Using contractors and subcontractors

There is an important distinction between using contractors and subcontractors.

What are contractors?

Contractors provide agreed services to a client for a set fee and usually for a set duration under a contract for services. (This is in contrast to a contract of service, eg the employment contract, which is between an employee and employer.)

Examples of using contractors

Many businesses typically use contractors for:

• building work
• catering
• cleaning
• gardening
• marketing services
• IT maintenance and support
• security services
• recruitment

Contractors can charge the client fees by the hour, day or on a lump-sum basis. Their contracts often specify milestones for part payment, eg on completion of specific goals.

See contractors and the Construction Industry Scheme.

What are subcontractors?

Subcontractors undertake a contract from the contractor. Subcontractors undertake work that a contractor cannot do but for which the contractor is responsible.

Subcontractors can be anything from an individual self-employed person - eg a plumber carrying out work for a building contractor - to a large national organisation. A subcontractor has a contract with the contractor for the services provided - an employee of the contractor cannot also be a subcontractor.

Subcontractor example

For example, a building contractor may hire a subcontractor to complete the electrical wiring part of the contractor's building job. The contractor is responsible to the client for the building job including the part performed by the subcontractor.

Subcontractors might work on task-based contracts with no fixed date, long-term arrangements which can be discontinued at any time, or fixed-term contracts.

See subcontractors and CIS.

Your business may need additional resources to carry out specific or specialist tasks. You may want to use the services of a contractor or subcontractor for this, although it is important to weigh up the advantages against the disadvantages of contracting and subcontracting.

Advantages of contracting and subcontracting

• You can hire a contractor and/or subcontractor when you need more flexibility with a specific job or task.
• You can use a contractor/ subcontractor for one-off jobs and jobs requiring specialist expertise or fast turnaround.
• Using contractors and/or subcontractors enables your permanent staff to concentrate on the core business.
• Some contractors and/or subcontractors can start the work or project at short notice, even when large numbers of workers are required.
• You can often specify the type and duration of contract you need for the contracted job.
• You have no PAYE or National Insurance contributions administration for contractors and/or subcontractors.
• Contracting and subcontracting allows you to obtain temporary cover for a permanent staff job or work that needs doing.

Get the most from contractors and subcontractors.

Disadvantages of contracting and subcontracting

• Contractors/subcontractors may cost your business more than the equivalent daily rate for employing someone.
• By relying on contractors and/or subcontractors, your business does not acquire or develop skills in-house.
• Permanent staff may resent contractors being paid more money for doing similar work to them.
• If you use a contractor that then uses a subcontractor, you have no direct control over the quality of subcontractors' work.
• Contractors and/or subcontractors may not appreciate your business culture and may lack the motivation and commitment of permanent staff.
• Workers can be employees or subcontractors of the contractor - you need to understand relevant tax implications and other rights. See employment status - implications for tax and workplace rights.

The employment status of those who do work for you has implications for tax and workplace rights:

• an employee has a contract of service, eg a contract of employment, with you as an employer
• a contractor has a contract for services with your business, while a subcontractor has a contract for services with your business if you are the main contractor

As such, neither contractors nor subcontractors will normally be considered as your employees. Instead they might be self-employed, an agency worker or employees of another business.

However, even though a worker may be described as a contractor or subcontractor, it is still possible that - under the law - they may actually be considered your employee.

If so, they would therefore have the full range of employment rights, eg the right to claim unfair dismissal and the right to maternity, paternity and adoption leave and pay.

If you are unsure, you must take steps to clarify their employment status.

You can also contact the Labour Relations Agency (LRA) for further advice on Tel 03300 555 300 or the Equality Commission for Northern Ireland on Tel 028 9089 0888.

Tax

If you use contractors/subcontractors, you will not generally make tax and National Insurance (NI) deductions or employer NI contributions.

However, special rules apply if you are a contractor using subcontractors in the construction industry - see Construction Industry Scheme.

In any relationship between a business - known as the client - and a contractor, both parties will have duties under health and safety law. Similarly, if the contractor uses subcontractors to carry out some or all of the work, all parties will have some health and safety responsibilities.

To ensure contractors' or subcontractors' health and safety you must:

• identify the requirements of the job and assess the risks involved - see health and safety risk assessment
• decide what information and training is required
• as the client, select an appropriate contractor and ascertain their health and safety policies and procedures
• as the contractor, find out about subcontractors' competence
• review the way work is carried out and the risk assessment

Health & Safety Executive guidance on working with contractors.

Ensure that there is co-operation and co-ordination at all times between you/your staff and the contractors/subcontractors. In particular, you should:

• provide all parties with information, instruction and training on anything that may affect health and safety
• make the contractors/subcontractors aware of your health and safety procedures and policies
• provide management and supervision to ensure the safety of contractors/subcontractors

Penalties for health and safety failures

There are actual cases where clients, contractors and subcontractors have all been fined for failing in their health and safety duties, eg failure to:

• ensure a contractor's/subcontractor's competence
• supervise a contractor/subcontractor
• take steps to prevent contact with live equipment
• provide information about the existence of asbestos
• ensure safe operation of vehicles
• ensure safe loading to or unloading from delivery vehicles
• assess risks to health from regular exposure to high vibration levels
• exercise a duty of care towards a contractor/subcontractor
• provide a formal site induction, risk assessment or method statement

Download Health & Safety Executive (HSE) advice on contractors' health and safety (PDF, 282K).

Also see what you need to do about health and safety and how to provide health and safety training and information.

There are some insurance and contractual issues that you should think about if you're considering using contractors or subcontractors.

Insurance issues

As well as employment rights, tax and health and safety, you should consider liability insurance when you engage contractors or subcontractors:

• If you have employees, you need employer's liability insurance. However, non-employees - such as contractors - aren't covered. Therefore, you will also need to have public liability insurance (PLI).
• Your PLI policy should cover contractors/subcontractors working for you away from your premises unless the contractors/subcontractors have their own PLI with the same level of cover.
• If contractors/subcontractors are working on your behalf, check they have appropriate insurance.
• If a contractor works at your business premises, eg a builder, they should have their own insurance to protect you and your property, while your PLI covers them.

To be certain, consult an insurance adviser and notify your insurer that you are using contractors/subcontractors.

Contractual issues

Many businesses aim to incorporate certain clauses into their contract with the contractor/subcontractor.

Examples include:

• protection of your intellectual property rights - eg material and equipment designs - if these will be accessed or used by contractors/subcontractors
• non-disclosure agreements - these might be needed if you have to tell contractors/subcontractors about - or they help you develop - confidential aspects of your business
• a project schedule - including performance targets and deadlines
• a payment schedule - this might include payments on account and the criteria to trigger such payments, eg completion of a piece/stage of work
• penalties for poor workmanship or late delivery
• minimum quality standards
• minimum health and safety standards - see health and safety requirements when using contractors and subcontractors

If in doubt, consult a legal adviser before you agree a contract for services with a contractor/subcontractor. Choose a solicitor for your business.

If you aren't involved in choosing a subcontractor, tell the contractor you expect them to address these matters in contracts with their subcontracted workers.

Think about how to get the most out of contractors and subcontractors from the point of engagement through to completion of the contracted work.

Consult your staff

Using a contractor/subcontractor can be successful where there is co-operation and co-ordination between your permanent staff and the contractor/subcontractor.

Ensure your staff understand the advantages of using a contractor/subcontractor by setting out any benefits for them, eg they can get on with the core business. Inform and consult your employees.

Exercise care when hiring contractors

Take up references and talk to others to determine a contractor's/subcontractor's competence.

Check qualifications, skills, membership of relevant trade or professional bodies, quality standards and accreditations of potential contractors.

Find out the contractor's/subcontractor's policies for health and safety, selecting subcontractors and employee consultation.

If you use contractors/subcontractors on a regular basis, think about setting up a database of contacts who you know and trust.

Have a written agreement for contractors

Agree in writing:

• the contractor's/subcontractor's responsibilities
• the objectives, scope of the work and key deliverables (goals), eg in a project schedule with milestones
• resources you must provide if the contractor/subcontractor needs access to your equipment and/or staff
• fees and a payment schedule - you may wish to consider penalty or incentive schemes for under-performance or over-performance
• a procedure for resolving disputes, eg review or termination
• confidentiality agreements

You have certain legal responsibilities when you engage contractors/subcontractors and you should agree a contract for services that will help you to discharge those duties. You should seek legal advice on this.

See health and safety requirements when using contractors and subcontractors and insurance and contractual issues when using contractors and subcontractors.

Manage the work of contractors

You should manage and supervise the contractor's/subcontractor's work, seek evidence of work done and check that contractual obligations are met. Raise any issues at the earliest opportunity.

There are plenty of ways to get assurance about the competence and integrity of contractors.

Determine the competence of contractors

Factors that will help give you the confidence to deal with a contractor include:

• Current membership of a trade or professional association or other recognised body, including approved scheme operators under the TrustMark initiative for the domestic repair, maintenance and improvement sector.
• Status as a licensed labour provider with the Gangmasters & Labour Abuse Authority, if they supply workers to the agricultural or horticultural industries or food, fish and shellfish gathering, processing and packaging industries. It is an offence for someone without a licence to provide labour in these sectors, and it is illegal to enter into an arrangement with an unlicensed gangmaster.
• Quality standards, such as British Standards and ISO standards for management systems. See quality management standards.
• Personal recommendations.
• References.
• Examples of previous work.

Trade or professional associations

Many associations and bodies set membership criteria and minimum standards in areas such as:

• quality systems and training
• health and safety
• environmental management
• deliverables and technical capabilities
• financial stability

Search for a trade association.

Personal recommendations

Recommendations from business or personal associates are often good indicators. Try to see for yourself examples of the contractor's previous work.

References

It is good practice to obtain at least three quotes or estimates. Make sure you understand the terms, any technical details and any aspects that could change such as:

• material prices that vary
• overtime
• night rates

Even if you get personal recommendations, follow up all references provided. Tips when taking up a reference include:

• letting the contractor know you are following up a reference
• contacting referees in good time so as not to delay your project start
• asking specific questions about information the contractor has provided
• asking about personal qualities, safety records, work standards, any legal case the contractor is or has been involved in
• checking the authenticity of telephone references and taking notes during the call

The Centre for the Protection of National Infrastructure

The Centre for the Protection of National Infrastructure (CPNI) provides protective security advice when using contract staff. This is for companies and organisations that deliver the UK's essential services.