New Law Adds Substantial Penalties for Wage Violations and Makes General Contractors Liable for Subcontractor's Payment of Employees

New legislation effective July 1, 2020 amends Virginia Code § 40.1-29, which governs employer liability for payroll violations, and enacts a new section, Virginia Code § 11-4.6, which deems general contractors to be employers of their subcontractor's employees.

Virginia Code § 40.1-29 requires all employers to pay their employees regular wages.  The amendments add civil penalties of $1,000 for each violation, and criminal penalties (a Class 1 misdemeanor for amounts less than $10,000; or a Class 6 felony for amounts of $10,000 or more and for repeated offenses).  The legislation also creates a private right of action for employees to sue, individually and collectively, their employer for unpaid wages.  Employees are entitled to recover twice the amount owed, and, if the Court finds the employer acted knowingly, three times the amount owed. The employee is also entitled to recover his attorney's fees and costs, and there is a three year statute of limitation on these claims.  Because of the substantial penalties, the right to collective action that means large amounts can be recovered, and the right to recover attorney's fees and costs, there is a likelihood that suits will be brought.  Employers must therefore be more careful than ever before to pay their employees appropriately.

The legislation also creates a new section, Virginia Code § 11-4.6, that deems general contractors to be employers for their subcontractors' employees, at every tier.  If any subcontractor fails to pay, the subcontractor and the general contractor are both liable under Virginia Code § 40.1-29.  However, the subcontractor is required to indemnify the general contractor for such liability, unless the subcontractor's failure to pay wages was due to the general contractor's failure to pay the subcontractor.  This Code section does not apply unless the general contractor "knew or should have known" that the subcontractor was not paying its employees.  It also does not apply to single family residential projects or projects worth $500,000 or less.

There are a few things a general contractor should do to protect itself:

1. Pay employees appropriately (i.e. on time and in full, subject only to applicable withholding). It may be worthwhile to engage a payroll manager if you don't have one in house.
2. Make sure subcontractors, and their subcontractors, pay their employees appropriately. A general contractor is liable only if it "knew or should have known," and criminal penalties only apply to willful and intentional conduct.  At a minimum, general contractors should require subcontractors to certify that they have paid, or will pay, their employees before paying the subcontractor.
3. Be careful who you contract with. It is more important than ever that you have reliable, experienced subcontractors that you can count on to meet their obligations.
4. Use contracts that require subcontractors (a) to pay their employees appropriately, (b) make sure their own subcontractors do the same, (c) indemnify, defend, and hold harmless the general contractor.
5. Require payment bonds that include liability for payroll.
6. Consider potential new methods to protect yourself, such as: agreements to make payment to a shared payroll company; require that subcontractors provide reports on each employee including hours, rate of pay, and confirmation of payment; contact selected employees and confirm payment and document contacts.
7. Consult your attorney.

Reid Broughton is managing shareholder of our Christiansburg office, specializing in government, business, and construction law, and a contributing author to the publication Construction Law in Virginia. If you have any questions about this post or any other employment law issues, please reach out to Reid or any member of the Labor and Employment Law Team.