Employers’ liability insurance is mandatory for most UK businesses that employ people, but the answer cannot safely be decided from the business name, legal structure or payroll records alone.
The decisive questions include where the employment is based, whether the person works under a contract of service or apprenticeship and whether a specific exemption applies.
England, Scotland and Wales use the Great Britain compulsory-insurance framework. Northern Ireland has its own legislation and official guidance. (HSE; HSENI)
The general rule in plain English
A business that becomes an employer will generally need employers’ liability insurance from an authorised insurer and must hold at least £5 million of cover.
GOV.UK describes the requirement as arising as soon as a business becomes an employer. HSE’s more detailed guidance says the statutory requirement concerns people employed under a contract of service or apprenticeship. (GOV.UK)
The insurance is intended to support compensation liabilities arising when an employee is injured or becomes ill because of their work.
Who may need to be covered?
The relevant legal question is not merely: “What do we call this person?”
HSE says that a contract can be written, spoken or implied. Calling someone self-employed, a contractor or a freelancer does not conclusively determine whether compulsory employers’ liability insurance is needed. Their tax position is also not decisive by itself. (HSE)
Indicators that cover may be required include circumstances where the business:
- controls where, when and how the work is done;
- supplies the work equipment or materials;
- requires personal performance and does not permit a substitute;
- deducts income tax and National Insurance;
- treats the person similarly to its other employees;
- benefits directly from the work and controls the resulting profit.
Indicators that may point away from an employment relationship include a person genuinely operating an independent business, supplying most equipment, working for multiple customers and having a genuine right to provide a substitute.
No one indicator settles the matter. The relationship must be considered as a whole.
Employees and workers
An employee working under a contract of service will generally fall within the compulsory-insurance framework unless a statutory exemption applies.
“Worker” has meanings in other areas of employment law, but the use of that label alone does not resolve the compulsory-insurance question. PIUK should therefore avoid saying that every person described as a worker is automatically included or excluded.
The proper question is whether the factual relationship falls within the compulsory-insurance legislation and policy.
Contractors and self-employed people
A contractor who runs an independent business, controls how the service is delivered, supplies equipment and can provide a substitute may fall outside the relationship for which compulsory cover is required.
A person described as a contractor may nevertheless work in circumstances resembling employment. HSE specifically warns that even someone treated as self-employed for tax purposes may be classed as an employee for other reasons. (HSE)
Businesses should not rely solely on:
- the heading of the contract;
- an invoice arrangement;
- an HMRC classification;
- a statement that the person is responsible for their own insurance.
Directors
A director is not automatically exempt merely because they hold office in a company.
The official Great Britain exemption applies where a company has only one employee and that employee owns 50% or more of the company’s issued share capital. The 2004 amending Regulations inserted this exemption into Schedule 2 of the 1998 Regulations. (Legislation.gov.uk)
Where there are other employees, more than one working director or a different ownership arrangement, the exemption may not apply.
Family members
Official guidance recognises an exemption for certain family businesses where all employees are closely related to the employer.
The Great Britain family-business exemption does not apply where the family business is incorporated as a limited company. An incorporated company would need to consider whether the separate sole-employee and 50%-ownership exemption applies instead. (HSE)
A business should not assume that any family connection is sufficient. The official definition lists specified close relationships, and the exact structure of the business matters.
Volunteers, students and work experience
HSE says that, in some cases, an employer will not need additional employers’ liability insurance specifically for volunteers, unpaid students, participants in certain training programmes or school students on work experience.
The guidance also says insurers will usually cover these people under an existing employers’ liability policy. It advises speaking to the insurer where the placement is long, involves unusual work or the business does not already have employers’ liability cover. (HSE)
This should not be simplified into “volunteers never need cover.” The activities, relationship and policy terms still need checking.
Sole traders
A sole trader who works alone and employs nobody will generally not have an employment relationship requiring compulsory employers’ liability insurance.
Once the sole trader takes on another person, the real nature of that relationship must be examined. The fact that the business remains a sole trade does not create a general exemption for staff.
Overseas work
For the Great Britain rules, HSE states that employers must have cover where employees are normally based in England, Scotland or Wales, including certain offshore employment.
An employee normally based abroad generally does not need to be covered under the Great Britain legislation unless they spend more than 14 continuous days in Great Britain, or more than seven days on an offshore installation. Employers must also check the law of the country in which overseas staff are based or working. (HSE)
Northern Ireland and overseas arrangements should be checked separately against the applicable official sources.
Penalties and enforcement
In Great Britain, HSE enforces the compulsory-insurance rules. An employer can be fined up to £2,500 for each day it is without suitable insurance.
Failure to display the certificate or refusal to make it available to an inspector can lead to a fine of up to £1,000. Northern Ireland official guidance identifies the same maximum figures under its framework. (GOV.UK; NI Business Info)
A practical requirement check
A business should establish:
| Question | Why it matters |
|---|---|
| Does anyone perform work for the business? | The working population must be identified before exemptions are considered. |
| Where is each person normally based? | Great Britain, Northern Ireland and overseas rules must not be merged. |
| Who controls the work? | Control can indicate an employment relationship. |
| Must the person perform the work personally? | A genuine substitution right may point towards independence. |
| Who supplies equipment and materials? | This may help characterise the relationship. |
| Is the business incorporated? | This affects the family-business exemption. |
| Is there only one employee who owns at least 50%? | The statutory company exemption may be relevant. |
| Does a customer demand cover? | A contractual requirement can exist even where the legal position differs. |
Read the main Employers’ Liability Insurance UK guide and Employers’ Liability Exceptions and Special Cases before relying on an exemption.
About this PIUK guide
PIUK is an educational publication. It does not sell, arrange or advise on insurance. It cannot determine whether a particular business is legally compliant, and it does not interpret a reader’s policy, employment status, contract or claim. This guide is not a substitute for current official guidance, legal advice, insurance advice or support from an appropriately authorised insurer or broker. Check the current official position whenever your circumstances are uncertain.