Bonafide Sub Contractors & Labour Only Sub Contractors – What is the difference?
Is your Company collaborating with bonafide sub contractors (BFSC) or labour only sub contractors (LOSC)? Or perhaps you’re a sub contractor working with various Company’s. Understanding the impact of these subcontractor types on your business insurance and legal responsibilities is crucial. Read on for a simplified guide on the distinctions between them.
Subcontractor Types:
Imagine a scenario where Harry, owner of “H Plumbing & Heating”, employs two categories of workers:
- Employees: Harry’s core team working exclusively for him.
- Sub Contractors: Harry collaborates with sub contractors when extra help is needed. These subcontractors can be categorised as ‘bonafide’ or ‘labour-only,’ each with its characteristics.
Bonafide Sub Contractor (BFSC) Definition:
- Bob instructs BFSCs on the task and timeline, but they decide how to execute the work.
- Typically experts in skills other than plumbing & heating.
- Bob pays them a lump sum for the entire job, and they are responsible for job completion.
Labour Only Sub Contractor (LOSC) Definition:
- Bob directs LOSCs on what, how, and when to work.
- Typically paid hourly, daily, or weekly.
- Bob may provide specialised equipment if needed.
Differences between Sub Contractors Comparison:
| Bonafide Sub Contractors (BFSC) | Labour Only Sub Contractors (LOSC) |
| Decide how to do their own work | Told how to do their work |
| Usually paid by the job | Usually paid by the hour or day |
| Responsible for completing the job | Work under hirer’s direction |
| Different skill from hirer | May have similar skills to hirer |
| Treated as third parties, not employees | Treated like employees |
| Need their own insurance | Covered under the Company’s insurance |
Sub Contractor Insurance Considerations:
- BFSCs are typically considered third parties, while LOSCs are often treated as employees for insurance purposes.
- A Company’s Public Liability Insurance will typically cover LOSCs (if insurers are made aware).
- BFSCs must have their own public liability insurance which must be the same level of cover as the Company they are sub contracting for.
Tax Differences:
Now, let’s dive into the tax differences between BFSC and LOSC, which can significantly impact your financial responsibilities as a Company or sub contractor:
Bonafide Sub Contractor (BFSC):
- BFSCs are often considered independent contractors for tax purposes.
- As a Company hiring BFSCs, you typically do not need to withhold taxes or provide employee benefits. BFSCs are responsible for handling their own taxes.
Labour Only Sub Contractor (LOSC):
- LOSCs are often treated as employees for tax purposes.
- When working with LOSCs, you may be required to withhold taxes, provide benefits, and comply with other employment tax obligations, depending on your local tax laws and regulations.
In summary, understanding subcontractor types, insurance implications, and legal responsibilities is vital for both Companies and sub contractors.