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Construction and Virginia’s New Wage Laws

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Of the record number of new laws in Virginia, a trio of wage laws will arguably have the biggest impact on contractors changing the way the construction companies operate in Virginia. Virginia statutes on non-payment of wages, worker misclassification and wage theft all create new administrative penalties and private rights of actions that combine to create new risks to every contractor or supplier on a project. Contractors need to modify their subcontracts, purchase orders, lien release certifications, and subcontracting plans to protect against the increased liability they now face.

First, Virginia’s Wage Theft Law was significantly strengthened to provide both criminal and administrative penalties as well as new civil cause of action. Virginia Code §40.1-29 now provides that an employer who “willfully and with the intent to defraud” fails or refuses to pay wages is guilty of a misdemeanor if the amount is less than $10,000 and a felony if more than that amount. It also provides that the Commission of Labor and Industry may assess a civil penalty of $1,000 for each violation, considering the size of the business and gravity of the violation, plus attorney’s fees of 1/3 the amount of the award. Finally, a new civil action exists for individually, jointly or on behalf similarly situated employees that can result in an award of wages, plus 8% interest, plus attorney’s fees and costs. If the employer is found to have “knowingly” failed to pay, then the assessed damages are triple the wages due. No specific intent to defraud the employee is necessary to prove this “knowingly” element, instead, actual knowledge, acts in deliberate ignorance of the truth or falsity of information, or acts in reckless disregard to the truth or falsity of the information satisfy this requirement. This statute alone is likely to cause significant litigation across the state as it incentivizes legal actions on behalf of “similarly situated employees” against employers with the promise of an award of attorney’s fees.

Second, a series of new laws make clear that worker misclassification will be a new priority in Virginia. A presumption now exists that workers should be classified as employees unless an employer can demonstrate the worker is an independent contractor pursuant to IRS guidelines. Violations of worker misclassification laws result in debarment from public contracting in Virginia, a private cause of action to the worker, and can include attorney’s fees that can include a wage claim under §40.1-29 discussed above.  The worker is entitled to the benefits the employer provides its employees, which includes worker’s compensation insurance coverage, medical coverage or retirement benefits. The employer is prohibited from taking retaliatory action against the worker or anyone reporting the relationship.

Third, Virginia Code §11-4.6 now provides that for any construction contract entered after July 1, 2020, the general contractor and each subcontractor at any tier are “jointly and severally liable to pay any subcontractor’s employees” all wages due. The general contractor is now deemed to be the employer of all the subcontractors’ employees at all tiers on the project, and subject to all penalties, criminal and civil of an employer that fails to pay wages due. This is a dramatic departure from centuries of Virginia law that generally limited a company’s exposure to those with whom it directly employed and contracted.

The combination of these three laws can be devastating: if a drywall sub-subcontractor on a project hires 50 misclassified temporary or independent contractor workers to hang sheetrock on a project then the sub-subcontractor, subcontractor and general contractor may each be liable as the employer of all 50 for their wages, plus interest at 8% and attorney’s fees. It is not a stretch for a worker to then claim that the general contractor was on-site and knew or should have known the situation and acted in deliberate ignorance or reckless disregard of the truth and, therefore, should be liable for treble damages. Plus, each contractor could be liable for $50,000 in fines to the Department of Labor and Industry, and each faces the possibility of criminal charges.  

What can a contractor do to guard against these dire consequences? No answer is perfect nor fit every circumstance, but contractors should consider the following actions

    1. Revise your subcontract indemnity provisions to attempt to shift the risk of wage non-payment to the entity responsible for the hiring. This is of limited value if the subcontractor has little assets to satisfy an indemnity obligation;
    2. Require payment and performance bonds of subcontractors. Bonds can be useful protection, but many subcontractors cannot meet surety financial strength requirements and they increase the cost of the project;
    3. Adopt and enforce subcontract requirements that limit the ability to sub-subcontract work without the approval of the general contractor, and then vet the ability of those contractors to pay wages that may become due. Such provisions are too often ignored and can increase the burden on the general contractor to vet the capacity of remote sub-subcontractors to pay their employees;
    4. Require the use of certified payrolls by every contractor providing labor on the project. This will likely be a requirement of every public project with the Commonwealth starting in May 2021, as well as localities opting to apply Virginia’s new prevailing wage law. Certified payrolls, required on projects using federal funds, identify the persons, hours and amount paid every individual working on a project during a pay period and is signed under penalty of perjury.  It makes sense for general contractors to institute procedures now on all projects to require monthly data, certified under oath, on the hours worked and amount paid for every worker on the project to track the payment of labor on the project each month, protect against enhanced treble liability for an alleged reckless disregard of the truth on a project, and prepare for the widespread use of certified payrolls beginning in 2021. While not perfect, they at least allow a contractor to track who should have been paid on a project and, if reviewed monthly for accuracy, guard against huge problems arising late in the project of allegations of months of unpaid labor;
    5. Modify the standard lien release language to specifically address the liabilities associated with wage claims and worker misclassification claims;
    6. Strengthen the certifications in lien releases to even impose personal liability for false statements made in these submissions. This is generally difficult to achieve as Virginia courts are not receptive to any attempt to turn a contract requirement into an action for fraud;
    7. Contractors could require proof of payment of employees and the ability to audit or sample employment and payment records of subcontractors working on a project to verify compliance; and
    8. Contractors can increase the use of joint check or the use of alternate security during the project. Public projects limit the retainage that a general contractor can hold to 5% of the subcontract value, but no limit exists on the requirement of alternate security such as a line of credit or other collateral.

These changes will dramatically increase the administrative burden on general and subcontractors managing lower tier workers. Logically, this added administrative cost could result in lower margins for contractors or higher prices for construction work in Virginia. The alternative, however, is an unacceptable amount of risk for any business that could be subject to unending lawsuits, administrative assessments and even criminal penalties.

Consult with the attorneys at Vandeventer Black LLP to develop your strategy to deal with the realities of Virginia’s new wage laws. Modify your subcontracts and develop the processes you need to protect your business and keep it successful in these changing times.

Written by James R. Harvey, a partner a partner in Vandeventer Black’s Construction and Public Contracts Law Group.  If you have questions about this article or need assistance with reviewing your contracts and subcontracts, please contact Jim or one of the other attorneys at the Construction and Government Contracts Practice Group.

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