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

Many businesses may also be taking on contractors to fill in potential staffing gaps caused by COVID-19.

There are two classifications of subcontractors, labour-only and bona-fide, and you will need to make sure that you know the difference to avoid fines, penalties or claims. Even though the implementation of IR35 in the private sector was delayed due to COVID-19, it is still coming into effect in 2021, so it is vital that you know the difference between the classifications of your subcontractors.

If you answer yes to any of these questions, your subcontractor is most likely labour-only:

• Do you pay your subcontractor hourly, weekly or monthly?
• Is the contractor eligible for overtime or bonus pay?
• Does your contractor work fixed hours?
• Do they follow the instructions of a team leader?
• Can a principal contractor direct them from task to task?

If you answer yes to any of these questions, your subcontractor is likely to be bona-fide:

• Is your contractor paid on a job by job basis?
• Do they work to their own schedule?
• Do they dictate how, when and where they work?
• Is the correction of unsatisfactory work their responsibility?
• Do they work unsupervised?

A labour-only subcontractor will have the following characteristics:

• You will supervise them, and give them direction on the project.
• You will provide tools, materials and equipment.
• They will abide by your work policies, such as health and safety.
• They don’t have a guarantee for the work done.
• They may leave at any point during the project.

Labour-only sub-contractors are essentially additional employees that you hire on a short term basis if your project is too large or complex for the team you already have. A labour-only subcontractor will be employed by you for the time that the project lasts, and you will have to pay them at the same rate as your regular staff, and classify them as employees when it comes to PAYE or your insurance.

A labour-only subcontractor will need to be covered by your Employers' Liability Insurance and your Public Liability Insurance.

A bona-fide subcontractor would have the following characteristics:

• They work without your supervision or direction.
• They use their own tools, equipment and materials.
• They will have their own policies that they abide by.
• They may use additional employees that you have no responsibility over.
• They will provide their own warranty for work that they do.

As part of a construction project, subcontractors are usually brought in for a specific skill that they have, such as electrical installations or plumbing, where there may be a skill gap in your business.

A bona-fide subcontractor will usually be paid via an invoice at a different rate to your regular staff.

A bona-fide subcontractor will need their own insurance for their employees and any PL needs.

If you take on a subcontractor without knowing your insurance obligations, you could land your business with fines, penalties or costly claims. Take a look at some of these scenarios when your business may face damages when taking on a contractor:

• If your bona-fide contractor has insufficient or no insurance to cover their employees or causes damage to a client, your firm could be liable for these claims, even though your contractor is at fault.
• If you have taken on a labour-only subcontractor and not told your insurer or broker, they may not be covered under the Employers’ Liability insurance that you have in place. Because of this, if they were injured or became ill due to work, you may be fully accountable for a claim.

Make sure you have the right insurance in place by:

• Discussing your insurance needs with one of the insurance advisors at Premierline to make sure that your liability covers labour-only subcontractors.
• Getting in writing that your bona-fide contractors have their own Employers’ Liability and Public Liability covers, and that their indemnity limits are similar, as you may need to top up the expense of a claim against them.
• Keeping in touch with a bona-fide subcontractor regarding their insurance schedules to ensure that they are still protected when carrying out work on your behalf.
• Telling your insurer or broker how much you pay your subcontractors, as this could impact your premium.