It’s common for building companies to engage labour-only contractors instead of taking on employees. This approach has many advantages, such as cost efficiency and flexibility, admin and tax simplicity and reduced employment-related legal obligations.
For individuals there can also be advantages to switching from being an employee to becoming a contractor and setting up their own company. These include charging higher rates, being able to deduct expenses and claim GST credits. However, there are also downsides that need to be carefully considered and may not be well understood. Aside from the loss of employment protections and job security there is also an increased administrative burden and obligations that bring liability & risk. This article highlights a few of these issues from a liability & insurance perspective.
Accidents & Illness
As a separate legal entity (whether you’re a sole trader or have set up a company) you’ll be responsible for paying ACC levies. In the event that you’re injured and can’t work ACC will assess your income to determine what compensation you’re entitled to. If you’ve configured your business so that your income is artificially low, perhaps by splitting it with your partner for tax reasons, or your invoiced income was patchy over the previous year, that will affect the amount ACC pays out, which may not be enough to survive on.
Solution: Contractors can switch to ACC Cover Plus Extra, which enables you to set an income level on which your compensation will be based if it is ever needed.
As a contractor if you get sick but the illness isn’t covered by ACC (since it only covers accidents) then you may lose all your income while off work.
Solution: Contractors should consider income protection insurance, which covers loss of income if the insured person gets sick.
Liability for Damage and Defective Work
As a separate legal entity you’re liable for damage you cause and can be caught up in claims of defective work. Main contractors may be more willing to “pass the buck” to their contractors for mistakes or damage compared to when the error is made by an employee.
Solution: Some public/general liability policies have an extension that covers labour-only contractors in certain conditions. So, if your main contractor has this cover it can protect you as if you were an employee. However, it won’t cover you outside of your work for that main contractor. In general, any separate legal entity should consider having its own public/general liability coverage that includes cover for defective workmanship.
Your Health & Safety Obligations as a PCBU
As an independent contractor you become a Person Conducting a Business or Undertaking “PCBU” for the purposes of the Health & Safety At Work Act. This means you have health & safety obligations and can be prosecuted and fined if you fail to meet these. If there is a serious accident on site WorkSafe will investigate and can include multiple PCBUs in a prosecution.
Statutory liability insurance covers legal defence costs and reparations in the event of a WorkSafe prosecution (it can’t legally cover the fine). However, independent contractors aren’t covered by their main contractor’s statutory liability insurance, even if they work exclusively for that builder on a labour-only basis. This leaves them exposed to significant financial burden if they are included in any prosecution.
The same exposure relates to other breaches of legislation, such as the Building Act, Fair Trading Act and Resource Management Act.
Solution: Labour-only contractors need to either obtain their own statutory liability insurance (usually packaged together with public/general liability) or request that they are specifically added to their main contractor’s policy as a named insured.
Does a Limited Liability Company Provide Legal Protection?
Operating as a limited liability company does provide significant legal protection for contractors by separating personal and business assets and limiting personal liability for business debts and obligations. However, this protection is not absolute. Contractors must adhere to their duties as directors and comply with relevant laws. For example, directors can be personally liable for company debts if the company was trading while insolvent. And they can be personally liable for breaching their duties under health & safety legislation. In some cases, usually serious misconduct such as fraud or beaches of statutory duty, courts may “pierce the corporate veil” and hold directors personally liable.
While a limited liability company typically shields its directors from personal liability for contractual obligations, this protection does not extend to tortious acts, such as negligence. If a builder personally engages in negligent construction work, they can be held personally liable for any resulting harm or damage, even though it was their limited liability company that was contracted to do the work.
Solution: Builders who are both directors of their own company and involved in the physical work need to be aware that they can be held personally liable for negligence or for breaches of statutory duties. The fact that the work was performed under the umbrella of a limited liability company does not absolve them from personal responsibility for the quality and safety of their work.
Given these risks, it is crucial for builders operating through a company to carry adequate liability insurance that covers both the company and the individual. This can provide financial protection in the event of claims of negligence.
Builders should also be mindful of how contracts are structured, ensuring that any personal obligations or responsibilities are clearly defined, and limitations of liability included where possible. However, even with protective clauses, the courts may still impose personal liability if negligence or direct personal involvement in defective work is established.
In a Nutshell
While there are advantages for individuals to contract on a labour-only basis to a main contractor, there are also risks. These include the effect on income in the event of accident or illness; increased liability for damage and defective work; greater health & safety duties and continued personal liability for negligent acts. Ensuring you fully understand these (and other) risks and have taken appropriate measures to mitigate them is an important aspect of setting yourself up as a labour-only contractor.