Do I need employer’s liability insurance for subcontractors?

You may think that hiring subcontractors doesn’t require you to have employer’s liability insurance, but this isn’t always the case. Here, we explain the difference between taking on a bona fide subcontractor versus a labour only subcontractor, and when employers liability insurance is needed.

Working with subcontractors 

Hiring a subcontractor is common practice in many industries, not least of all within construction. 

It’s typical for building firms, for instance, to subcontract out specialist jobs such as plumbing and electrical wiring to professionals with the relevant experience. This is known as a bona fide subcontractor or BFSC; someone who works independently to provide a service to your business for which they invoice you.

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The other type of subcontractor is a labour only subcontractor or LOSC. LOSCs are hired directly by a business to work on a non-permanent basis for a set period of time. Like an employee LOSCs work under direct instruction and supervision, using tools and materials provided to them by the business that hires them. They’re not technically employees in the traditional sense, more like a seasonal or short term worker, but they are considered employees under UK law. 

Both types of subcontractor will need to have insurance that covers the work that they do and it’s up to you to ensure that the right type and level of protection is in place. Whether that falls to them to arrange or to you is another matter, one that we’ll come back to in just a bit. First, let’s take a look at exactly what employers liability insurance is and when you need it. 

What is employer’s liability insurance?

From the moment you make your first workplace hire you’re required by law to have employer’s liability insurance in place. This type of insurance offers you protection if an employee you hire gets sick or becomes injured as a result of the work they do for you and they decide to sue.

In instances such as these employer’s liability insurance would cover any legal expenses you incur as a result of the claim and any compensation it’s deemed the employee is owed should the court decide in their favour. 

Is employer’s liability cover needed for subcontractors?

You might assume that as employer’s liability cover applies to employees that it isn’t needed for any subcontractors your business works with but this isn’t always the case, as we’ll explain.

You see, what a lot of people working with subcontractors in the UK don’t realise is that a labour only subcontractor is classed an employee under UK law. This means that they do need to be covered under your company’s employer’s liability policy. 

To put it another way: even if you don’t have any permanent employees working for your company you still, by law, need to take out employer’s liability protection if you engage labour only subcontractors to undertake work for your business.

Why is employer’s liability cover needed for labour only subcontractors but not for bona fide subcontractors? 

The short answer is because labour only subcontractors are legally considered employees in the UK whilst bona fide subcontractors are not. This boils down to a few different factors:

  1. Bona fide subcontractors work independently under their own direction, while labour only subcontractors work directly under instruction and supervision from the business that engages them. 
  2. Labour only subcontractors work with tools and materials provided to them by the company that engages their services. Bona fide subcontractors work with their own tools and source all their own materials. 
  3. Labour only subcontractors are paid by the hour, week, or month and can even accrue overtime or bonuses. Bona fide contractors, by contrast, invoice a company for payment once they’ve completed a job and the work has been signed off. 
  4. Bona fide subcontractors have the authority to employ other people. Labour only subcontractors do not have this authority. 
  5. Labour only subcontractors must follow your company’s health and safety policies while bona fide contractors set and abide by their own. 

Despite the fact that you only need employer’s liability insurance for labour only subcontractors, you should still check that any bona fide subcontractors you take on has their own professional indemnity and public liability insurance in place. At a minimum, these policies should cover the work that you’ve contracted them to do and have a level of indemnity that isn’t less than yours. 

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Risk transfer agreements 

Another way you can protect yourself if you contract bona fide subcontractors is with a risk transfer agreement. This is essentially a contract whereby the subcontractor signs to say he or she will be 100% accountable for the work that they undertake whilst subcontracted to your business, thereby relinquishing you of any legal responsibility for any damages they may cause. 

An agreement of this nature clearly defines, in no uncertain terms, the contractors’ responsibilities. If you do decide to go down this route, be sure to seek legal guidance to help you with the wording in order to ensure that the agreement is watertight. 

For more advice about liability insurance for your business or any subcontractors you employ, visit