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Compulsory insurance: an SME guide to employers’ liability


A recent survey by Switch My Business found the vast majority of respondents (77.4%) not aware that employers’ liability insurance is a legal requirement. This lack of knowledge means SMEs are running serious risks, including bankruptcy.

What is employers liability?

Employers’ liability insurance (EL insurance) is the only cover required by British law. It protects businesses in the event that employees seek compensation for an accident or illness that happens at work – either on or off site. The minimum insured value is £5 million and you can be fined £2,500 for each day you don’t have proper cover.

Even those business owners and managers that know about the legal requirement can find themselves wrongly insured. In many cases, this is the result of a misunderstanding of what constitutes an employee.

HMRC vs Employment law – defining an employee

HMRC sets out a number of distinct employment categories:

  • Worker
  • Employee
  • Self-employed or contractor
  • Director
  • Office holder

Many SME business owners make the assumption that only those classed as ‘Employee’ would trigger the need for employers’ liability insurance. This is understandable – a contractor may be required to have their own insurance covers in place – but that does not preclude the employer from needing to have employers’ liability insurance cover in place for them too.

Definition of employee for business insurance

The definition of an employee is anybody you have on your premises who is assisting you in your work. Whether on a part-time basis, a full-time employee, a self-employed sub-contractor, a trial basis worker – even voluntary workers, unpaid interns or students on work experience – anyone under your instruction and working on your premises is technically employed by you.

Who isn’t classed as an employee?

A business may be exempted from having employers’ liability insurance if all employees are close relatives and the business itself is not incorporated as a limited company.

Similarly, companies where the owner is the sole employee and owns at least 50% of the company’s issued share capital may well also be exempt.

But these employer liability exemptions are far from cut and dried; it might be a good idea to take qualified advice to be sure if this applies to you or not.

The legal definition of an employee

The way your business works and the manner in which people work for it have very important legal implications. This is where those five distinct categories for employees become relevant.

There are also essential tax and National Insurance contribution differences associated with different ways of working. As an employer, it’s your duty to understand the category to which the people who work for you belong, and to make sure you fulfil your legal and tax obligations to them.

As a general principle, if someone is classified as self-employed for tax purposes they are usually classified as employed (worker or employee) for employment rights purposes – so you would need to have employers’ liability cover in place.

Understanding the detail of the HMRC definitions for employees may be the difference between your business adequately protecting itself and its staff, and falling foul of the law and being on the receiving end of a hefty fine. Let’s take a closer look.

Workers and employees

All employees are entitled to employment protection rights, though some rights require a minimum period of continuous service.

A number of core rights, such as the National Minimum Wage and regulations on working time including rest and paid annual leave, are available to employees and those deemed to be workers.

What is the difference between and employee and a worker?

In a nutshell, a person’s employment status will depend on whether their contract is a contract of employment, a contract for the personal performance of work, or a contract for services.

An employee is someone who works for you under the terms of an employment contract. A contract of employment doesn’t need to be written down (although it’s probably wise for all parties involved that it is); it could be verbal or implied.

A worker is a broader category: it includes any individual person who works for you, whether under a contract of employment or other type of contract, but is not self-employed. A ‘worker’ may include casual workers, agency workers or (some) freelance workers, but the terms of the contract will determine their employment status.

Employment Law

For the purposes of income tax and National Insurance Contributions (NICs), the agency providing an agency worker or casual worker is responsible for operating Pay As You Earn (PAYE) and accounting for NICs for that worker.

If there is a dispute about employment status as it relates to employment rights (or taxation), this can ultimately only be decided by the courts.

 

Five key considerations that may decide an employee’s status

Court cases on the true employment status of an individual re-examine several criteria: ultimate control integration, mutuality of obligations, substitution and economic reality. It’s worth considering these closely when deciding whether or not you need employers’ liability insurance.

Ultimate control

Whether you as an employer can instruct them how and which tasks to perform.

Integration

Is the individual a part and parcel of your organisation?

Mutuality of obligations

Is the worker is personally obliged to carry out set tasks? Are you, as an employer, obliged to pay the worker for the work?

Substitution

Whether someone else can be sent to do the same job

Economic reality

Whether they are in business on their own account, e.g. where they bear the financial risks of failure to deliver the service

 

There has recently been a trend towards applying a ‘composite test’ that takes account of all relevant factors. If you are unsure of the employment status of someone who works for you, you should seek advice.

Who is legally classed as self-employed?

Whether you can be classed as self-employed rather than as an employee or worker typically depends on the level of your autonomy.

There is no decisive test. However, you are likely to be classed as self-employed if you:

  • have the final say in how your business is run
  • risk your own money in the business
  • are responsible for the losses as well as profits of your business
  • provide the main items of equipment you need to do your job
  • are free to hire other people on your own terms to do the work you have taken on and pay them at your own expense
  • are responsible for correcting unsatisfactory work in your own time and at your own expense

To add to the confusion, it’s actually possible to be employed and self-employed simultaneously. Imagine that you work for a business during the day but run your own part-time business in the evening. It could be you run a hobbyist website or an eBay shop. In circumstances where you have two distinct income streams like this, you may have dual classification as an employee.

You must tell HM Revenue & Customs (HMRC) you are self-employed within three months of the end of the calendar month in which you became self-employed. Failure to do so may result in a penalty.

Contractors and subcontractors in the construction sector labour under special rules. If you provide your services through a third party, such as a limited company or partnership, IR35 rules may apply. Special rules also apply to individuals who provide their services through a managed service company.

If you really aren’t clear about your employment status, or that of someone who provides you with services, you should take advice.

Different types of directors and employers’ liability

Executive directors of limited companies are classed as office holders for the purposes of tax and National Insurance contributions (NICs).

The rules for calculating NICs for directors are different to those for other employees. Class 1 employee and employer NICs must still be paid if the director earns over the primary threshold but, unlike employees, the directors are taxed on a cumulative basis. This means that you have to recalculate their NICs every time they are paid based on their total earnings to date.

Non-executive directors could be classed as employed by the company or self-employed under a contract for services. To determine which, a review of the terms and conditions under which services are provided should be undertaken.

Irrespective of status – executive or non-executive – all company directors have a range of additional responsibilities under company law and in relation to the completion of self-assessment tax returns.

If, as a self-employed worker, you choose to convert your business to a limited company, you’ll typically become a director of the company as well as an employee.

As far as employment law is concerned, a director of a limited company has the status of an office holder. The rights and duties of an office holder are defined by the Companies Acts and the articles of association of the company, rather than by any contract of employment. Office holders are not usually covered by employment legislation unless specifically mentioned.

A company director may also have a contract of employment with the company and so be both an office holder and employee. This would allow them to benefit from the employment rights of an employee.

Compare business insurance

The law surrounding employment is complex. The low level of understanding of employers’ roles and responsibilities is perhaps understandable, although worrying nonetheless.

Even assuming that a business owner gets the employment status correct, having the right employers liability insurance covers in place can be equally challenging. With the growth in mobile and home workers, you may find that you need particular covers in place beyond the general.

The number of staff, their roles and responsibilities and their geographical whereabouts will all impact on the value and breadth of cover that a business needs. Taking advice from a specialist business insurance provider may be the best way to ensure that your business doesn’t fall foul of the law.

The process does not have to be onerous: Our simple and quick comparisons focus on finding affordable policies with the right cover based on every company’s specific business insurance requirements.

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