Bona Fide Sub-Contractors – What You Need to Know

Does your construction business use Bona Fide Sub-Contractors? It can save you money on obligatory pension schemes, National Insurance payments, and essential employers’ liability insurance. But are you confident that those you hire truly meet the correct criteria to be considered Bona Fide Sub-Contractors? Getting it wrong can mean a big headache, including fines or large insurance claims. To make it easy to protect yourself when you hire a sub-contractor and to save money, we’ve put together this complete guide to everything you need to know about Bona Fide Sub-Contractors.

1) Firstly, what are Bona Fide Sub-Contractors?

Unfortunately, there’s no legal definition set out, so this can be a bit of a grey area. However, a Bona Fide Sub-Contractor is generally considered any contractor you use who can work without your direction. They usually use their own materials and tools to do the job. And they hold their own employer’s liability and public liability insurance.


2) Do I need employer’s liability insurance to cover Bona Fide Sub-Contractors?

No. If your sub-contractor meets the criteria to be considered a Bona Fide Sub-Contractor you don’t need to include them when you take out your employer’s liability insurance. However, to eliminate risk, you should take care to ensure they do hold appropriate insurance or you could be left in a financially difficult position.

Your insurer will only cover you for your responsibilities. If a Bona Fide Sub-Contractor does something that results in a claim, and they do not have the appropriate cover, your insurance company will not cover you. It should also be noted that in most cases, your insurer will insist that you have checked the insurance cover of any Bona Fide Sub-Contractors. Failure to do so could invalidate your insurance and leave you with big bills.

What can I do today?

  • Act now to check the paperwork of any existing Bona Fide Sub-Contractors that you use.
  • Has their insurance cover been checked?
  • If not, get this essential paperwork in order.
  • Make sure sight of insurance cover is included in any future sub-contracts.
  • Ensure that your sub-contractors hold at least the same level of public indemnity as your business holds.


3) Does your company employ employees?

According to an employee is someone who works under an employment contract. All employees are workers, but an employee has extra employment rights that don’t apply to workers who aren’t employees, such as sub-contractors. Employers should take care, as just because you consider someone to be a sub-contractor, they could make a claim for extra rights, or financial pay-outs. If their solicitor can prove that they work for you in a way that is like an employee, they will win their case against you.

What can I do today?

Decide if someone is an employee by using this checklist now. If all or most of your answers are yes, they are probably an employee:

  • They have to work regularly unless they’re on approved leave
  • They do a minimum number of hours and expect to be paid for time worked
  • A manager or supervisor is responsible for their work timetable, deciding how it should be done and when it must be completed
  • They can’t ask someone else to do their work
  • Tax and National Insurance contributions are deducted from their wages by your business
  • They’re entitled to paid holiday and maternity or paternity pay
  • They can join the company pension scheme
  • Your disciplinary and grievance procedures apply to them
  • They work at the business’s premises or at an address specified by the business
  • Redundancy procedures are set out in their contract
  • The materials, tools and equipment they need for work are provided by your business
  • They only work for the business or if they do have another job, it’s completely different from their work for the business
  • Their contract or offer letter uses terms like ‘employer’ and ‘employee’

4) What are the other types of sub-contractors?

Bona Fide Sub-Contractors are not the only type of sub-contractors you could be using. Depending on how they work for you, your business could also be considered to have Labour Only Sub-Contractors. Truly understanding the difference between these categories can help you to avoid costly pay-outs in the future.

What can I do today?

Use this simple sub-contractors checklist now to find out what type of contractor you use. If the answer is yes to all or most of the following questions, then the worker is probably a Labour Only Sub-Contractor:

  • Are they paid hourly, weekly, or monthly?
  • Can they receive overtime pay or get a bonus payment?
  • Do they only supply their own small hand tools?
  • Do they always have to do the work themselves?
  • Can you tell them at any time what to do, where to carry out the work or when and how to do it?
  • Do they work a set amount of hours?
  • Can you move them to a different task when you want to?

5) Do I need employer’s liability insurance for Labour Only Sub-Contractors?

Yes. Anyone who is an employee or Labour Only Sub-Contractor will need to have their wages included when you ask your insurance broker to calculate your employer’s liability insurance premium.

What can I do today?

  • Grab a pen and paper or set up a spreadsheet on your computer.
  • Now, list all the people that you have working for you.
  • Ask the above questions for each individual to work out if they are an employee or Labour Only Sub-Contractor.
  • Jot down their wages and add them all together. That way you’ll have an accurate figure in mind when you speak to your insurance broker to arrange employer’s liability insurance.


6) Still not sure?

It’s really important that you are 100% certain that you use a Bona Fide Sub-Contractor. Getting it wrong can have major financial implications for your construction business. Don’t just assume because you said yes to a couple of the statements in the checklist above, that you are using a Bona Fide Sub-Contractor.

What can I do today?

Be confident in your decision by using this easy to follow checklist to decide if you can declare someone a Bona Fide Sub-Contractor (BFSC). If the answer to all or most of the questions below is yes, they are probably a BFSC:

  • Do they work on a fixed-price contract regardless of how long the job takes?
  • Can they fix their own schedule of what, how, when, and where to work?
  • Are they responsible for putting unsatisfactory work right?
  • Do they work without supervision?
  • Do they have a contract of service as opposed to a contract of employment?
  • Within the specified deadline, can make up their own minds what work to do, how and when to do the work and where to provide the services?
  • Do they regularly work for a number of different people other than you?
  • Are they required to correct unsatisfactory work in their own time and at their own cost?
  • Have they got public liability insurance in their own name?
  • Do they pay for all materials or supplies required for the work (excluding minor items and consumables) and not claim this back from you?
  • Can they hire someone to do the work or pay for someone to help them at their own expense?
  • Do they risk their own money? For example, if they bid for a job and the bid is too low to cover the actual costs of carrying out the work, will they have to bear the additional cost themselves?
  • Do they own or hire the essential main pieces of equipment (not just the small tools that many workers own themselves) that they need to do their job?


6) Why use Bona Fide Sub-Contractors?

There are lots of reasons why your construction business may opt to use Bona Fide Sub-Contractors. One of the biggest reasons is financial efficiency.

Compulsory pensions schemes may be good news for employees, but this legal must-have has hit businesses of all sizes hard. In response, more businesses, including those in the construction industry, are using self-employed contractor workers, which also delivers savings on Employers National Savings. Some businesses have sought to reduce costs further by declaring these workers as Bona Fide Sub-Contractors to achieve reductions on their essential Employer Liability insurance.

What can I do today?

If you’re hiring a Bona Fide Sub-Contractor, ask them to sign a risk transfer agreement. This outlines exactly who is responsible if something goes wrong. But remember, they must meet all the criteria for a Bona Fide Sub-Contractor. Even if they sign a risk transfer agreement, if their solicitor can prove that they were not in reality a Bona Fide Sub-Contractor, they can make a financial claim against you.

Your risk transfer agreement should include the following:

  • State that the sub-contractor is an independent operator and that you are not responsible for tax-related deductions
  • Outline the pay rate and agreed delivery
  • Outline the work that is agreed, including a deadline
  • Agree on any extra costs, such as materials
  • Include a non-compete clause, prohibiting your sub-contractor from working directly for your client
  • Include a dispute clause, outlining how any dispute will be handled
  • If necessary, include a confidentiality agreement.


7) Why is it important to understand the differences between an employee, a Labour Only Sub-Contractor, and a Bona Fide Sub-Contractor?

It’s important to know the difference between these employee/contractor classifications, as you can expose your business to major risks if you confuse them.

What can I do today?

  • Follow steps 3), 4), and 6) above for each worker you use, to clearly identify whether they are an employee, Labour Only Sub-Contractor or a Bona Fide Sub-Contractor.


8) What happens if an employee or Labour Only Sub-Contractor is accidentally declared as a Bona Fide Sub-Contractor on your insurance?

Declaring workers as Bona Fide Sub-Contractors for insurance purposes can reduce your premium. But if they are not, you can end up paying a lot more in the long run. If the sub-contractor does not have the relevant public liability insurance and there is an incident, your firm could be liable but will not be covered by insurance. If the sub-contractor falls ill or is injured at work, your firm could also be liable for damages but won’t have the insurance cover to pay for it.

What can I do today?

  • If you have any Bona Fide Sub-Contractors, carefully go through step 6) above. Are you confident that they fit this definition? If not, and there is an incident, their solicitor could argue that they were in fact either an employee or Labour Only Sub-Contractor and you will be liable for damages
  • Speak to your insurance broker as quickly as possible to amend your employer’s liability insurance if needed. That way, you won’t be left liable financially if a claim is made against the business.

9) What are the risks of using a Bona Fide Sub-Contractor?

Whilst using Bona Fide Sub-Contractors can bring financial benefits and flexibility to your business, there are also risks to consider. The main three are:

  • Quality control
  • Time Management
  • Liability

What can I do today?

Before you hire a sub-contractor:

  • First, ask for references and examples of past work. Check their standards match your own.
  • Invest in opening channels of communication between you and the sub-contractor. It’s vital to communicate well.
  • Finally, double check they have the right level of insurance. Ask to see this, don’t just take their word for it. if something goes wrong and they don’t have the cover, you’ll be liable instead.

10) Other sub-contractor costs: What is the Construction Industry Scheme (CIS)?

Under the Construction Industry Scheme (CIS), contractors deduct money from sub-contractor payments and pass it to HM Revenue and Customs (HMRC).

The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered. You must register as a contractor if either:

  • You pay subcontractors for construction work.
  • Your business is not a construction business but you spend more than an average of £1million a year on construction in any three-year period.

What can I do today?

  • If you’re already registered as a contractor, you cansign in to CIS online to file your monthly returns or to verify a subcontractor.

11) Finally

In conclusion, understanding the differences between sub-contractors is essential to reduce costly risks to your business. If you need to take on short-term help to complete a project, carefully considered if those people will be employees, Labour Only Sub-Contractors or genuine Bona Fide Sub-Contractors. Short-term savings on insurance and pension costs can be heavily outweighed if something goes wrong. For more advice, speak to a specialist insurance broker with expert knowledge of insurance for the construction industry.