Year: 2019

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Virginia Will Focus On Misclassification Of Workers As Independent Contractors

In August 2018, Governor Northam signed Executive Order 16, which established the Inter-Agency Taskforce on Misclassification and Payroll Fraud. The Taskforce’s purpose was to make recommendations on how to measure and combat “misclassification” of workers as independent contractors in the view of the Commonwealth. The Taskforce included representatives from a variety of state agencies, such as the Virginia Employment Commission, the Department of Professional and Occupational Regulation, the Department of Taxation, and the Office of Attorney General. The Taskforce did not include non-governmental representatives.

The Taskforce produced its report on November 22, 2019. The report reiterates the importance of potential misclassification of persons designated as independent contractors instead of employees. It found that “up to one-third of audited employers in certain industries misclassify employees,” reducing their overhead by 40% and lowering Virginia state income tax by $28 million a year. Further, the report criticizes independent contractor relationships and looked at ways to address related perceived “misconduct” through incentives and penalties.

Along with providing their own recommendations, the Taskforce looked at the laws and regulations of other states. According to the report, over 20 states have specific laws to combat worker misclassification and an additional 15 have taskforces for the same purpose. In some states, there is a rebuttable presumption that workers are employees/the employer has the burden of overcoming that presumption. In other states, the state must certify independent contractors. Based on the research of other states laws and an analysis of the current enforcement and investigation procedures in various Virginia agencies, the Taskforce offered the following 11 recommendations aimed at deterring and correcting what the Taskforce deemed worker misclassification:

  1. Formally adopt and continue applying the IRS standard for employment and assess greater penalties substantial enough to deter misclassification.
  2. Apply penalties to employers even when they received advice, consultation, or counsel on its business model, effectively eliminating a good faith defense to penalties.
  3. Create a private cause of action for workers to sue an employer for damages resulting from misclassification, such as wages, taxes, value of benefits, lost, and attorney’s fees.
  4. Provide whistleblower protection for those who report suspected misclassification or other workplace fraud.
  5. Allow the DPOR Board of Contractors to sanction licensed contractor firms for misclassification.
  6. Make employers who have misclassified workers ineligible to bid on contracts under the Virginia Public Procurement Act.
  7. Produce uniform investigative and enforcement procedures for the task force and the agencies to utilize in combating misclassification.
  8. Identify an agency to lead the efforts in the inter-agency investigation and enforcement of misclassification.
  9. Fund education for the general public, workers, and employers on worker misclassification.
  10. Apportion funding to support the inter-agency model to hire investigators and continue joint cooperation.
  11. Keep the Taskforce in place to monitor and inform on these efforts.

Although these recommendations do not have the force of law, they provide a signal for employers. In particular, employers can expect greater attention to perceived worker misclassification by Virginia enforcement and investigative agencies.  Losing at the agency level could lead to fines, legal expenditures, and litigation. Given the continuing evolution of these and related employment law matters, employers should continuously evaluate their independent workforce approaches and the appropriateness, and defensibility, of such arrangements. The labor and employment law attorneys at Vandeventer Black LLP can provide counsel along the spectrum of labor and employment law matters, including the proper classification of workers.

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Compliance With Overlapping Solicitation Requirements

The Berry Amendment Example

Hopeful government contractors must be aware of all the requirements of a solicitation to avoid being deemed non-responsive.  This is rarely a simple task; however, when multiple clauses govern the same subject, the risk of error in following such requirements increases.  This article demonstrates such an issue by explaining the interworking of the Buy American Act (BAA), 41 U.S.C. §§ 8301-8305, with the Berry Amendment, 10 U.S.C. §§ 2533a-2533b, which are both implemented in the Department of Defense (DOD) contracts through the Defense Federal Acquisition Regulation Supplement (DFARS).

Most government contracts incorporate the BAA into their requirements through 48 CFR § 52.225-1 et seq. See also 48 CFR §§ 252.225-7000-02 (DFARS BAA clauses).  The BAA provisions require that “domestic end products” that are deliverable under the contract be manufactured in the United States and be comprised of at least 50% domestic components by cost.  It should be noted that some exceptions apply, including the allowance of goods from countries with whom the US has entered an agreement under the Trade Agreement Act and the allowance of other goods that meet specific criteria.  The Berry Amendment, on the other hand, restricts the DOD’s purchases of certain non-domestic end products or components, including food, clothing, fabrics, tents, hand tools, and specialty metals.  See 48 CFR §§ 252.225-7008-09, 7012.

The Government Accountability Office (GAO) had heard two separate bid protests where the dissatisfied bidders were deemed non-responsive to a solicitation when they met the BAA requirements, but not the more stringent Berry Amendment requirements.  One of these protests dealt with a proposal to sell fish that would have been processed in the US but was deemed non-responsive since the fish would have been caught by foreign vessels. In re F.J. O’Hara & Sons, Inc., 1990 U.S. Comp. Gen. LEXIS 271.  The other bid was deemed non-responsive since 12% of the labor for producing the solicited clothes would have taken place in Haiti. Matter of Penthouse Mfg. Co., 1985 U.S. Comp. Gen. LEXIS 1241, aff’d 1985 U.S. Comp. Gen. LEXIS 811.  Both bidders asserted that the bids were responsive since the goods met the BAA’s requirements for “domestic end product.”

GAO construed the bidders’ protests to assert that the BAA’s definition of “domestic end product” superseded the Berry Amendment’s “Preference for Certain Domestic Commodities” which requires that covered goods “may not be used for procurement of an item if the item [or its components] is not grown, reprocessed, reused, or produced” domestically. 10 U.S. Code § 2533a(a).  The GAO rejected this argument in both protests finding that the BAA’s “domestic end product” definition was not relevant to a determination of whether a bid complied with the Berry Amendment clauses, as both are measured independently of one another.

The lesson here is that bidders must consider all the requirements of a solicitation and that if a bidder fails to do so, its bid may be deemed non-responsive.  While this article demonstrates one example of this issue, contractors should seek the advice of counsel to determine whether similar issues lie in solicitations for which they intend to compete and to assure that they remain compliant during contract performance.

Small Business Size Standards: Calculation Of Annual Average Receipts

Transition From A 3-Year Averaging Period To A 5-Year Averaging Period

As reported in the Federal Register, the U.S. Small Business Administration (SBA or Agency) is modifying its method for calculating average annual receipts used to prescribe size standards for small businesses. Fed. Reg. Vol. 84,  No. 234, Dec. 5, 2019. Specifically, in accordance with the Small Business Runway Extension Act of 2018, SBA is changing its regulations on the calculation of average annual receipts for all of SBA’s receipts-based size standards, and for other agencies’ proposed receipts-based size standards, from a 3-year averaging period to a 5-year averaging period. SBA is adopting a 5-year averaging period for calculating the annual receipts of businesses. SBA adopts a transition period through January 6, 2022, during which firms may choose between using a 3-year averaging period and a 5-year averaging period.

In response to comments received concerning its earlier Proposed Rule, SBA also clarifies how it believes annual receipts should be calculated in connection with the acquisition or sale of a division. Specifically, the final rule provides that the annual receipts of a concern would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certified as small. This would be different from how SBA treats the sale or acquisition of a subsidiary, which is a separate legal entity and an affiliate. In the case of a subsidiary, SBA’s regulations provide that ‘‘[t]he annual receipts of a former affiliate are not included if affiliation ceased before the date used for determining size. This exclusion of annual receipts of a former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased.’’ 13 CFR 121.104(d)(4).

This final rule is effective January 6, 2020, and resolves the controversy regarding the impact of the Runway Extension Act on Small Business Size Standards. You should perform comparative calculations to determine the effect on your business and which method will be more advantageous to use during the two year transition period.

Mixed Economic News from the Construction Industry

Navigating mixed signals in the construction industry; the AIA’s Architecture Billings Index through September 2019 indicates generally flat but encouraging business conditions. Dated – No. Important – Yes. Why?

The Architecture Billings Index (ABI) is a composite index derived from monthly report surveys from member firms located throughout the country reporting on activity of “work-on-the-boards.” The data is compiled by the American Institute of Architects Economics & Research Group. Using a first-hand survey index from architectural firms, the ABI serves as a leading economic indicator of nonresidential construction activity and provides a glimpse of nonresidential construction activity approximately 9-12 months into the future or the typical time frame for a project to mature from design development through to construction. The ABI has a reputation as being an even-handed barometer of expected construction and economic activity within that forward-looking time frame.

ABI scores are centered near 50, with scores above 50 indicating an aggregate increase in billings and scores below 50 indicating a decline in billings. While the September ABI score remained below 50 at 47.9, that score is 2.5 points higher than the prior month indicating that fewer firms saw declining billings in September. In September, the Design Contract Index robustly increased up to 54.4, an increase from 47.9 the prior month indicating that firms experienced an increase in the number of clients signing contracts for new projects.

The ABI also evaluates the  impact of stalled and cancelled projects at architectural, engineering, and contracting firms as a predictive element of economic downturn. The ABI found that since the beginning of the year 52% of firms had seen projects significantly delayed, placed on hold, significantly scaled back or cancelled while 46% reported no such impact.

Overall, data from the ABI combined with recent data reported by the U.S. Dept. of Commerce announcing that construction spending rose by 0.5% in September 2019, in part, because of a combination of new governmental and private residential projects, indicates positive, but tempered, growth.

Guarantor Provisions to Negotiate in Non-Recourse Financing

Many commercial real estate loans are “non-recourse,” which means in general terms that foreclosing on the real estate securing the loan is the lender’s sole remedy for a borrower’s failure to repay the loan.  The lender is generally prohibited from suing the borrower entity or any individual guarantors to recover the unpaid debt or any deficiency remaining after foreclosure. 

However, there certain types of defaults and circumstances for which the borrower and, in most cases, individual guarantors could be liable, despite the non-recourse nature of the loan.  In the interest of facilitating the deal and closing of the loan, guarantors too often undertake unreasonable obligations, which can be substantially mitigated by incorporating measured, but effective, qualifications and limitations into the guaranty of recourse obligations (the “Guaranty”) and environmental indemnity.  The main objective of the guarantor’s counsel in negotiating the Guaranty and environmental indemnity is to limit the guaranteed obligations and deliverables of guarantors. Limiting the guarantors’ responsibilities should begin with the representations and warranties made by guarantors. There should be minimal overlap thereof with representations and warranties made by the borrower, since a breach would be recoverable against the borrower and the lender already has a means of recovery. Any property-related representations should be limited to the actual knowledge of the guarantor, without independent duty to verify or inspect. The guarantor’s obligation to deliver financial statements should be limited as much as possible, so as to avoid the risk of any administrative default for failure to deliver. With respect to delivery of financial statements, guarantors should insist that the lender accept a personal certification, rather than audited financial statements. Depending on the size of the loan, guarantors may be able to negotiate that such deliverables only be required during ongoing events of default. If the lender is unwilling to agree, then counsel should ensure that the guarantors are not required to deliver financial statements more than once annually, and upon lender’s reasonable demand during the continuance of an event of default. A guarantor should also try to reduce the amount of any penalty for failure to timely deliver financial reports.

While the desire of guarantors to help “close the deal” may obscure the importance of such concerns, guarantors should (i) be wary of being too accommodating and (ii) engage independent counsel to best protect their interests, while striking the proper balance with the commercial realities of the transaction.

Preemptive Wordsmithing: Considering Future Alterations of Commercial Property at the Outset

Borrowers often envision future alterations to enhance the economic value of the commercial real estate asset, when closing the initial loan. Such alterations can be in the form of capital improvements, tenant improvements, renovations, and/or expansions of the facility. At term sheet negotiation, the borrower should consider the long-term and short-term plans for the property, so that the loan contains appropriate flexibility to deal with future alterations. Obtaining the lender’s consent after the loan documents have been signed is typically more difficult and expensive than obtaining such consent up front. In addition to any finance professionals working on the loan, legal, leasing, development, and property management teams need to be involved in such discussions, so that appropriate feedback is obtained for strategic planning. 

Under most loans, future construction or significant alterations are not permitted, unless the lender’s prior, written consent is obtained. The easiest and most convenient way to deal with construction plans is to address it directly in the loan and to obtain lender’s advance approval over the terms of such construction and development. If not addressed in the loan documents, the lender will likely have broader discretion as to whether it will be permitted, and the borrower will have limited leverage in negotiating favorable requirements after the initial loan closing.

It is important, prior to signing the loan documents, to provide the lender with as much information as to the proposed plans as possible. The lender will want to become comfortable with the planned construction and consent in advance.  It is critical that (i) the project is clearly defined as to scope, cost, schedule, and (ii) detailed present plans are presented to the lender in advance. It is important to build into the loan a specific approval process for details, as they become more specific. In the loan documents, the lender would typically require deliveries of (i) detailed plans and specifications, (ii) an officer’s certificate confirming no default, (iv) copies of permits and variances, (v) security documents or funds, (vi) proof of insurance, and (vii) any tenant or third-party consents required in connection with the proposed development. It is possible that for minor or limited construction or redevelopment the lender’s consent may not be required, if it falls below certain thresholds, which can also be negotiated as part of the loan. Such factors may include whether the alterations would (i) have a material effect, (ii) exceed a dollar amount or percentage of the loan amount, or (iii) be structural in nature. The issues referenced above are non-exhaustive, and the host of lender concerns with releasing a portion of the real estate collateral underscore the need to clearly document such parameters clearly and preemptively, so as to minimize unbudgeted time and expense in obtaining the lender’s consent down the road It is important that an attorney be engaged to properly memorialize and capture such nuances.

YOUR SWAM CERTIFICATION IS AT RISK

The Virginia Department of Small Business and Supplier Diversity (DSBSD) administers the small, women-owned and minority-owned (SWaM) business program. The DSBSD SWaM Certification Division reviews initial and recertification applications. DSBSD certification eligibility determinations are based on existing circumstances at the time of application. The criteria are in the Commonwealth of Virginia Administration Code regulations:

7VAC13-20-40. Eligible Small Business.
In general, a business may be certified as a small business if it meets the definition of small business provided in § 2.2-1604 of the Code of Virginia.

§ 2.2-1604. Definitions.
“Small business” means a business that is at least 51 percent independently owned and controlled by one or more individuals who are U.S. citizens or legal resident aliens and, together with affiliates, has 250 or fewer employees or average annual gross receipts of $10 million or less averaged over the previous three years. One or more of the individual owners shall control both the management and daily business operations of the small business.

7VAC13-20-110. Control
The applicant must show evidence that the women, minority, or individual owners have control of the business. The following factors will be examined in determining who controls an applicant’s business:

1. Governance.
a. The organizational and governing documents of an applicant (e.g., limited liability company operating agreements, partnership agreements, or articles of incorporation and bylaws) must not contain any provision that restricts the ability of the women, minority, or individual owners from exercising managerial control and operational authority of the business.

The DSBSD is scrutinizing company operating agreements, partnership agreements, articles of incorporation, and bylaws to assure that women and minority owners control the business. Even if a business was previously certified, the DSBSD might deny recertification based on its current more vigorous and technical review of the company documents that were previously approved. For example, provisions that require a non-woman or non-minority owner to be present for a quorum, or a supermajority vote might disqualify your company. Make sure to carefully review your documents before you apply.

A business whose application for certification has been denied may reapply for the same category of certification six months after the date on which the business receives the notice of denial. An applicant denied certification may apply for certification in any other category without delay if otherwise eligible. The applicant may request a waiver of the six-month reapplication period from the department director by submitting a written request for reconsideration and providing a reasonable basis for the waiver. However, these are rarely granted. For more information, please contact the authoring attorney.

Shopping Subcontractors After Using Bid That Resulted In Contract Award

Can contractors “shop” bids after obtaining and using them to obtain contract awards?  Generally speaking, the answer is yes under Virginia law.  However, the law varies in other jurisdictions.  While this may not seem necessarily fair, jurisdictional views vary. For example, Virginia holds that bids are a means by which the prospective subcontractor (SC) and prospective general contractor (GC) agree to potentially agree upon a subcontract award, if the Owner makes an award to the GC.  However, other jurisdictions see it differently and allow the GC to hold the SC to the bidding process.

This means that, for practical purposes, if Virginia law applies, the GC can shop bids after being awarded a contract and SCs can reject prospective subcontracts, even if the SC’s bid was used by the GC in submitting the GC’s bid or proposal to the Owner.  Various efforts have been made to avoid this result, both by GCs and SCs.  Additionally, there are practical concerns for both sides in that bid shopping is generally disfavored and viewed as a sharp business practice as is refusing to honor a submitted bid – both with potentially significant long-term business consequences, even if there are no legal consequences.

Construction contracts typically undergo a tiered bidding process.  First, the Owner requests bids from GCs for the scope of the overall project.  Before submitting bids, the GC then seeks its own bids from SCs for different tasks.  The GC then submits its bid to the Owner, relying upon quotes received from the SCs.  While the GC is typically bound to the bid it submits to the Owner, the GC is not bound to the SC bids used in its proposal.  Thus, absent valid contractual prohibitions, the GC may seek alternatives to the SCs used in its winning proposal.  However, depending on jurisdiction, a SC may be bound to its bid, for at least long enough to allow the GC to accept the SC’s offer.

In Virginia, a GC’s detrimental reliance on a SC’s bid does not bind the SC, so long as the SC revokes the offer before the GC accepts.  When a party detrimentally relies on another’s promise, even without a valid contract, courts in some jurisdictions may hold the other party to said promise under a theory of promissory estoppel.  However, Virginia does not recognize this theory of promissory estoppel and generally requires the formation of a valid contract.  This is consistent with Virginia’s position on teaming agreements, wherein parties agree to negotiate in good faith, which are also treated as mere “agreements to agree” and not as valid contracts.  In short, as previously stated, GCs in Virginia are generally free to bid shop after a contract award.

Most states other than Virginia follow the Drennan doctrine on promissory estoppel when dealing with GC-SC bidding.  Drennan v. Star Paving was a 1957 California Supreme Court case that involved a GC bidding on a school construction project and a SC that mistakenly underestimated its bid for paving services.  The SC revoked its offer after the GC received the award, but before the GC could accept the SC’s offer.  Nonetheless, the court held in favor of the GC, stating that “it is only fair that [the GC] should have at least an opportunity to accept [the SC]’s bid after the general contract has been awarded to [the GC]” in reliance on the SC’s bid, but noted that “a [GC] is not free to delay acceptance after [it] has been awarded the general contract in the hope of getting a better price.”  Thus, in Drennan jurisdictions, the SC is typically liable for performance, but may be relieved of such liability if the GC attempts to bid shop, renegotiate, or unduly delay acceptance.

Despite the general Virginia law, GCs in Virginia may be able to mitigate the risk of a SC dishonoring its bid by including language that specifically provides for an acceptance period in the event of award or entering into an actual subcontract with all aspects negotiated pending the award.  You should consult your attorney for advice on specific bids and contract needs if you wish to more formally structure such relationships.

Shopping Subcontractors After Using Bid That Resulted In Contract Award

Can contractors “shop” bids after obtaining and using them to obtain contract awards?  Generally speaking, the answer is yes under Virginia law.  However, the law varies in other jurisdictions.  While this may not seem necessarily fair, jurisdictional views vary. For example, Virginia holds that bids are a means by which the prospective subcontractor (SC) and prospective general contractor (GC) agree to potentially agree upon a subcontract award, if the Owner makes an award to the GC.  However, other jurisdictions see it differently and allow the GC to hold the SC to the bidding process.

This means that, for practical purposes, if Virginia law applies, the GC can shop bids after being awarded a contract and SCs can reject prospective subcontracts, even if the SC’s bid was used by the GC in submitting the GC’s bid or proposal to the Owner.  Various efforts have been made to avoid this result, both by GCs and SCs.  Additionally, there are practical concerns for both sides in that bid shopping is generally disfavored and viewed as a sharp business practice as is refusing to honor a submitted bid – both with potentially significant long-term business consequences, even if there are no legal consequences.

Construction contracts typically undergo a tiered bidding process.  First, the Owner requests bids from GCs for the scope of the overall project.  Before submitting bids, the GC then seeks its own bids from SCs for different tasks.  The GC then submits its bid to the Owner, relying upon quotes received from the SCs.  While the GC is typically bound to the bid it submits to the Owner, the GC is not bound to the SC bids used in its proposal.  Thus, absent valid contractual prohibitions, the GC may seek alternatives to the SCs used in its winning proposal.  However, depending on jurisdiction, a SC may be bound to its bid, for at least long enough to allow the GC to accept the SC’s offer.

In Virginia, a GC’s detrimental reliance on a SC’s bid does not bind the SC, so long as the SC revokes the offer before the GC accepts.  When a party detrimentally relies on another’s promise, even without a valid contract, courts in some jurisdictions may hold the other party to said promise under a theory of promissory estoppel.  However, Virginia does not recognize this theory of promissory estoppel and generally requires the formation of a valid contract.  This is consistent with Virginia’s position on teaming agreements, wherein parties agree to negotiate in good faith, which are also treated as mere “agreements to agree” and not as valid contracts.  In short, as previously stated, GCs in Virginia are generally free to bid shop after a contract award.

Most states other than Virginia follow the Drennan doctrine on promissory estoppel when dealing with GC-SC bidding.  Drennan v. Star Paving was a 1957 California Supreme Court case that involved a GC bidding on a school construction project and a SC that mistakenly underestimated its bid for paving services.  The SC revoked its offer after the GC received the award, but before the GC could accept the SC’s offer.  Nonetheless, the court held in favor of the GC, stating that “it is only fair that [the GC] should have at least an opportunity to accept [the SC]’s bid after the general contract has been awarded to [the GC]” in reliance on the SC’s bid, but noted that “a [GC] is not free to delay acceptance after [it] has been awarded the general contract in the hope of getting a better price.”  Thus, in Drennan jurisdictions, the SC is typically liable for performance, but may be relieved of such liability if the GC attempts to bid shop, renegotiate, or unduly delay acceptance.

Despite the general Virginia law, GCs in Virginia may be able to mitigate the risk of a SC dishonoring its bid by including language that specifically provides for an acceptance period in the event of award or entering into an actual subcontract with all aspects negotiated pending the award.  You should consult your attorney for advice on specific bids and contract needs if you wish to more formally structure such relationships.

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Is Denial of a Motion to File a Surreply Really a Denial if the Court Reads it Anyway?

Everyone likes to have the last word.  Indeed, often dubbed the “recency effect” there is scientific support that going last may increase persuasion.  But in ordinary motions practice in the EDVA, the movant both goes first and last.  Local Rule 7(f)(1) does allow the non-movant to request leave of court to file a surreply.

I often advise clients it is a request that should rarely be made before our judges.  And a recent order from Judge Miller reinforces that view as in Adams v. Applied Business Services, 2:18-cv-559 he denied the defendant’s request to file its surreply.

But, the opinion does reveal what I have often found confusing about the motion for leave process.  Judge Miller implicitly demonstrates that he has reviewed the proposed surreply—he both describes its contents and quotes from the surreply.  So although he denied the motion, he did read the brief.  On appeal of the underlying motion, perhaps, the contents of the surreply are not part of the record.  But if the Defendant’s goal was to focus the Court to a particular issue and reiterate its argument, the Defendant may have won the war even if it lost this particular battle.

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