is a Bona Fide Subcontractor.
N.B. The above checklists aren’t exhaustive and it’s therefore recommended that policyholders seek legal advice if they are unsure.
Bona Fide And Labour Only Subcontractors Have Very Different Insurance Requirements
Bona fide subcontractors are responsible for arranging their own insurance cover. Additionally, they are usually required to indemnify you as their principal, in respect of work they undertake for you.
Whereas, labour only subcontractors aren’t responsible for arranging their own insurance cover in respect of work they undertake for you. Some may have their own policies. But, irrespective of this they need to be covered under your Employers Liability policy. They also need to be covered by your Public/Products Liability insurance whilst working under your direction, supervision and control.
If there is any aspect of your liability insurance arrangements you would like to discuss, please complete our Call Back Request form below:
or Call Us on 01384 442 165 during Office Hours (Monday – Friday, 9am-5pm)
We will gladly discuss and review your insurance requirements, and answer any questions you may have.