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...

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"...

Does Congestion Have a Cost?

Many of the costs of driving are fixed (see the AA's driving table of driving costs...). However, that doesn't change the fact that they exclude some people from owning/driving a car (as does a congestion charge, i.e. it's not really any more of a social discrimation factor than other motoring costs). As regards whether they influence whether people use their cars or not, if we do want to discourage car use then more of these costs must be made variable, i.e. if one drives less one pays less. Some steps have been made towards this, e.g. pay as you drive insurance (Norwich Union being one example). If road tax were also usage-dependent (as well as on emissions and vehicle weight) this would further encourage people to carefully consider each car journey.

Does congestion itself have a cost? I would say "definitely". Before listing a few example costs, one interesting point to consider is the price people are willing to pay to avoid congestion (which hence puts a value on it). Clearly people do place a value on getting round congestion, as evidenced by people using toll roads (e.g. the M6 toll) instead of alternatives. What costs does congestion have? A few are:

• Longer journey times, which means less time at work, or with family. Either results in lower productivity and hence lower incomes. For some businesses, such as multi-drop deliveries, more congestion means more vans/drivers are needed.
• Air quality is considerably worse with large numbers of cars idling, then continually undergoing stop/start transitions (as in congested cities). Higher levels of pollution cause long term health problems (asthma, probably lung cancer...), which then cost the tax payer via the NHS.
• Journey costs are increased to the driver themselves, as congested conditions will mean less efficient fuel burn, plus extra wear and tear on the vehicle due to continual stop/start behaviour.
• Congestion has been linked to higher incidents of vehicle collisions, which both increases health costs and insurance/repair expenses.

All of these costs have significant values (hence the £12bn/year estimate I gave in the post titled "Road Pricing & Delivery Vehicles"). This is both in costs to individuals and to society as a whole. However, clearly these costs aren't ones that the average driver considers when planning a journey (e.g. every time I go to the shops I don't think about the tiny increase in the probability that I'll get lung cancer). Moreover, such costs are paid for by everyone, regardless of whether they drive. It seems fairer to charge those who are causing such costs accordingly.

Further details of the costs of congestion can be found in section 5.5 of VTPI's "Transportation Cost and Benefit Analysis".

A congestion charge could indeed be used to raise tax revenues. However, there is nothing to stop a government, in principal, committing it to be spent on transport. This has been the case in London, Bergen, and Stockholm. Such revenue hypothecation is one of the characteristics of successful congestion charging schemes (if only the UK government would learn that).

In terms of high fuel duty not affecting congestion, that is correct: it simply increases the costs of driving, regardless of when or where (apart from using more fuel in congested areas). A congestion charge (particularly time-variant) provides an economic disincentive to people from travelling in congested areas at peak times (i.e. causing congestion). Petrol prices do have an effect on how much people use their car, as was seen in the USA recently when prices were particularly high (estimate of 58 billion fewer miles travelled in first seven months of 2008). However, that just penalises everyone wherever, whenever.

Overall a government needs to be clear on whether they want to reduce congestion, which is discouraging people from travelling at certain times in certain places, or to reduce total vehicle miles, which can be achieved by increasing the proportion of the total cost (but not necessarily the total cost!) of running a vehicle that is distance-dependent. Of course, we probably need to do both, (carbon dioxide emissions now being hugely significant will require us to cut down total vehicle miles; congestion costs us all, as described above).

So: does congestion have an economic cost? Yes, definitely. But do people really take that cost into account at the moment? No.

(Cross-posted from the thread on congestion charging over at the Cambridge Network social network.)

Does Road Pricing Force the Poor Off the Roads?

The short answer to this question is "yes".

The long answer is more interesting. I agree that road pricing/congestion charging might price some people out of using the roads at rush hour. But the same could be said of petrol prices, or road tax, or insurance... The key point is that roads are not free to use for any motorised vehicle now. The aim of a charge is to make road users (effectively) pay the economic cost of the congestion they cause: yes, this means that the rich can cruise in more quickly than before. But today the rich can use their private car versus having to use the (cheaper) bus service. The poor have less choice.

If the charge is set correctly, and there is a viable public transport alternative, the (really) less well-off in society end up with a more affordable and efficient public transport service than at present. The issue is that congestion is damaging to a country's/region's economy as a whole, and the only way to reduce that is by reducing the number of vehicles on the road at rush hour (i.e. somehow people are forced to change journey timings or move on to public transport).

Jon Davies makes another interesting observation: if a congestion charging scheme is made revenue neutral (i.e. total revenues raised by government are the same as currently under road taxation), then it might in fact become cheaper for the less well-off to drive at certain times (e.g. midnight). That might mean some people could afford to use the road who cannot at present.

For some facts and figures on cost/benefit of cordon-based road pricing, see the results of the Stockholm trial. The last page details benefits of reduced journey times, cleaner air, etc..

Ultimately, is being able to afford to use a car a "right" or a privilege? If we had good public transport I think I'd regard it as more of a luxury... Thoughts?

(Cross-posted from the thread on congestion charging over at the Cambridge Network social network.)

Road Pricing & Delivery Vehicles

At the risk of this blog losing its (already vague) focus, I thought I'd post some of my thoughts on congestion charging, a form of road pricing. Over at the Cambridge Network social network there's been a thread on this precise subject, as there are proposals for such a scheme in Cambridge, UK. So I'm now cross-posting my thoughts here.

As regards congestion charging being good/bad for business, it's really dependent on the increased value it generates versus the costs. In the case of deliveries, it can be argued that the less time spent in traffic jams, the lower the fuel costs, and also the more deliveries per day a single van can make. If deliveries during rush hour are essential, then the above benefits apply. If not, then (with a time-varying charge) the delivery firm would not incur the charge.

Meanwhile, if a charge means that people spend less time in traffic jams and more time at work or at home, employers are likely to benefit. The real problem with evaluating many congestion charging schemes is the cost that's attached to current levels of congestion. Estimates in 2004 were £12bn/year for all of the UK (Feasibility Study of Road Pricing in the UK, Dft, 2004). Similarly, in the USA, the 2003 estimate in the Texas Urban Mobility Report was $63bn/year.

The real question is therefore whether people appreciate what the cost of their causing congestion is.

Rebooting America: Applicable to the UK?

Thomas Friedman, author of the excellent book "The World is Flat", argues in an article in the New York Times titled "Time to Reboot America" that Americans need to subscribe more to the "tax and spend" philosophy, and less to the "borrow and spend" ideal. Good plan.

His writing concerning the USA resonates with my thoughts on the UK's economy. True, we don't have a history of such enormous government debt (currently the USA has $10 trillion), but as a population we do have this mad mentality of "we want more public services, and lower taxes". Governments therefore attempt to cut spending in areas that the public won't really notice, particularly long-term projects that have no short-term political pay-offs, and in addition try to show that public services are getting better by creating targets. (One example of an ill-conceived success measure is the number of people who have stopped smoking with NHS help: it's measured by number of people who have not smoked for 4 weeks after the treatment program. In practice it's not clear what "not smoked" really means... See Assessing smoking cessation performance in NHS Stop Smoking Services.)

What does this result in? Hospitals, schools, and local authorities all spending disproportionate amounts of time on taget-related paperwork and skewing their activities to fulfilling those targets (e.g. by moving patients out of Accident & Emergency departments quickly, then leaving them in over-crowded wards, or "teaching the test" for SATS exams). More worryingly, progress on energy policy, long-term sustainable transport, and actually making the UK a knowledge-based economy is glacial.

Ultimately, if the UK wants to remain one of the world's most powerful economies, it cannot rely on manufacturing (we've seen that go East long ago, for the most part). It can remain so if it continues to climb educationally higher, i.e. if its population continues to have greater intellectual capital than others (see Friedman's book for more on this). At present this clearly isn't happening, despite what government targets would have us believe. Students at the top universities in the UK are becoming more international, particularly at postgraduate level: in 2006-2007 2,926 students at the University of Cambridge were from the UK and EU, whilst 1,856 were from the rest of the world (see University of Cambridge Facts & Figures), implying that home grown education is by no means the best in the world. Meanwhile top universities have expressed concern over the standards of the pupils applying to them (and difficulty using A-Levels to differentiate between them), and institutions such as the Royal Society of Chemistry have shown that O-level/GCSE exam question difficulty has dropped.

So, what's to be done? The UK sits between the USA (low taxes, little state welfare) and the countries in Scandinavia (high taxes, huge amounts of state welfare). I don't believe this helps anyone, as the UK population expects Scandinavian welfare, and USA taxes. If we are seriously committed to a welfare state, we must increase our levels of education.

Why do I think this? Because until people have higher levels of education, it will not be easy for a government to convince them that certain "painful" decisions are necessary. If people understood that 20% of the UK's power is produced by nuclear stations, how most of those stations will close down in 20 years, how new stations take about a decade to design and build, and how renewables alone are not going to satisfy our energy demands (see David MacKay's book Sustainable Energy -- Without the Hot Air) they might be more pro-nuclear. I don't think it's a coincidence that Finland has one of the highest public library borrowing rates (loans/head of population) in the world (in 2002 this was 20.7 compared to the UK's 6.8 [see LibEcon Public Library Statistics, and the Finnish Ministry of Education's Public Library Statistics]), and them being the first country in Western Europe since 1991 to build a new nuclear reactor (note that Finland is a lot closer to Chernobyl than the UK). Of course there are lots of other factors. But I don't think it would have been approved by the population had they not understood the good reasons for it. Lorry charging on a per km basis is another issue that the government has wasted huge amounts of time and money on, whilst not actually achieving anything. Meanwhile, the German and Swiss governments have used the time to implement systems that work well, and moreover are now being upgraded to the next version (see my paper titled "A Survey of Technologies for the Implementation of National-Scale Road User Charging" (Transport Reviews, 27:4, Jul 2007).

In addition, paying people who actually generate long-term value is hugely important. (I'm somewhat biased having read for a PhD, but anyway.) If people with PhDs have no job security in going into research, and moreover can earn 2-3 times as much going into jobs in the financial sector, they will do the latter. That means that 20 years down the road a lot of research that could have generated new products, jobs, and hence economic value hasn't been done. Similarly, if teachers aren't paid enough to attract the very best people to the profession, we will miss out on educating the next generation of knowledge workers. Oh, and by the way, we're trying to become a knowledge economy... If those teaching children science or mathematics do not really understand what they teach, or have enthusiasm for it, why are we surprised when applicant numbers for science/maths degree courses fall (2005)? (Though that decline may now be being reversed, 2008.) Note, however, that there are many good teachers. My point is simply that, in a very general sense, you get what you pay for. Can we afford not to invest wisely now, to obtain long-term gains?

Conclusion: the economic outlook is bleak. We can try to borrow in order to prop up existing ways of doing things, or we can try to re-invent ourselves as a truly knowledge-based economy. That will take time, but is more sustainable than sticking our heads in the sand and asserting that the government should bail us all out of our economic misery so that we can keep doing what we've always done. Oh, and whilst also protesting against the increased taxes that would be necessary to fund such an endeavour.

Any thoughts?

Update: Jon Davies suggests that one reason people expect government to provide more services for the same, or less, tax revenue is that they think the government wastes this money. I suspect Jon is right, and moreover that there is wastage. However, I suspect society thinks the wastage is far more than it is. Or perhaps not...!