Why a 'labour-only worker' is a train crash waiting to happen.

The fact that many construction firms prefer to use a workforce consisting of individual contracted workers instead of directly employed staff is already likely to bring them into conflict with the HMRC over the tax treatment of their remuneration. If that is not a concern to you, then here is another reason why contracted-in labour is not such a good idea.

The problem arises from the way insurance underwriters accommodate their insured clients by agreeing to provide insurance cover to what they describe as labour-only contractors. The presumption is the underwriters will only accept liability for a claim arising from this kind of worker if the client can demonstrate the same level of control over how, when, and where they worked in the same way as their directly employed staff.

One should immediately begin to see the potential problem here … If one argues the way the 'labour-only workers' are managed is identical to that of a directly employed staff member, then they become disguised employees in all but name. Their self-employed status is potentially shot to pieces.

Now spin the same argument on its head. Insurance underwriters faced with having to meet a large claim, will consider if they can escape the liability because the client failed to comply with the terms of the insurance policy in some way. If the client has treated the offending worker that gave rise to the claim as a self-employed individual who was paid under CIS, then they must be exercising less control over the actions of the individual needed to meet the underwriter's definition of a labour-only contractor. There is a risk here that the underwriters may refuse to meet the claim.

Likewise, if the HMRC is investigating the employment status of a contractor, and that individual carried no independent professional insurance, then the presumption is the engager must be relying on the worker's labour-only status for insurance cover purposes. This compromises their self-employed status for tax purposes.

In other words a worker cannot be both a self-employed worker and a labour-only contractor at the same time. They are mutually exclusive.

We advise clients against engaging any individual contractor if they do not carry their own professional insurance cover. If you do, you will struggle to argue they are self-employed to the HMRC, and you may find your underwriters refuse to meet a claim they gave rise to. You lose both ways.