New Law Creating Upheaval in Construction Industry

July 27th, 2020

Though passed without much notice or publicity, a new law that took effect July 1 is now threatening to cause havoc in Virginia’s construction industry.

The law specifies that in many situations, general contractors may be held liable if their subcontractors fail to pay their employees, or if they pay them less than what the law requires. Similarly, subcontractors face the same liability for nonpayments or short payments by their sub-subcontractors.

The obligations imposed come without any guidance as to exactly how contractors are supposed to monitor the practices of the independent contractors they hire, to know the exact identities of every laborer who might set foot on-site or to monitor whether employees may have reached the point where overtime wage rates go into effect (especially since the employees may be working on more than one project at a time). Worse, by adopting the definitions of “general contractor” and “subcontractor” used in the statute governing mechanic’s liens, the new law actually (and probably by legislative error) could be construed to apply to the relationship between any working contractor (general or sub) and its materials vendors, architects, engineers and others as well. We are hopeful that courts will not apply the law in this latter aspect, however.

As the ramifications – both intended and perhaps unintended – dawn on those in the construction industry, panic is sweeping the offices of general contractors in particular, as they struggle to come up with new contractual provisions and operating procedures to avoid what could conceivably be huge and unbudgeted liabilities. While taking actions of this nature is definitely called for, all construction company managers should first take note of the limitations on the new law’s applicability.

There are in fact three key limitations on the law – situations where a contractor will face no criminal sanctions or civil liabilities:

The law totally excludes construction projects for single-family residences from its scope.
Even for duplexes, multi-family housing projects, and commercial jobs, the law does not apply if the contractor’s contract is for $500,000 or less. This will eliminate many projects from the scope of the law entirely, and will also exempt many subcontractors even on larger projects.
And even when dealing with a larger, commercial project, there is no sanction or liability under the law unless a contractor allowed nonpayment or underpayment to persist after he either actually knew, or reasonably should have known of a downstream violation of the laws requiring payment to workers.
The first two exceptions present bright-line standards that are easily applied. But for all projects not excused by those two points, the “knew or should have known” standard will be the critical “out” for nearly all other situations. Importantly, the new law imposes no obligations to inquire or otherwise learn of what downstream subcontractors and vendors are doing with their laborers. Thus, ignorance is bliss, so to speak. In order to manage the new statutory obligations effectively, contractors should resist the urge to be totally proactive. Instead, contractors should avoid looking into any of their downstream parties’ payroll practices, unless and until they first get notice of the existence of a problem.

When the law is applicable AND notice of a problem comes, THEN a contractor must spring into action, for its own protection. We recommend that the following steps be taken:

Notify the subcontractor involved that it must suspend all work on-site while an inquiry is undertaken.
Require the subcontractor to document the identities of all laborers on-site, and that they have been paid as the law requires. Note that subcontractors who try to avoid proper payroll by mis-labeling laborers as “independent contractors,” or by paying cash to illegal immigrants, cannot be allowed to continue such practices going forward. (See our blog of June 25, 2020 as to a separate crackdown on the abuse of the “independent contractor” label.)
Terminate any subcontractors who cannot provide satisfactory documentation immediately.
Withhold further payment to any terminated subcontractors until the employing contractor can be assured that it has been fully indemnified for any liabilities under the statute or additional expenses incurred in replacing the subcontractor or in dealing with resulting project delays.
Note that contract forms in use will need to be revised in order to provide explicit authorization for taking these steps where necessary. All those affected by the new law should have their current forms reviewed and updated.

Marrs & Henry remains fully open and available to you during our current, difficult time. If you need help, there’s no need to wait. We can meet with you in person at our offices, we can come to you, we can talk by telephone, we can be reached by e-mail, and we’re also available via video teleconference.