Employer's Liability Insurance

[StillFedUp]

Does a limited construction company that has two directors (who are 50% shareholders) and no employees require employer's liability insurance?
The directors are reimbursed for expenses but not for labour, which they do provide to the company.

The company will use the service of 'bona-fide' subcontractor companies (not hired in individuals) during construction.

I can't find a definition of employee and so I don't know if these directors would be classed as employees.

In the case of an injury to one of the directors I would not expect a claim for compensation.

Thanks,

SFU

[didds]

its why in sixteen years of being a director of a one man band company I never bought EPL, on the basis I coudn't see it ever paying out (it helped that as a IT skills based company i was unlikely to achieve much more than a paper cut

i had a similar stance with the DPA... the only details of anybody I had on record was me. I wasn't gong to pay a fee to the DPA because I knew my own details.

didds

[Slarti]

I was always under the impression that if you use subbies, you need insurance that will cover them and that this was covered by ELI.

Slarti

[Clitheroekid]

Does a limited construction company that has two directors (who are 50% shareholders) and no employees require employer's liability insurance?

Somewhat surprisingly (and rather stupidly) the answer is probably yes.

If the company had just one director they would be exempt thanks to the Employers' Liability (Compulsory Insurance) (Amendment) Regulations 2004. This adds to the list of employers that are exempted from the requirement to have EL insurance:

"Any employer which is a company that has only one employee and that employee also owns fifty per cent or more of the issued share capital in that company.”

But if a limited company has two directors they don't qualify for this exemption.

However, whilst I would obviously never condone breaking the law I would think that the chances of (1) being found out; and (2) being punished if you `overlooked' taking out EL insurance are absolutely minimal.

[StillFedUp]

Thanks CK,

Unfortunately one of the directors is extremely cautious so if the rules state ELI is compulsory in this situation then so be it.

SFU

[Clitheroekid]

Unfortunately one of the directors is extremely cautious so if the rules state ELI is compulsory in this situation then so be it.

You could always point out that if he took no payment from the company he would not be considered an employee, and the company could therefore legitimately avoid the need for ELI!

[melonfool]

Does a limited construction company that has two directors (who are 50% shareholders) and no employees require employer's liability insurance?

Somewhat surprisingly (and rather stupidly) the answer is probably yes.

If the company had just one director they would be exempt thanks to the Employers' Liability (Compulsory Insurance) (Amendment) Regulations 2004. This adds to the list of employers that are exempted from the requirement to have EL insurance:

"Any employer which is a company that has only one employee and that employee also owns fifty per cent or more of the issued share capital in that company.”

But if a limited company has two directors they don't qualify for this exemption.

However, whilst I would obviously never condone breaking the law I would think that the chances of (1) being found out; and (2) being punished if you `overlooked' taking out EL insurance are absolutely minimal.

I would have considered they were not liable in the case outlined.

The quote I read from the HSE said: "companies employing only their owner where that employee also owns 50% or
more of the issued share capital in the company." - Slightly different wording than you have quoted?

...and our legal advice was always that two directors with 50% each was exempt.

http://www.hse.gov.uk/pubns/hse40.pdf - page 4.

From my reading, and advice I have taken around contracting firms as recently as early 2016, I would have said they were exempt in these circumstances.

They may also be exempt under this rule, if they are related: "family businesses, ie if all of your employees are closely related to you (as husband, wife, civil partner, father, mother, grandfather, grandmother, stepfather, stepmother, son, daughter, grandson, granddaughter, stepson, stepdaughter, brother, sister, half-brother or half-sister). "

Mel

[chris]

I think you have covered the IR35 angle with single person companies in the construction industry by saying that you only use Bona Fides companies, which I assume mean companies employing several staff. As long as you are not subbing the odd plasterer, electrician etc. who may fall under this legislation. Obviously you will know that the thing about IR35 is that these people would be considered as your employees under this provision and therefore this would extend your liability even if you weren't 'employing' them.

If you are not going to get employer's liability insurance, I would contact all the companies you use and ask for a copy of their employer's liability insurance. Then at least you know that you are covered if something happens whilst they are on site. I would ask for this no matter how big or bona fides the company may seem and keep it updated every year.

[Clitheroekid]

I would have considered they were not liable in the case outlined.

The quote I read from the HSE said: "companies employing only their owner where that employee also owns 50% or
more of the issued share capital in the company." - Slightly different wording than you have quoted?

Slightly different wording, but saying the same thing.

The key wording is "that employee" in the singular. It does not allow for two or more employees, and in fact this reflects the reason that the 2004 regulations were introduced - they were specifically designed to exempt one man companies such as IT contractors.

...and our legal advice was always that two directors with 50% each was exempt.

Get a new legal adviser!

From my reading, and advice I have taken around contracting firms as recently as early 2016, I would have said they were exempt in these circumstances.

That may be the general view, and it in many ways reflects common sense, but it is legally wrong.

They may also be exempt under this rule, if they are related: "family businesses, ie if all of your employees are closely related to you (as husband, wife, civil partner, father, mother, grandfather, grandmother, stepfather, stepmother, son, daughter, grandson, granddaughter, stepson, stepdaughter, brother, sister, half-brother or half-sister)."

That only applies to unincorporated businesses, not to limited companies. By definition, if it's a limited company these people are not "your" employees, they are employed by the company.

[melonfool]

I would have considered they were not liable in the case outlined.

The quote I read from the HSE said: "companies employing only their owner where that employee also owns 50% or
more of the issued share capital in the company." - Slightly different wording than you have quoted?

Slightly different wording, but saying the same thing.

The key wording is "that employee" in the singular. It does not allow for two or more employees, and in fact this reflects the reason that the 2004 regulations were introduced - they were specifically designed to exempt one man companies such as IT contractors.

No, indeed it does not allow for two or more employees. But here there are no employees?

Mel

[Gengulphus]

I would have considered they were not liable in the case outlined.

The quote I read from the HSE said: "companies employing only their owner where that employee also owns 50% or
more of the issued share capital in the company." - Slightly different wording than you have quoted?

Slightly different wording, but saying the same thing.

The key wording is "that employee" in the singular. It does not allow for two or more employees, and in fact this reflects the reason that the 2004 regulations were introduced - they were specifically designed to exempt one man companies such as IT contractors.

No, indeed it does not allow for two or more employees. But here there are no employees?

Surely in that case there is no employee who owns any shares in the business, and so it's impossible for "that employee" to own 50% or more of the issued share capital?

Of course, it's probably possible to arrange that one of the directors is employed to do something minor, and the other isn't...

Gengulphus

[StillFedUp]

Thanks for all the replies.

The two directors are not connected except through this company - they are not related in any way.

Neither director draws a salary and on that basis I would regard neither as an 'employee'.

Both directors carry out manual labour for the company as well as clerical work. Obviously their interest is in the capital appreciation as a benefit to them as shareholders rather than an income as employees.

Chris, I think you are confusing matters with IR35. The construction industry operates the CIS scheme, which is slightly different from IR35 in that the subcontractor needs to be verified with HMRC in order to be paid gross. Alternatively his customer must withhold a proportion and pass on to HMRC, which can then be reclaimed by the subcontractor if he has paid the correct amount of tax. All bona fide contractors will be paid gross - generally it is one man bands who are often paid in cash will have deductions made. If IR35 applied in this situation then it would be the subcontractor who would be liable for any shortfall in tax/NI payments. Having also worked in the IT industry for 20 years I am well aware of both schemes.

All subcontractor agreements are drawn up to cover the CIS obligations as well as requiring proof of their own EL insurance.

In trying to obtain insurance quotes I have been told that EL insurance will be required as the directors carry out manual labour (caveat - this information comes from those with an interest in selling insurance). Whether either director would be able to claim compensation through that insurance because they are not employees is another matter.

SFU

[Clitheroekid]

No, indeed it does not allow for two or more employees. But here there are no employees?

The discussion had moved from this specific case to whether or not a company with two directors who were both also employees needed ELI. Hopefully, I've now established that it does.

But you're quite right to remind me that the original question was whether or not the directors in this particular case were employees.

My provisional view is they could well be, even though they are only being paid expenses. This is because although they aren't actually receiving any remuneration at present there is probably an expectation that they will do so once the company has enough money to pay them.

This was pretty much the situation in the 2015 case of Stack v Ajar-Tec Ltd, which went to the Court of Appeal, and is therefore a very powerful authority.

The basic facts were that Mr Stack and two others had set up Ajar-Tec Ltd. They were all directors and shareholders, but Mr Stack never received any remuneration. They fell out and Mr Stack's appointment as director was terminated.

He made a claim against the company, alleging unfair dismissal. The Employment Tribunal confirmed that he was an employee of the company as there had been agreement that he would work for the business and they considered it was common sense that he would be paid for the work that he did. A term regarding payment was therefore implied into his contract.

The company appealed, but the Court of Appeal also agreed that Mr Stack was an employee and that there had been an agreement between Mr Stack and the other two directors prior to starting the Company that they would all receive payment.

The fact that the parties had not expressly agreed a term about remuneration did not mean that there was no contract between them and the Tribunal had therefore been quite correct to imply a term that a director would be paid a reasonable rate into the contract between Mr Stack and the company.

I suspect that it's a very similar situation in this case, namely that although the two directors aren't receiving any payment at present they are nevertheless expecting to do so, and that there is therefore an implied term in their appointment as directors that they will receive payment at some stage. If so, then they are probably both employees, and it follows that, strictly speaking, ELI is a legal requirement.

If I'm wrong, and they are genuinely just giving their services for free with no expectation of payment then I would accept that they are probably not employees, in which case there would be no need for ELI.

[JonE]

Whether either director would be able to claim compensation through that insurance because they are not employees is another matter.SFU

The term 'employee' doesn't seem to have a definition that remains consistent across every context.

For example, it may be worth noting that a charity staffed solely by unpaid volunteers should have EL Insurance according to The Charity Commission. Being paid isn't the sole badge of being an employee for this purpose.

Cheers!

[melonfool]

A lot has been said here. In fact, a director is NOT an employee, he is an office holder.

BUT - If the Director has a contract of employment, THEN he is an employee AND an office holder.

Most directors do not have contracts of employment and in fact I think it is a mistake to do so. For example - An office holder (Director) is exempt from minimum wage legislation. BUT an employee HAS to be paid minimum wage. So, you can easily see why a Director should, in my opinion, not have a contract of employment. Hope that helps.

Fred.

Indeed, for my own Ltd company (a bit different because it is just me anyway) I don't have an employment contract and I don't pay myself min wage.

I do not have ELI. But where I have looked into it the cost has only been about £40pa on top of the two insurances I do hold (PI, and public liability, that latter probably being unnecessary but insisted upon by a client last year).

Mel

[Cornytiv34]

The questions that should be asked is what can happen? Can I, the company, fellow directors and shareholders afford the consequences or should we purchase insurance to reduce the risks? (just a sad review on reality of life!)

Changing relationships between firms, employees, subcontractors and their insurers are a minefield. Employment and contract law is complex and compliance with H&S or Building Regulations add to the burden of risks to the business. It is easy in an emergency to slip into a different risk situation.

Accidents or illness result in liabilities and substantial legal costs. Public and Employer’s Liability insurance have their place in reducing the risks of loss of your assets, delays and interference with your work.

A few examples, insolvency of contractor or their insurers? Do you control the method of work or materials? Could there be more than one subcontractor on site at the same time who's employees could injury to another? Could an injured contractor’s employee bring action against another subcontractor and you as a “joint tortfeasors” and leave you to recover from other parties?

Frighten yourself by looking up on the internet “Respondeat Superior” and “Vicarious liability” then see

http://www.thompsons.law.co.uk/ltext/he ... olvent.htm
these are lawyers who work for trade unions and were anticipating a new Act.

http://www.legislation.gov.uk/ukpga/201 ... 010_en.pdf
This is the 2010 Act mentioned above, to enable recovery from insurers of insolvent persons. It gives some idea of how complex the law can be and only came into force on 1st August 2016 “Yes 2016”!

I conclude there is risk of ending up in the mire and with “No Win No Fee” law firms around I would not “run naked”.