Quick answer: A labour-only subcontractor is hired on a job and considered an employee under employment law, despite being self-employed. They are usually paid by the hour, day, or week.

When a bona fide subcontractor is hired for a job, they act as independent business and are usually classified as self-employed contractors. They are often paid for the job in full.

If you work in construction or a related trade, you’ve likely come across the terms “bona fide subcontractor” (BFSC) and “labour-only subcontractor” (LOSC). But what do they actually mean – and why does it matter?

Understanding the difference between the two can affect your business insurance, tax obligations, and legal responsibilities.

What is a subcontractor?

A subcontractor is a self-employed person hired by a main contractor to carry out specific work on a project. Unlike employees, they’re responsible for their own tax and National Insurance contributions.

The below example scenario can help you to understand the difference between employees and the different types of subcontractors.

Company: Bob’s Builders

Business owner: Robert (Bob) Brickley

Employees

Bob works on site with his team renovating houses for clients. Two of his team members always work with him. They don’t work for anyone else and 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.

When a BFSCs is hired, they usually give a quote for the job in full, rather than by the day or hour. This means if something goes wrong and the plumbers need to come back and fix the problem, Bob won’t pay them any more.

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

Bona fide subcontractors (BFSC)	Labour-only subcontractors (LOSC)
Decide how to do their own work	Told how to do their work
Usually get paid by the job rather than per hour or day	Usually get paid by the hour, day or week
Responsible for completing the contracted job fully and properly	Work under the direction of the person or firm hiring them
Usually have a different skill to the person or firm hiring them	May have similar skills to the person or firm hiring them
Treated like third parties (not employees)	Treated like employees
Need their own insurance	Covered under the firm’s insurance

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

Employment status criteria used by UK tribunals

In employment law, a person’s employment status helps determine their legal rights and their employer’s responsibilities. If an employment dispute goes to a UK tribunal, the courts will look at the level of control, right of substitution, and mutuality of obligation to decide a worker’s true status.

Because LOSCs work under the direct control of the hiring firm and cannot usually send someone else to do their work, tribunals often classify them as workers or employees. This means they’re entitled to certain employment rights.

So while they’re often legally classed as employees for insurance, health, and safety purposes – they’re usually considered self-employed for tax.

BFSCs, on the other hand, decide how to do their own work and act as independent businesses – meaning they are usually classified as self-employed contractors.

HMRC Construction Industry Scheme (CIS) rules

If you pay subcontractors for construction work, you’ll likely need to register for the Construction Industry Scheme (CIS). Under CIS rules, contractors must deduct money from a subcontractor’s payments and pass it directly to HMRC. These deductions count as advance payments towards the subcontractor’s income tax and National Insurance.

Tax deduction percentages for UK subcontractors

While contractors must register for the scheme, subcontractors don’t actually have to. But it makes financial sense for them to do so.

If a subcontractor is registered for CIS, the contractor deducts 20% from their payments. If the subcontractor isn’t registered, HMRC requires the contractor to deduct a higher rate of 30%.

Exemption qualifications for CIS tax deductions

You don’t have to register for CIS if you only do certain specific jobs. Exemptions include architecture, surveying, engineering design, and consultancy work with no labour.

You’re also exempt if you make materials used in construction, deliver materials, or do non-construction work on a site like running a canteen.

Are subcontractors treated as employees for the purposes of insurance?

Different insurers word their policies slightly differently, so it’s always important to read your policy documents carefully. Some definitions of BFSC and LOSC might be considered open to interpretation. That said, it’s often safe to assume:

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

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 if you only work with your LOSCs on certain ad hoc jobs. But because you direct their work, insurers view them as your responsibility.

Are subcontractors covered under employers’ liability insurance?

Whether a subcontractor is covered under your employers’ liability insurance depends on what type of subcontractor they are.

Labour-only subcontractors (LOSCs) are treated the same as employees for insurance purposes. This means they’re covered under your employers’ liability insurance if they’re injured or cause injury to others while working on your behalf.

Bona fide subcontractors (BFSCs) are treated as third parties – not employees. So they’re not covered under your employers’ liability insurance.

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Why is public liability insurance important for subcontractors?

If a BFSC injures an employee

If a BFSC subcontractor injures an employee, this won’t be covered under employers’ liability insurance. This is because BFSCs are not treated as employees, so they fall outside of a business insurance policy.

Making sure any BFSCs you hire have their own public liability insurance in place can help in case one of your employees needs to make a claim.

If an employee injures a BFSC

If one of your employees injured a BFSC, they could raise a claim under your public liability insurance. This is because BFSCs are treated as third parties for the purposes of insurance.

If you don’t have public liability insurance in place, the injured BFSC might try to take action against you personally. This is why BFSCs should always make sure the firm they’re working with has public liability insurance in place before starting a job.

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 both the 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 always 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. Most likely, they would take action against both.

Do subcontractors need their own tool cover?

Tools belonging to labour-only subcontractors are 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. This is because they act as independent third parties.