When I speak to employers and business owners, many explain that their business operates using sub-contractors and they have very few or no employees. In practice, this arrangement benefits both the business and the individuals/smaller enterprises providing the labour or service. Flexibility and long standing traditions in particular industries are often quoted as the reason.
Both parties need to be aware that the way in which they describe the relationship may not be the decisive factor should problems arise.
HM Revenue and Customs have found their own ways to deal with scenarios involving sub-contractors in certain industries who regularly work for one organisation. From a tax perspective, they can look behind the name given to the arrangement and then impose the appropriate tax rules.
Most businesses want the flexibility of the sub-contractor relationship. Employees have specific rights and protection. In cases where the individual works for a number of organisations and can himself outsource or sub-contract his work, then it would be inappropriate for those rights to extend. If a dispute does arise however the tribunal will look at the reality of the relationship and decide whether this is an employee or sub-contractor situation.
When looking at health and safety risk management, it is important to be aware that problems can arise if an accident occurs. If a business considers everyone ‘working’ on their contracts/business activity is a sub-contractor, then chances are the business will not obtain employer liability insurance cover. Public liability (PL) insurance will be obtained, but when speaking to the broker or insurer, the business will say that it does not have any employees, so cover will not be purchased.
If a sub-contractor is injured, then liability for any health and safety breaches may still rest with the main contractor. In this scenario, the PL insurance is likely to provide cover for any liability and will generally deal with the claim (investigating, instructing solicitors etc).
If however, the sub-contractor is found to be an employee, then the PL policy will not provide cover as the claim is made under the employer liability legislation. This argument is sometimes raised by PL insurers who maintain the claim is not covered under the PL policy.
A sub-contractor, or their family/representative may try to argue that they were in reality an employee, as certain health and safety regulations only apply to employees. Again, the law will look behind the title used by the parties and assess whether the individual is a true sub-contractor or is really an employee.
The extent of PL cover should also be checked. A main contractor’s PL policy may not cover for the liability of a sub-contractor as they should have their own cover. Both parties should check that the other has valid PL cover on an ongoing basis. If a sub-contractor is not insured, the main contractor could find themselves facing a claim. This may be legitimate or not. A PL policy can exclude cover for ‘non bona fide’ sub-contractors and a sub-contractor without PL, will not be seen as bona fide. Even if the claim is defended by the PL insurer, this is still classed as a claim and could increase future premiums.
These situations often arise where an arrangement between friends goes on for many years or an informal or one-off set up becomes more permanent. Without any written agreement or record of the relationship, it is difficult to prove the intention of both parties at the time the arrangement started. As the saying goes, ‘be wary of mixing business and pleasure’ without protecting your business.