What’s the difference between a labour-only subcontractor and a bona fide subcontractor?

Does your firm work with bona fide subcontractors (BFSC) or labour-only subcontractors (LOSC)? Maybe you are one of those subcontractors who works with a range of different firms. Does working with (or being) one type or the other affect your business insurance and legal responsibilities?

Read on for our simplified guide to the difference between labour-only subcontractors and bona fide subcontractors.

• Do I need employers' liability insurance?
• Do I need public liability insurance?

It's important to understand the difference between these terms so you can answer questions about them on an insurance quote form and get the right level of cover. But they still cause confusion for all types of tradespeople trying to buy their business insurance – from builders to electricians to plumbers and plenty more in between.

What is a subcontractor?

It might be easiest to answer this question using a made-up scenario.

Company: Bob’s Builders

Firm owner: Robert (Bob) Brickley

Employees

Bob works on site with his team renovating houses for the rich and famous. Two of his team always work with him. They don’t work for anyone else. They are employees of Bob’s Builders.

Subcontractors

Bob also works with subcontractors when he needs more help to complete certain jobs. These workers also work for other builders. Subcontractors can either be ‘bona fide’ or ‘labour-only’. Here’s the difference:

Bona fide subcontractor (BFSC) definition

Bob tells his BFSCs what job he wants them to do and when, but he leaves it up to the subcontractors to decide how they’ll do the work.

Like most BFSCs, the ones working with Bob’s firm are experts in a skill other than building. In this case, Bob has hired two plumbers to work on his latest renovation project. Bob’s a builder, not a plumber, so he wouldn’t know how to direct their work anyway.

Bob pays the plumbers for the whole job in one lump sum, which is how it usually works when paying BFSCs. If something goes wrong and the plumbers need to come back and fix the problem, Bob won’t pay them any more because they’re responsible for themselves and getting the job done properly.

Labour-only subcontractor (LOSC) definition

Bob tells his LOSCs what work to do, how to do it, and when to do it.

Bob’s LOSCs are labourers he brings in for certain jobs. Like most LOSCs, they’re paid by the hour, day or week. They bring a few hand tools that they like to work with, but Bob provides them with any specialist equipment if they need it for certain tasks.

Bona fide subcontractors v labour-only subcontractors comparison

Read on for more on how these differences can affect your insurance.

Are subcontractors treated as employees for the purposes of insurance?

Different insurers word their policies slightly differently. Some definitions of BFSC and LOSC might be considered open to interpretation. That said, it’s generally safe to assume:

• labour-only subcontractor = employee
• bona fide subcontractor = third party (not an employee)

We can say the key distinction between these two types of subcontractors rests on who directs and controls the work.

When you’re answering questions on your insurance quote form relating to employees, you should always include any LOSCs you work with. This might seem a bit confusing, seeing as you may only work with your LOSCs on certain ad hoc jobs (unlike the way you work with employees who are with you all the time).

Are subcontractors covered under employers’ liability insurance?

We’ll take another visit to the renovation project that Bob's Builders are working on at the moment. One of Bob’s permanent employees has accidentally hit another of his permanent employees over the head with a plank of wood.

The first employee has been injured by the second employee, not Bob’s Builders as a business. This means the first employee could take legal action against the second employee personally. But because the employee that caused the injury is working on behalf of Bob’s Builders, the firm’s insurance policy covers her. She doesn’t need to worry about being personally liable.

We said above that LOSCs can be considered equal to employees for the purposes of insurance, so they would be treated in the same way here. BFSCs, on the other hand, aren’t considered equal to employees. They’re treated in the same way as third parties. This means they’re not covered under Bob’s Builders’ employers’ liability insurance.

Why is public liability insurance important for subcontractors?

If a BFSC injures an employee

If one of Bob’s BFSCs injures one of his employees, this won’t be covered under Bob’s employers’ liability insurance. This is because BFSCs are not treated as equal to employees and are not, therefore, covered under Bob’s Builders’ business insurance policy.

In this case, the injured employee could claim against the BFSCs public liability insurance. If the BFSC didn’t have this cover in place, the injured employee could still take action against her and she would need to meet any awarded claim out of her own pocket.

The injured employee might try to take action against his employer, Bob’s Builders. While the firm shouldn’t be held liable, Bob may have to defend the firm in court and incur costs from the case. This is why Bob should always make sure any BFSCs he works with have their own public liability insurance.

If an employee injures a BFSC

If it was one of Bob’s employees who injured the BFSC, she wouldn’t be able to claim under Bob’s employers’ liability insurance. Instead, she could raise a claim under his public liability insurance. This is because BFSCs are treated as third parties (not employees) for the purposes of insurance.

The injured BFSC might try to take action against Bob personally if Bob’s Builders didn’t have public liability insurance. This is why BFSCs should always make sure the firm they’re working with has public liability insurance in place.

If a BFSC injures a member of the public

Insurance policy wordings vary on the exact level of cover for when a BFSC injures a member of the public. To be on the safe side, it’s always a good idea for a BFSC and the employer to have their own public liability insurance in place.

If a LOSC injures a member of the public

This scenario is simpler than it is for BFSCs. LOSCs are treated as equal to employees so are covered under the firm’s public liability insurance. LOSCs should check that the firm they’re working with has this cover in place.

If the firm didn’t have public liability cover and the LOSC injured someone, that third party could take action against the LOSC personally or the firm - or most likely both.

Do subcontractors need their own tool cover?

Tools belonging to labour-only subcontractors would be covered under Bob’s Builders’ tools insurance because they’re treated as equal to employees. Tools belonging to bona fide subcontractors working with the firm wouldn’t be covered by Bob’s insurance because they’re treated as equal to third parties (not employees).

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Has this article helped your understanding of the difference between bona fide subcontractors and labour-only subcontractors? Let us know in the comments section.