Do you need employers’ liability insurance for self-employed staff?

In most instances, you'll need employers' liability insurance for your business. But what if you hire someone who is self-employed?

You’d think it would be a case of, ‘If you have staff, yes. If you don’t, no.’ However, this question is laden with caveats.

In this article, we’ll be looking at whether you need employers’ liability insurance (ELI) for your business and what exceptions apply.

I only hire subcontractors and freelancers – do I need employers’ liability insurance?

Rules are especially murky for subcontractors and freelancers. The level of control you have is the defining factor. 

You will need employers’ liability insurance for subcontractors that are ‘labour-only’ as you’ll be providing tools and uniform. A ‘bona fide’ subcontractor, on the other hand, 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,” said Gareth Matthews, partner at MLP Law. “Small businesses might use what they term ‘freelancers’, but they might be exerting more control over them than they think. By doing that, they’re increasing the likelihood that they’re not genuinely self-employed.”

He referenced recent cases around employment status, including Uber and Deliveroo. “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. [In this situation] I’d have to work when I’m told I have to. If I want a holiday, I’d have to book it.

“With a freelancer, you shouldn’t really have that. But actually, you’ll find that lots of businesses will do that. What they’re doing is the blurring the lines.”

As mentioned, where individuals work is important too – if they work remotely then you don’t need insurance. If you tell them to come and work on-site and use your equipment, then you do. Be careful about this. If they become unwell from ill-positioned equipment, for example, they could make a claim against you. 

“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,” said Matthews. “Usually, you’d find that the court is likely to sympathise with the individual.”

If you are in any doubt, contact the Health and Safety Executive (HSE).

What happens if I need employers’ liability insurance and don’t have it?

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. On top of that, you’re at risk of a £1,000 fine for not having your employers’ liability certificate displayed where your employees can easily read it. You’ll get the same level of fine if you refuse to hand your certificate over when an inspector requests it.

Not having ELI when you need it could leave you open to a court or tribunal too. “It doesn’t matter what you think the arrangement is, we think it’s different in law. You’re going to now say to us, ‘Oh, but we gave them freelancer contracts,’ but it doesn’t wash,” Matthews told Growth Business.

“The weird thing is that then you might think, ‘Well, okay, I’m a business. I’m going to engage freelancers, but I am going to get ELI just in case.’ Then the very notion of getting any ELI is that you must think they’re employees now. It’s kind of a circular thing.”

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. As well as staff injury and illness, employers’ liability covers the cost of things outside your control, such as earthquakes and terrorism. Whatever level of cover you go for, it’ll need to be from an authorised insurer.

“There are only certain insurers that can cover that because it’s such a big policy that cannot be found on either the Government website or the Association of British Insurers (ABI),” said Matthews. He said that people often use brokers to find insurers because they make sure they’re getting the right deals and the right cover.

Although most SME business insurances are set to grow this year, new figures from Smart Money People found that 14 per cent of businesses with 50-249 employees will be reducing or have already reduced their ELI this year while 9 per cent will be stopping or have stopped it altogether.

The research found that those businesses who are stopping their policies or reducing their overall cover (including ELI) have significant concerns:

  • 48 per cent are worried about being unable to access the additional support embedded within insurance policies
  • 28 per cent are concerned about the financial aspect of being uninsured and not being able to claim, or having to find the funds themselves
  • 26 per cent feel they may be unable to pitch for or undertake certain types of work, potentially risking the future growth of their business

Minal Backhouse, director of Backhouse Solicitors, told Growth Business why, in light of this research, it’s crucial to have ELI if you need it. “Businesses that do not put Employers’ Liability Insurance in place are taking a financial and reputational big risk. There is a risk that other companies may not want or be able to deal with a company that does not have Employers’ Liability Insurance, potentially affecting the future earnings of the business.  This is particularly true when supplying public sector organisations.

“There is also a reputational risk. If an employer does not want to protect itself and its people, then what does that say about the kind of company it is? Not only is Employers’ Liability Insurance required by law, but companies should want to do the right thing.”

When do I not need ELI?

Family businesses that only employ close family members (if they’re not incorporated as limited companies) are exempt, as are businesses with employees who are based abroad.

Sole employee businesses don’t need insurance either – that is, unless it’s requested by clients or they own less than 50 per cent of the shares in their company.

Limited companies will need employers’ liability if there’s more than one director.

How to prevent employers’ liability insurance mistakes

Communication and outlining expectations clearly at the outset are key. It will do you good to speak to a professional so that you’re on the right side of the law. They’ll look at what those working for you are doing and how much control you’ve got over them. They will then deem them an employee or a self-employed person and you can adapt your business practices to fit the outcome. 

“There are things you can potentially do,” said Matthews. “You could say, ‘Well, look, I’ve engaged an independent contractor, I’m convinced that they have done all the checks. I’m insisting that they get their own insurance, because they’re in business on their own account. I want to make sure they get their own policies of insurance to protect themselves in their own business.”

Matthews recommends that your subcontractors and freelancers have professional indemnity insurance and general liability insurance: “Whenever I draft a freelancer or consultancy agreement, I will include those kinds of insurance requirements,” he said.

Ensure freelancers know the risks and that if the work isn’t delivered, they won’t get paid. “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’,” said Matthews.

He added that it’s much better to have that agreement than trying to argue it retrospectively: “You don’t want to be breaching your employment obligations if you should have been complying with them.”

Read more about the business insurance you need

Business insurance: What you need to know

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Anna Jordan

Anna is Senior Reporter, covering topics affecting SMEs such as grant funding, managing employees and the day-to-day running of a business.

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