Do You Need Employers' Liability Insurance?

I'm involved with three companies: N-Sim, a software consultancy, Accuvex, a holding company, and Verieda,
which works on EDA tools. When each of them has been started, the same
question has gone through my head: "do we need to take out employers'
liability insurance?".

Employers' liability insurance, or ELI for
short, is normally required by law in order to protect your employees.
For example, if an employee on a building site falls from some
scaffolding, (hopefully!) the company's ELI will pay out. In the United
Kingdom, the minimum cover is £5 million, and most policies offer cover
of £10 million.

For many companies, the question of "do I employ
anyone?" has an obvious answer. Construction workers are a case in
point. However, when it comes to software companies, it might not be
such an easy question. "Surely", the argument goes, "I don't need ELI if
I don't employ anyone, if all my work is done by contractors?".

Exemptions from ELI

The UK Health & Safety Executive have a guide to ELI for employers, which describes what exemptions there are. In particular the following are exempt:

• Most public organisations (government departments, police...), and health bodies.
• Family businesses where all employees are closely related to the owner (but not when the business is a limited company).
• Companies which only employ their owner, where that owner owns 50% or more of the issued share capital.

I'll
assume that we're dealing with a private limited company, probably
writing software, and hence that the first two exemptions aren't
relevant. The 2004 amendment to the 1969 Employers' Liability (Compulsory Insurance) Act
allows only for a company with a single employee (who fulfills the 50%
criterion above) to be exempt. Hence, two directors who split the equity
equally and are employees are not exempt.

That's
fine, but what about companies with unequal shareholdings, or more than
two directors, or with contractors? Who counts as an employee?

Who's an Employee?

For
income tax purposes, directors of limited companies are treated as
employees, and hence fill in the "Employment" pages of their
self-assessment tax return. In most cases, this is reasonable, since the
directors are likely to be deriving benefit (salary or dividends) from
their work, and moreover are essential (difficult to replace) in the
company's normal function. They cannot subcontract their
responsibilities, nor (generally) do they provide their own tools for
doing the job. All of these aspects are some of the tests of whether someone is employed by the company, or a self-employed contractor.

On the face of it, then, companies that employ more than one director need ELI.

However, the HSE's guide to ELI for employers
also says that "you may not need [ELI] for people who work for you,
where they do not work exclusively for you". Clearly, this is relevant
when a contractor performs some work for the company, but also carries
out similar work for other entities. It is important to note that the
HSE's definition of who is an employee is distinct from HMRC's (Revenue
& Customs) definition: someone's tax arrangements may mean they are
defined as self-employed, but from an ELI perspective, they may be an
employee. I'm going to assume that this provision does not apply to
part-time employees of your business, who have another job. It's
unclear, though.

Of course, if you're a start-up company, and you
don't pay your directors anything, then they don't count as employees
for ELI (see HSE's guide to ELI for employers
again), but the company can still be held liable in case of a claim for
compensation, so taking out ELI might still be wise. Hence, one
exemption might be to have a director, who owns a majority shareholding,
being an employee, whilst having another person helping you out, who is
unpaid. Bad luck for the unpaid person...

So Who Does Need Employers' Liability Insurance?

If
you're a one-person band (with a majority shareholding), and only use
contractors (who satisfy HSE's tests for not being employees, rather
than just having self-assessment status for tax purposes), you're likely
to be exempt. In any other case, you're not.

Which brings us to
an interesting conclusion: if two friends start-up a limited company
that sells shareware software, both of them being directors with 50%
holdings, and carrying out part-time work for the company for which they
are paid, say, £10 a month (it's a small company!), it seems that they
need ELI. This is despite the fact that they are both directors, working
from home, earning tiny amounts, and would be stupid to sue themselves.
Perhaps this is one reason that such small companies shouldn't bother
incorporating.

Having said that, note that if you have a limited
company that is not paying its directors (e.g. because it's just
starting up, or is dormant), it appears that ELI is not necessary.

(Note
though, that if you're a director, when you want to fill in your tax
return, you'll need an "employer's PAYE reference". This can only obtain
by registering the company as an employer with HMRC. And then not
paying yourself anything to avoid needing ELI. Oh well...)

But ELI Costs Too Much!

It's
definitely worth shopping around: different insurers quoted us wildly
disparate premiums. Policies tend to be based on how large the company's
wage bill is, hence the premium doesn't have to be unmanageable.
Different companies will have different minima for such total wage bills
(one reason for shopping around). At present, N-Sim uses Zurich Insurance, who meet our needs well, though they do include (for free) a public liability insurance that does not cover our main line of business which is selling software consulting services. Nevermind...