How to Protect Yourself When Hiring a Subcontractor

Hiring a subcontractor is a standard part of many industries, and it's not without its benefits. Working with subcontractors helps lighten your workload, offers you more flexibility than hiring a permanent employee, and often gives you access to a new set of skills.

But, when hiring a subcontractor, it's important that you practise good risk management to avoid liabilities. To help you, we've compiled the most important information on subcontractor hiring below.

Types of subcontractors

First, you need to know the difference between labour-only subcontractors and bona fide subcontractors:

• Labour-only subcontractors: A labour-only subcontractor is very similar to an employee. They work under your supervision using material, equipment, and tools that you have provided. Usually, you determine their hours and direct where and how they work. You may even pay them a salary. When working with labour only subcontractors, you are legally required to have employers' liability insurance for them.

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• Bona fide subcontractors: Bona fide subcontractors are more independent— setting their own hours, getting paid by invoice, working without supervision, and supplying their own tools, equipment, and materials. You do not need employers' liability insurance for bona fide subcontractors, but you should ask for proof that they are licensed and that they have public liability insurance before you hire them. If they have any staff, make sure that they're insured too.

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Risks to consider when hiring subcontractors

Next, evaluate the risks of hiring a bona fide subcontractor. The three biggest concerns are quality control, time management, and liability.

Before you hire your subcontractor, ask for references and examples of their past work. Make sure they have the experience you need, that their quality level matches your own, and that they're not cutting corners by using cheap materials or unsafe practices.

It's also important that you communicate well with your subcontractor. Walk through the site with them and lay out your specific expectations. Then, after you understand their availability, work out a reasonable deadline for the finished project.

Be aware that hiring a subcontractor usually means more time spent communicating. You need to be on hand to answer their questions and check their progress, in addition to addressing client concerns. Be certain that this is someone you can get along with—you may be working with them for a while.

And, once again, make sure that they're properly licensed and insured.

Sign a risk transfer agreement

Finally, ask your subcontractor to agree in writing to all of your agreements. Sign a contract that holds them accountable for their work and protects you from any damages they cause. This contract should be simple but thorough, covering:

• That the subcontractor is an independent operator and that you are not responsible for tax-related deductions
• The work a subcontractor has agreed to, including duration and deadline
• The pay rate and delivery method agreed upon
• Any additional costs (material, transportation, or other expenses) that you've agreed to deliver.
• When and why your contract might terminate
• Confidential information and/or non-disclosure clauses (if necessary)
• A non-compete clause so that your subcontractor doesn't work directly with your client
• A dispute clause, which dictates how disagreements will be handled

This risk transfer agreement is one of the most important parts of your working relationship, because it clearly outlines who is responsible when loss occurs. Establishing contracts like this early will make for a smoother working relationships in the long run.

Communicate clearly with your subcontractors

Business runs best when subcontractor relationships go smoothly, but remember that this is still your project. You should keep your client informed about a subcontractor's involvement and make sure that they're OK with a third party's involvement. Keep a clear communication channel open with your clients and deal with all of their concerns directly.

If you have any questions about hiring a subcontractor or the insurance that you need to get started, we're happy to help.

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About the author

Alison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has over 20 years' experience as a residential landlord.