Employers’ liability insurance requirements often trip up small businesses that hire subcontractors or freelancers, creating a legal gray area between genuine self-employment and employee status. The determining factor is typically the level of control exerted over the worker, according to legal experts who advise businesses to carefully assess their relationships with independent contractors.
The Control Factor
The distinction hinges on whether a subcontractor is “labour-only” or “bona fide.” You will need employers’ liability insurance for subcontractors that are ‘labour-only’ if you provide tools and uniform. These workers operate under direct supervision, following the employer’s methods and schedules. A ‘bona fide’ subcontractor is one who can work without direction, holds their own insurance, and they’ll usually provide their own materials and tools. They can also employ a substitute if they’re unable to do the job themselves, so you won’t need cover for them.
“The issue comes from the fact that employment status is very rarely black and white,” explained Gareth Matthews, partner at MLP Law. He noted that businesses often label workers as freelancers while exerting employee-like control, such as requiring office attendance, using company equipment, or dictating schedules. “With a lot of freelance arrangements, those people are coming into the office X number of days a week, using the company’s equipment and networks and are under direct control, like an employee would be.”
Work Location and Legal Risks
Where individuals work also impacts insurance needs. Remote work generally exempts businesses from ELI requirements, but on-site work using company resources triggers legal obligations. If you need employers’ liability insurance and don’t have it, you could be fined up to £2,500 for every day you don’t have it. Not having ELI when you need it could leave you open to a court or tribunal.
“If a freelancer had an accident, and they tried to claim under it, we look at that control test. If there’s enough control, they’ll probably be able to claim under that even if the business is set up with freelancers,” Matthews said. Courts often side with individuals in such disputes, he added.
Read Also: How to craft a pitch that wins investors
Businesses with staff (this does include individuals such as volunteers and interns) must hold at least £5m in employee liability insurance. That’s the legal minimum, but larger businesses may want to take out more as they’re at greater risk. Whatever level of cover you go for, it’ll need to be from an authorised insurer. Statistics reveal widespread gaps in compliance: 39% of businesses with one to nine employees lack ELI, while 28% of sole traders carry no insurance at all. Family businesses employing only close relatives (outside limited companies) and firms with employees based abroad are exempt.
Matthews emphasized that proactive communication and clear contractual terms help clarify worker status. Requiring subcontractors to obtain their own professional indemnity and general liability insurance can further mitigate risk. “All of this sort of stuff within the agreement will enable you to pull that out and say, ‘They were genuinely an independent contractor, they might have come into our office to work because that was their preference, but they didn’t have to, we didn’t make them,’” he said.
Exemptions and Legal Penalties
Similarly, businesses with employees based abroad or sole proprietors with a single director who own less than 50 per cent of their own company do not require ELI unless clients mandate coverage. Limited companies with only one director are also exempt.
Understanding Insurance Requirements
The line between contractors and employees becomes blurred when businesses exert excessive control over workers’ schedules, equipment use, or work locations. Professional guidance and clear contractual terms are essential.
Leave a Reply