Employers’ liability for non-PAYE businesses
When you become an employer in the UK, there are three main administrative concerns that you’ll have to consider: registering as an employer with HM Revenue and Customs (HMRC), creating a PAYE scheme and purchasing employers’ liability insurance.
Registering as an employer:
You will normally need to register as an employer with HMRC when you start employing staff (be it full time, part time, paid or unpaid), or begin using subcontractors. You must also register if you’re employing yourself – for example, if you’re trying to create a private limited company and need to appoint yourself as director to fulfil HMRC’s registration requirements.
What is Pay As You Earn (PAYE)?:
Employers usually operate PAYE as part of their payroll. It is a way for HMRC to collect Income Tax and National Insurance Contributions (NICs). Employers are exempt from having to register for the PAYE scheme if their employees are paid less than £111 per week, do not have another job, do not get expenses or benefits and do not get a pension.
What constitutes an employee?:
The Employers’ Liability (Compulsory Insurance) Act 1969 can help you determine whether your worker is an employee and needs to be covered with an insurance policy. A worker is classified as an employee depending on the nature of their relationship with you. Typically, employees are defined as being under a contract of service, and under the direct control and supervision of their employer. This can include:
- Workers who you control where, when and how they work.
- Workers who you supply with work materials and equipment.
- Workers who you have the right to any profit they make.
- Workers who cannot employ a substitute to take over if they are unable to do the work.
- Workers who are treated the same way as other employees.
You’ll find this often includes the following types of employees:
- Full and part-time employees, including casual workers and volunteers.
- Paid and unpaid workers.
- Labour masters and any individual workers they supply.
- Individuals employed as labour-only subcontractors.
- Self-employed individuals that are hired by, but not in partnership with the employer.
- Individuals lent to or borrowed by the employer.
- Individuals undertaking study or work experience under the supervision of the employer.
- Individuals attending interviews for the purpose of being employed.
You may not need employers’ liability insurance for a worker if they fulfil most of the following criteria:
- They do not work exclusively for you (e.g. an independent contractor with various clients).
- They work on their own initiative and do not need direct instruction or supervision from the employer.
- They supply most of the equipment and materials they need for the job.
- They personally reap most of the profits from the work they do.
- They can employ a substitute if they are unable to do the work themselves.
- You do not deduct income tax or national insurance for them (note that while some workers may be self-employed for tax purposes, they may still be classed as an employee, in which case you will need employers’ liability insurance to cover them).
Subcontractors often fall under the worker type listed above. If you regularly employ subcontractors for construction work, or if you spend more than £1 million per year on construction, you will need to register as a contractor with the Construction Industry Scheme (CIS).
Employers’ liability insurance is a legal requirement for all employers, who must purchase their cover from an authorised insurer as soon as they become an employer. Often available alongside a broader insurance package, employers’ liability cover acknowledges that employers are responsible for their employees’ wellbeing and are accountable for their health and safety during their employment.
If your employee claims to have fallen ill or suffered an injury due to working with you, the policy can help to cover the cost of defending against such claims and provide any necessary compensation. You are legally obliged to ensure the minimum limit of indemnity is £5 million, although insurers often offer up to £10 million as standard. Employers’ liability cover can also help prove to recruitment agencies, end clients and HMRC that you are a genuine business under IR35.
While almost all employers will need employers’ liability insurance, you may be exempt if:
- You are a sole trader and not registered as part of any businesses or employing anyone else.
- You are a sole trader in a company with only one employee (yourself) owning 50% or more of the company.
- You only employ close family members (unless your family business is incorporated as a limited company).
- You only employ people based abroad.
Also exempt are government departments and agencies, local authorities, health service bodies and most organisations financed by public funds. This includes governments of foreign countries who employ people in the UK. You can check whether your business is exempt from employers’ liability requirements through the Health and Safety Executive (HSE) website.
Consequences of neglecting employers’ liability insurance:
You can be fined £2,500 for each day you are not properly insured under employers’ liability laws, and a fine of £1,000 may also be levied if you do not make your employers’ liability certificate readily available (in either hard or soft copy) to either your employees or HSE inspectors. It is recommended that you keep all previous/expired employers’ liability certificates – they can be useful if an employee makes a claim long after they have finished their employment with you.
Hiring a non-PAYE worker:
While PAYE is checked by HMRC, employers’ liability insurance is checked by the HSE. As such, you may find that workers not classed as employees for accountancy (PAYE) purposes are still classed as employees for employment law purposes – read the guidelines carefully to determine the status of your worker.
If you have determined that you are not liable for your non-PAYE worker, it is recommended that you make your legal relationship clear in your terms of agreement. If your non-PAYE worker is injured while working for you and your legal relationship is not explicitly stated, they could claim to be under a contract of service and claim against you as if they were an employee. This will not be the case if they are employed by you through a contract for service. You might also find that if you hire the same non-PAYE worker regularly, they can be classed as an employee for the purposes of insurance.
Employers’ Liability Trading Office (ELTO):
Keep in mind that you may be asked for your employers’ reference number (ERN) by the Employers’ Liability Tracing Office (ELTO) when you purchase employers’ liability insurance. ELTO’s website helps employees find their company if they need to make a claim against it. Your ERN is often the same number as your PAYE reference. If you are among the small majority of employers that does not have an ERN (due to paying all your employees below the PAYE threshold, for example), you may need to contact your insurance provider.
Extending your employers’ liability cover:
While typical employers’ liability insurance is extensive, you may be offered options to extend your cover. Two notable options include:
- An extension to meet claims if a successful court action from your employee against another party (i.e. a client) goes unpaid within three to six months. Your policy could both pay the money owed to the employee and chase the debt from the third party.
- Provision for compensation for loss of working time if employees or directors are required to attend court in order to defend a claim.
Exclusions to your employers’ liability cover:
Insurers will not approve claims due to injuries resulting from radioactive contamination (individuals working with radioactive material must purchase specific insurance, and are expected to take necessary precautions) and motor accidents to employees travelling as passengers (this exclusion does not apply to employees injured when driving on company business).
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