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...
Update (21/04/2009): Just found the statistic that around 210,000 SMEs in the UK do not have ELI. Not really a surprise, given the costs and how one could easily think "we're friends, we won't sue each other"...
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