Business Essentials: 'Will I be breaking the law the minute I hire a worker?'

Since February this year, a change in legislation has meant that it is no longer compulsory for sole traders to take out employers' liability insurance. As a result, Grant Davison, the managing director and only full-time employee of Switch Electrical Services, decided to cancel his policy.

Since February this year, a change in legislation has meant that it is no longer compulsory for sole traders to take out employers' liability insurance. As a result, Grant Davison, the managing director and only full-time employee of Switch Electrical Services, decided to cancel his policy.

But he's not quite sure he's done the right thing. Like many other sole traders, he occasionally employs additional labour when his workload gets the better of him. He has also heard through the grapevine that there may be certain situations where employers' liability cover remains a legal requirement and that failure to have a policy could result in a hefty fine.

"It's difficult because there doesn't seem to be one point of contact to find out the pros and cons of having employers' liability insurance or indeed the current legal position," explains Mr Davison, an electrical contractor who carries out commercial, industrial and domestic projects in north London and the Home Counties. "I just hear things from other people in the industry and from newsletters, and some of the information is quite contradictory."

Essentially, the insurance protects people such as Mr Davison if employees make a claim for compensation against an employer over illness or injury suffered as a result of their work. The costs of defending the claim will be covered, as will any award to the worker. Without the insurance, the employee is still able to sue, and the employer would have to fund the claim from his own resources.

Clearly, the main advantage of having the cover is peace of mind, says Mr Davison. "It means I am fully protected. But on the downside, as I sometimes go for long periods without employing additional labour, it is a difficult cost to justify."

When the need does arise for extra labour, Mr Davison either takes on someone directly - usually someone self-employed whom he knows within the industry - or goes through an agency. "Sometimes I have to employ more than one person at a time," he admits. "I think the most I have ever had to take on is 10 people."

He's fairly sure he wouldn't be protected without his employers' liability insurance if he opted to hire people himself in the future. "But if I employ someone from an agency, I pay an hourly rate and understand that the insurance is incorporated into that.

"So if I have a project where I need to use a mix of both direct and agency labour," he adds, "should I have my own employers' liability policy? And if so, am I in effect paying for the cover twice? Is it easier to have an annual policy to reflect my varying labour needs?"

To date, Mr Davison has never had to make an insurance claim. "I have a strict health and safety policy in place and consequently there have not been any incidents or accidents to date. That can be said for most of the contractors I know. However, the reality is you never know what could happen."

WHAT THE EXPERTS SAY

Rachel Cotton, manager, More Th>n Business, the small business insurance arm of Royal & SunAlliance

"While employers' liability cover is a business expense, like all insurance it's an investment that protects against much higher and potentially damaging costs. If a sole trader hires temporary staff, it's a legal requirement to have this cover.

"Firms like Switch Electrical Services have two options: they can have their own policy or, when using an agency, they can see if the fee includes liability cover. But as Mr Davison sometimes hires staff directly, an annual policy where he can spread the expense through monthly instalments may be more cost efficient.

"When using an agency, he should ask if he can opt out of its cover and pay a reduced fee, so he doesn't end up paying twice for protection.

"Finally, if he's in any doubt about his requirements, he should ask an insurer to guide him through the options."

Stewart Masterton, business adviser, Business Link for London

"Although employers' liability insurance is not compulsory for sole traders, it is still a legal necessity when hiring workers.

"The law applies to the following staff: casual; temporary - depending on your contract with the agency; the self-employed - again, depending on the extent of your responsibility for their supervision, and on the terms of your contract with them; and unpaid volunteers or work-experience students - depending on your existing insurance arrangements.

"Failure to meet employers' liability legal requirements could result in a fine of £2,500 a day. And although there is a permitted exclusion for sole traders, it may not be the right thing to do.

"The decision to buy or not buy the cover should be based on what is best for protecting the business. As an occasional employer, Mr Davison's company is likely to be exposed to potential liability. It is advisable to discuss requirements with an insurance company."

Louise Fowler, marketing director, Barclays Small Business Banking

"The Employers' Liability (Compulsory Insurance) (Amendment) Regulations 2004 stipulate that any employer which is a company with only one employee - and where that employee also owns 50 per cent or more of the issued share capital - is exempt from purchasing the insurance.

"However, one-man firms that employ staff, including casual labour taken on for a few hours or less, will require employers' liability insurance and can face fines of up £2,500 a day for not having it.

"This means that even though you only employ help occasionally, you will still need to take out employers' liability Insurance.

"You should also take care if hiring contractors or contract staff to perform work on your behalf. Unless the terms of the agreement make the legal relationship between the parties absolutely clear, an injured contractor could claim to be under a contract of service (rather than a contract for service) and claim against you as though he or she were an employee."