By Joshua E. Holt of Smith Currie
Published March 19, 2021
In 2012, Virginia’s Joint Legislative Audit and Review Commission (“JLARC”) issued a report finding that worker misclassification—where an employer improperly classifies its employees as independent contractors—is a pervasive problem in the Commonwealth. The report focused, in particular, on incidents of worker misclassification in the construction industry.
In 2020, Virginia Governor Ralph Northam signed into law a raft of employee-friendly legislation aimed at tackling the worker misclassification problem identified in the JLARC report. Virginia thus joins states like Delaware, New York, Illinois, Maine, Maryland, New Jersey, Pennsylvania, and Massachusetts that have worker misclassification laws specifically targeting construction industry employers.
The new laws have only been in effect for a few months, but already workers on some of the largest construction projects in Virginia are utilizing the new statutory tools available to them to challenge the use of the independent contractor label in the construction industry.
Virginia’s New Worker Misclassification Laws—Employee Status is Now Presumed
Under Virginia’s new laws, workers are presumed to be employees of a company that pays for their services unless the company can prove that the worker is actually an independent contractor. To determine whether a worker qualifies as an independent contractor, the statutes incorporate the Internal Revenue Service’s test, which looks at numerous factors, but focuses primarily on the degree of control that the company exerts over the worker. If the company has the right to control or direct only the results of the work being done, then the worker may qualify as an independent contractor. If the company has the right to control any other aspects of the work, such as what work is done or how it is done, the worker is an employee and is entitled to all of the benefits available to employees under state and federal law.
Mechanisms for Enforcing the New Standard
The new worker misclassification laws empower the Department of Taxation to investigate allegations of misclassification and to impose sanctions. If the Department finds that an employer has misclassified its employees, the Department can levy civil penalties ranging from $1,000 to $5,000 per offense and can bar the employer from public contracting for up to two years.
In addition, the new laws authorize misclassified employees to file suit against their employers—either individually or on behalf of similarly situated employees—to recover damages resulting from the misclassification. Those damages can include any compensation or benefits that the employees would have earned if they had been properly classified as employees, plus reasonable attorneys’ fees and costs incurred in bringing the lawsuit.
Employees that have been improperly classified as independent contractors may also be able to assert a claim against their employers under the Virginia Wage Payment Act, which generally requires employers to make timely payment of all wages earned. As discussed in a previous update, the Wage Payment Act provides for the recovery of up to three times the amount of any wages owed, making it a particularly attractive tool for employees seeking to challenge their classification as independent contractors. Importantly for employers in the construction industry, the Wage Payment Act also specifically provides that contractors on certain large-scale commercial projects may be liable for the wage payment violations of any subcontractor on the project.
Recent Enforcement Efforts in the Construction Industry
In October of 2020—just a few months after the new worker misclassification laws went into effect—laborers working for a drywall subcontractor on dozens of projects throughout Virginia filed a class action lawsuit in federal court, claiming that the drywall subcontractor improperly classified them as independent contractors. See Moran, et al. v. Agent Wall Sys., Inc., et al., Civil Action No. 3:20-cv-00823-HEH (E.D. Va. Oct. 22, 2020). The drywall subcontractor did not hire the laborers directly, but retained their services through various labor brokers. Nevertheless, the laborers claim that their relationship with the drywall subcontractor is such that they should be considered employees of the labor brokers and the drywall subcontractor. In support of this argument, the laborers point out that the drywall subcontractor supervises their work, sets and records their hours, and determines their rate of pay. The laborers also point to the fact that the work they perform for the drywall subcontractors is within the usual course of its business, as opposed to work that is customarily considered an independently established trade. The laborers claim that they are entitled to unpaid overtime and liquidated damages under the federal Fair Labor Standards Act, as well as any benefits and other compensation that they would have received as employees under Virginia’s new worker misclassification laws, plus attorneys’ fees and costs.
In December of 2020, a second group of laborers working for a different drywall subcontractor filed a nearly identical class action in federal court. See Rosales, et al. v. Capital Interior Contractors, Inc., et al., Civil Action No. 3:20-cv-00916-HEH (E.D. Va. Dec. 1, 2020). As in the first case, this second group of laborers claim that they are employees of both the labor brokers that hired them and the drywall subcontractor that retained their services, and that they were denied overtime and other benefits as a result of having been improperly classified as independent contractors. As such, they assert claims under both the federal Fair Labor Standards Act and the new Virginia misclassification laws. In addition, the second group of laborers claim that the drywall subcontractor’s failure to pay overtime constitutes a violation of the Virginia Wage Payment Act. As a result, they claim that they are entitled to recover up to three times the amount of unpaid overtime.
Both of these cases are still in the early stages of litigation, so it remains to be seen whether the laborers will have any success in challenging their classification as independent contractors. However, if these two cases are any indication of what the future holds, employers in the construction industry face the potential of significant exposure.
Recommendations for Construction Industry Employers in Virginia
To avoid liability under Virginia’s new worker misclassification laws, employers in the construction industry should carefully examine their hiring practices, as well as the current make-up of their workforce, to ensure that they are properly classifying their workers. While some employees may prefer to be classified as independent contractors, and are unlikely to file or join a lawsuit challenging that classification, employers must nevertheless be wary of state enforcement actions. As the JLARC report noted, Virginia loses millions of dollars in tax revenue each year because of employers that improperly classify their employees as independent contractors. As a result, the state has a strong incentive to crack down on the use of the independent contractor label, even if the individuals classified as independent contractors are not inclined to do so themselves.
In addition, because contractors on certain projects may now be liable for any lower-tier subcontractor’s wage payment violations, general contractors and subcontractors doing business in Virginia should also consider taking steps to insulate themselves from liability for a subcontractor’s misclassifications. Those steps include:
- implementing a robust prequalification program for subcontractors and suppliers;
- insisting that subcontractors obtain written approval before contracting with lower-tier subcontractors and suppliers;
- requiring payment bonds for all subcontractors;
- mandating the use of certified payrolls;
- expanding and strengthening the language of the indemnification provision in any standard subcontract or supplier agreement to cover wage claims and worker misclassification; and
- modifying the language of any standard payment application and/or lien release forms to specifically address liability for wage claims and worker misclassification.
We will continue to monitor and provide updates on any developments related to Virginia’s new worker misclassification laws, and particularly the impact that the new laws are having on the construction industry.
Joshua E. Holt is an associate with Smith Currie. He concentrates his practice in the area of construction law. He can be reached at jeholt@smithcurrie.com or 703.506.1990.