Using contractors and subcontractors: insurance and contracts
In this guide:
- Using contractors and subcontractors
- The difference between contractors and subcontractors
- Advantages and disadvantages of using a contractor or subcontractor
- Employment status of contractors and subcontractors: Tax and workplace rights
- Health and safety requirements when using contractors and subcontractors
- Using contractors and subcontractors: insurance and contracts
- Get the most from contractors and subcontractors
- Protect your business from rogue contractors
The difference between contractors and subcontractors
Understand the differences between contractors, and subcontractors and what this means for your business.
There is an important distinction between using contractors and subcontractors.
What are contractors?
Contractors provide agreed services to a client for a set fee and usually for a set duration under a contract for services. This is in contrast to a contract of service, eg the employment contract, which is between an employee and employer.
Examples of using contractors
Many businesses typically use contractors for:
- building work
- catering
- cleaning
- gardening
- marketing services
- IT maintenance and support
- security services
- recruitment
Contractors can charge the client fees by the hour, day, or on a lump-sum basis. Their contracts often specify milestones for part payment, eg on completion of specific goals.
See contractors and the Construction Industry Scheme.
What are subcontractors?
Subcontractors undertake a contract from the contractor. Subcontractors undertake work that a contractor cannot do but for which the contractor is responsible.
Subcontractors can be anything from an individual self-employed person - eg a plumber carrying out work for a building contractor - to a large national organisation. A subcontractor has a contract with the contractor for the services provided - an employee of the contractor cannot also be a subcontractor.
Subcontractor example
For example, a building contractor may hire a subcontractor to complete the electrical wiring part of the contractor's building job. The contractor is responsible to the client for the building job including the part performed by the subcontractor.
Subcontractors might work on task-based contracts with no fixed date, long-term arrangements which can be discontinued at any time, or fixed-term contracts.
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Advantages and disadvantages of using a contractor or subcontractor
Some of the advantages and disadvantages of using contractors and subcontractors.
Your business may need additional resources to carry out specific or specialist tasks. You may want to use the services of a contractor or subcontractor for this, although it is important to weigh up the advantages against the disadvantages of contracting and subcontracting.
Advantages of contracting and subcontracting
Flexibility
You can hire a contractor and/or subcontractor when you need more flexibility with a specific job or task.
Short-term specialist expertise
You can use a contractor/ subcontractor for one-off jobs and jobs requiring specialist expertise or fast turnaround.
Focus on core business
Using contractors and/or subcontractors enables your own staff to concentrate on the core business.
Short notice to start a project
Some contractors and/or subcontractors can start the work or project at short notice, even when large numbers of workers are required.
Set out the contract type and duration
You can often specify the type and duration of the contract you need for the contracted job.
Temporary cover
Contracting and subcontracting allow you to obtain temporary cover for a permanent post or a work project.
Get the most from contractors and subcontractors.
Disadvantages of contracting and subcontracting
Higher costs
Contractors/subcontractors may cost your business more than the equivalent daily rate for employing someone.
Loss of skills
By relying on contractors and/or subcontractors, your business does not acquire or develop skills in-house.
Staff resentment
Your own staff may resent contractors being paid more money for doing similar work to them.
Poor quality work
If you use a contractor that then uses a subcontractor, you have no direct control over the quality of subcontractors' work.
No regard for business culture
Contractors and/or subcontractors may not appreciate your business culture and may lack the motivation and commitment of your own staff.
Tax implications
Workers can be employees or subcontractors of the contractor - you need to understand relevant tax implications and other rights. See employment status of contractors and subcontractors: Tax and workplace rights.
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Employment status of contractors and subcontractors: Tax and workplace rights
Why determining the employment status of contractors and subcontractors matters.
The employment status of those who do work for you has implications for tax and workplace rights:
- an employee has a contract of service, eg a contract of employment, with you as an employer
- a contractor has a contract for services with your business, while a subcontractor has a contract for services with your business if you are the main contractor
As such, neither contractors nor subcontractors will normally be considered as your employees. Instead, they might be self-employed, agency workers, or employees of another business.
Establishing employment status for contractors and subcontractors
However, even though a worker may be described as a contractor or subcontractor, it is still possible that - under the law - they may actually be considered your employee.
If so, they would therefore have the full range of employment rights, eg the right to claim unfair dismissal and the right to maternity, paternity, and adoption leave and pay.
If you are unsure, you must take steps to clarify their employment status.
You can also contact the Labour Relations Agency (LRA) for further advice on Tel 03300 555 300 or the Equality Commission for Northern Ireland on Tel 028 90 500 600.
Tax for contractors and subcontractors
If you use contractors and/or subcontractors, you will not generally make tax and National Insurance (NI) deductions or employer NI contributions. However, some exceptions may apply. See off-payroll working (IR35).
Special rules apply if you are a contractor using subcontractors in the construction industry - see Construction Industry Scheme.
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Health and safety requirements when using contractors and subcontractors
Your responsibility for the health and safety of any contractors or subcontractors on your business premises.
In any relationship between a business - known as the client - and a contractor, both parties will have duties under health and safety law. Similarly, if the contractor uses subcontractors to carry out some or all of the work, all parties will have some health and safety responsibilities.
Health and safety responsibilities
To ensure contractors' or subcontractors' health and safety you must:
- identify the requirements of the job and assess the risks involved - see health and safety risk assessment
- decide what information and training is required
- as the client, select an appropriate contractor and ascertain their health and safety policies and procedures
- as the contractor, find out about subcontractors' competence
- review the way work is carried out and the risk assessment
Health & Safety Executive guidance on working with contractors.
Ensure that there is cooperation and coordination at all times between you/your staff and the contractors/subcontractors. In particular, you should:
- provide all parties with information, instruction, and training on anything that may affect health and safety
- make the contractors/subcontractors aware of your health and safety procedures and policies
- provide management and supervision to ensure the safety of contractors/subcontractors
Penalties for health and safety failures
There are actual cases where clients, contractors, and subcontractors have all been fined for failing in their health and safety duties, eg failure to:
- ensure a contractor's/subcontractor's competence
- supervise a contractor/subcontractor
- take steps to prevent contact with live equipment
- provide information about the existence of asbestos
- ensure safe operation of vehicles
- ensure safe loading to or unloading from delivery vehicles
- assess risks to health from regular exposure to high vibration levels
- exercise a duty of care towards a contractor/subcontractor
- provide a formal site induction, risk assessment or method statement
Download Health & Safety Executive (HSE) advice on contractors' health and safety (PDF, 282K).
Also see what you need to do about health and safety and how to provide health and safety training.
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Using contractors and subcontractors: insurance and contracts
When engaging contractors and subcontractors, you may well need public liability insurance.
There are some insurance and contractual issues that you should think about if you're considering using contractors or subcontractors for your business.
Insurance issues when using contractors or subcontractors
As well as employment rights, tax, and health and safety, you should consider liability insurance for your business when you engage contractors or subcontractors:
- If you have employees, you need employer's liability insurance. However, non-employees - such as contractors - aren't covered. Therefore, you will also need to have public liability insurance (PLI).
- Your PLI policy should cover contractors/subcontractors working for you away from your premises unless the contractors/subcontractors have their own PLI with the same level of cover.
- If contractors/subcontractors are working on your behalf, check they have appropriate insurance.
- If a contractor works at your business premises, eg a builder, they should have their own insurance to protect you and your property, while your PLI covers them.
To be certain, consult an insurance adviser and notify your insurer that you are using contractors/subcontractors.
Contractual issues when using contractors or subcontractors
Many businesses aim to incorporate certain clauses into their contract with the contractor and/or subcontractor.
Examples include:
- protection of your intellectual property rights - eg material and equipment designs - if these will be accessed or used by contractors/subcontractors
- non-disclosure agreements - these might be needed if you have to tell contractors/subcontractors about - or they help you develop - confidential aspects of your business
- a project schedule - including performance targets and deadlines
- a payment schedule - this might include payments on account and the criteria to trigger such payments, eg completion of a piece/stage of work
- penalties for poor workmanship or late delivery
- minimum quality standards
- minimum health and safety standards - see health and safety requirements when using contractors and subcontractors
If in doubt, consult a legal adviser before you agree a contract for services with a contractor/subcontractor. Choose a solicitor for your business.
If you aren't involved in choosing a subcontractor, tell the contractor you expect them to address these matters in contracts with their subcontracted workers.
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Get the most from contractors and subcontractors
From engagement to completion of the contract, maximise the potential of your contractors and subcontractors.
Consider how to achieve maximum benefits when using contractors and subcontractors from the point of engagement through to the completion of the contracted work.
Consult your staff
Using a contractor/subcontractor can be successful where there is cooperation and coordination between your own staff and the contractor/subcontractor.
Ensure your staff understands the advantages of using a contractor/subcontractor by setting out any benefits for them, eg they can get on with the core business. Inform and consult your employees.
Exercise care when hiring contractors
Seek references and talk to other businesses that have used contractors to determine a contractor's/subcontractor's competence.
Check qualifications, skills, membership of relevant trade or professional bodies, quality standards, and accreditations of potential contractors.
Find out the contractor's/subcontractor's policies for health and safety, selecting subcontractors, and employee consultation.
If you use contractors/subcontractors on a regular basis, think about setting up a database of contacts who you know and trust.
Have a written agreement for contractors
Agree in writing:
- the contractor's/subcontractor's responsibilities
- the objectives, the scope of the work, and key deliverables (goals), eg in a project schedule with milestones
- resources you must provide if the contractor/subcontractor needs access to your equipment and/or staff
- fees and a payment schedule - you may wish to consider penalty or incentive schemes for under-performance or over-performance
- a procedure for resolving disputes, eg review or termination
- confidentiality agreements
You have certain legal responsibilities when you engage contractors/subcontractors and you should agree on a contract for services that will help you to discharge those duties. You should seek legal advice on this.
See health and safety requirements when using contractors and subcontractors and using contractors and subcontractors: insurance and contracts.
Manage the work of contractors
You should manage and supervise the contractor's/subcontractor's work, seek evidence of work done, and check that contractual obligations are met. Raise any issues at the earliest opportunity so that they can be addressed and resolved from the outset.
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Protect your business from rogue contractors
Tips on how to spot and avoid unscrupulous contractors.
There are plenty of ways to get assurance about the competence and integrity of contractors.
Determine the competence of contractors
Factors that will help give you the confidence to deal with a contractor include:
Membership of trade or professional body
Current membership of a trade or professional association or other recognised body, including approved scheme operators under the TrustMark initiative for the domestic repair, maintenance, and improvement sector.
Licensed labour provider
Status as a licensed labour provider with the Gangmasters & Labour Abuse Authority, if they supply workers to sectors within the fresh produce supply chain, ie agriculture, horticulture, shellfish gathering, or the processing and packaging of all fresh food, drinks, and other produce. It is an offence for someone without a licence to provide labour in these sectors, and it is illegal to enter into an arrangement with an unlicensed gangmaster.
Quality management standards
Ensure the contractor applies quality standards, such as British Standards and ISO standards for management systems. See quality management standards.
Recommendations
Recommendations from business or personal associates are often good indicators. Try to see for yourself examples of the contractor's previous work
Trade or professional associations
Many associations and bodies set membership criteria and minimum standards in areas such as:
- quality systems and training
- health and safety
- environmental management
- deliverables and technical capabilities
- financial stability
Search for a trade association.
Quotes and following up on references
It is good practice to obtain at least three quotes or estimates. Make sure you understand the terms, any technical details, and any aspects that could change such as:
- material prices that vary
- overtime
- night rates
References
Even if you get personal recommendations, follow up on all references provided. Tips when taking up a reference include:
- letting the contractor know you are following up on a reference
- contacting referees in good time so as not to delay your project start
- asking specific questions about information the contractor has provided
- asking about personal qualities, safety records, work standards, any legal case the contractor is or has been involved in
- checking the authenticity of telephone references, and taking notes during the call
The Centre for the Protection of National Infrastructure
The Centre for the Protection of National Infrastructure (CPNI) provides protective security advice when using contract staff. CPNI has also produced a good practice guide for employers on personnel security and contractors (PDF, 489K).
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