Liability Insurance – Labour Only Sub-Contractor v Bona-Fide Subcontractor


One of the most frequently asked questions by a client under their liability insurance is the status of various subcontractors: – e.g. those engaged by a policyholder to perform work on its behalf. An insurer will normally define these into two major categories and it is material to your policy that the relevant percentage split or numerical wage rolls are accurately declared in respect of those.

So what is a Bona-Fide Subcontractor (BFSC)?

A Bona-fide subcontractor will normally be a contractor who works under their own direction (rather than the direction of the insured party), they will usually have their own insurance in place and should be bringing their own tools and materials to the job rather than having them provided or owned by the contractor.

  • A bona-fide subcontractor must not be working under the specific direction of the contractor. They should have their own insurance, risk management and responsibilities and understand their legal liabilities in full. If this is true there is no need for employees of the bona-fide subcontractor to be included in Employer’s Liability or Public Liability premium calculations.
  • This does not mean that if a bona-fide subcontractor’s actions cause you to be legally liable for something that you are not insured. Your insurance will cover any liabilities against you even if they are produced by another party.
  • However, you should be aware that your insurer will not offer coverage for any liability of the bona-fide subcontractor. That bona-fide subcontractor should have their own insurer cover this liability.
  • Most insurance policies require that you check that your bona-fide subcontractors have the same level of public liability coverage as you do prior to engaging them and regularly review their capabilities and actions in light of this definition, taking action if required to remedy any failures in those duties.

For example – a client is working on a construction project which includes the need for a specialist in mechanical and electrical services (say a Lift or Air conditioning system). The client does not have the technical experience or ability in this area and engages specialist subcontractors to undertake this element of the project. Specialist Piling or deep excavation ground-workers are also other common examples of where a specific job will be delegated to an external professional. Further examples may include Scaffolding contractors, specific roofing system installers, in fact any area of a Construction project can be delegated to a BFSC.

What is a Labour Only Sub-Contractor (LOSC)?

For the purposes of UK labour law; a labour-only sub-contractor is considered to be an employee. They do not provide their own materials and tools normally although they may do if delegated by the principle. They generally work under the overall direction of the contractor, but may make small decisions themselves with permission of the principle. They will need to be factored into your insurance calculations as employees as typically they will not provide their own insurance coverage.

You have a strict duty in Law to hold Employers’ Liability insurance for a minimum of £5m, but more usually £10m to cover your responsibility to those classified as employees undergoing any related work to your business activities.

Example – a client who is a refurbishment contractor is working on a construction project which is too large for the full time employees to handle within the required time scales. To fill the short term need the client then engages labour only subcontractors to assist with the specific project, they may have their own contracting companies elsewhere, but if they are acting fully under the direction of the insured, then they are still considered to be an employee for the purposes of UK law and insurance requirements.

How do You tell the difference between the two?

You should check with your insurer if you are unsure but if you can answer yes to several of the questions below; it’s more likely they are a labour-only sub-contractor rather than a bona-fide subcontractor.

  • Do you pay the person hourly, weekly or monthly? (Bona-fide subcontractors tend to be paid by invoice).
  • Do you pay the person overtime or bonuses?
  • Do you supply them with the majority of their tools?
  • Do they do all the work required of them, themselves?
  • Can the main contractor direct them how, when, where and at what time they should do work?
  • Do they work a fixed number of hours?
  • Can the contractor reassign them to another task?

On the other hand if you can answer yes to the majority of these questions they are more likely to be a bone-fide sub-contractor:

  • Are they on a fixed-price contract irrespective of what is needed to get the job done?
  • Are they on a service rather than employment contract?
  • Do they decide their own hours, how to do the job, when to do it and where to do it?
  • Do they work for other parties as well as the main contractor?
  • Are they obliged to correct any quality deficiencies at their own expense and in their own time?
  • Do they have public liability insurance that they can provide evidence of?
  • Do they cover the costs of any materials, tools, etc. used on the job?
  • Are they able to hire additional labour if required at their own expense?
  • Are their earnings at risk if they have incorrectly priced the job?


Why is this important when arranging liability insurance?

A liability insurer will usually adopt the following approach when calculating premiums:

  • Payments to LOSC are included within wage roll estimates when rating
  • Payments to BFSC are excluded from wage roll estimates
  • The Public Liability section of the premium is related to the turnover and excludes BFSC. A lower rate is applied to BFSC Payments due to the contingent nature of the risk
  • Some insurers will not reduce the PL rate if there is a high proportion of BFSC due to the chances of multiple parties being involved in the event of a claim
  • It is common for insurers to apply a condition stating that BFSC will have a minimum level of cover. The condition also usually requires BFSC policies to contain an indemnity to principal clause and a duty for the insured to be checking for this prior to letting anyone onto site.

If a policyholder incorrectly classifies payments to LOSC or BFSC an incorrect premium or terms may be applied to the policy which could ultimately lead to a claim being rejected by the insurer or additional premiums due at a later date.

It is crucial that a policyholder has a clear understanding of the differences between the subcontractors that they engage. The most important consideration is the degree of supervision, direction and control that a policyholder has over their subcontractors.

If you would like any further support or advice, please call Clarke Williams and ask to speak to one of our construction specialist advisors.


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