Since last year, Virginia has been taking bold steps to update its wage and labor laws more in favor of employees. Various pieces of legislation put much more emphasis on employers, and in some cases especially those in construction, to correctly classify employment status and calculate – and pay –accurate wages.

From January 1, 2021 through July 1, 2021 new laws that construction firms need to be aware of include:

  • Contractor/Employee Misclassification
  • Minimum Wage Increase
  • Wage Theft
  • Overtime Pay

Contractor Misclassification

Effective January 1, 2021, a new Virginia law regarding employee misclassification has the potential to seriously impact construction and government contractors.

Under Virginia’s new law, workers are “presumed employees if they perform services for remuneration” unless the employer can prove the worker is an independent contractor under IRS rules. This is an important distinction in that the law assumes first that workers should be compensated like regular employees – including tax treatment and benefits – unless proactive steps are taken to show otherwise.

The penalties for misclassifying workers are steep. The employer could be barred from public contracts and held liable for fines ranging from $1,000 per worker for a first offense, $2,500 for a second offense, and $5,000 for third and subsequent offenses.

Employee misclassification extends to subcontractors and staffing agencies, too. To avoid potential liability, contracting companies need to ensure that employees are treated as such for tax and benefits purposes, and independent contractors clearly meet the requirements of IRS guidelines. This new legislation will prohibit the awarding of public contracts to businesses that misclassify workers.

In an industry that heavily relies on the contributions of independent contractors, this is a reporting detail that must be clearly understood and adhered to.

How to Determine If a Worker is an Employee or an Independent Contractor

There are three categories to examine when determining if a worker is an employee or an independent contractor, and each one relates to the amount of control in the working relationship. The categories are:

Behavioral Control
Employee: The business has a right to direct or control both what will be done and how it will be done.
Independent Contractor: The business controls only the results of the work, not how the services will be performed.

Financial Control
Employee: Usually, an employee will not have to invest in his or her own work equipment; the business provides it for him or her. The employer will typically reimburse the employee for job-related expenses and the employee cannot reasonably realize a profit or loss.
Independent Contractor: An independent contractor may have a significant investment in facilities where the work is performed or in tools and materials self-owned. Independent contractors will also have liability for business expenses, thus the ability to incur a profit or loss. They typically will perform services for more than one firm at a time.

Relationship of the Parties
Employee: May or may not have an employment contract in place; will likely receive employee benefits like paid time off and access to a retirement plan.
Independent Contractor: May or may not have a written contract in place; will not receive employee benefits as mentioned above.

At the federal level, the Department of Labor (DOL) recently issued final regulations for the definition of an independent contractor under the Fair Labor Standards Act. The regulations provide clarity and further narrows the definition of an independent contractor from its previous “20-factor test” and instead includes the above-noted categories as well as the skill level required to do the work and the degree of permanence of the working relationship between worker and potential employer. The DOL’s final regulations take effect on March 8, 2021.

For construction and government contractors, how the worker is classified must be determined before work begins or the worker is paid. It’s also a good idea to retain an updated copy of the subcontractors’ license and review it prior to beginning work.

Minimum Wage Increase1

On May 1, 2021, Virginia’s minimum wage increased to $9.50 per hour. This is part of a multi-year wage increase that was supposed to start on January 1, 2021 but was delayed four months due to COVID-19. From here, the minimum wage will gradually increase each year – see below.

  • May 1, 2021: $9.50
  • January 1, 2022: $11.00
  • January 1, 2023: $12.00
  • January 1, 2024: no increase
  • January 1, 2025: $13.50
  • January 1, 2026: $15.00

The last two increases in 2025 and 2026 are contingent upon the General Assembly re-enacting the legislation by July 1, 2024, so it is possible that the wage will not reach its full amount. After October 1, 2026, Virginia’s minimum wage will be adjusted annually based on the consumer price index for all urban consumers, or CPI-U.

Beginning May 1, 2021, employers do have the option of paying a “training wage” to employees who are in on-the-job training programs that are 90 days or less. If selected, the training wage would be the greater of 75 percent of the state’s minimum wage at the time or the federal minimum wage.

Wage Theft Statute2

Another newer law in Virginia gives employees considerably more power to claim unpaid wages. There are three possible statutory remedies employees can pursue, depending on the situation. If the employee successfully proves that wages were withheld, he or she can recover past due wages PLUS:

  • 8 percent interest on the amount of unpaid wages,
  • Attorney’s fees, if the employer was shown to knowingly withhold wages, and/or
  • Up to triple the amount of unpaid wages in liquidated damages, if there was no “bona fide dispute” regarding the wages.

Construction employers are particularly vulnerable. For contracts greater than $500,000, if the General Contractor knew or should have known a subcontractor was not paying its employees all wages due, the GC is considered the employer for purposes of unpaid wages. It is imperative that GCs revisit their sub’s contracts and protect themselves against indemnification in case a situation occurs where the sub is involved in a wage theft dispute with an employee.

Overtime Pay3

Continuing along the discussion of changes to wage laws, Virginia enacted an Overtime Wage Act on July 1, 2021. Under the Act, Virginia employers are now required to pay employees one and a half times their regular rate of pay when they work more than 40 hours a week. This new law supersedes requirements in the FLSA and could dramatically change how employers calculate and pay employees.

Differences between FLSA and Virginia’s overtime law relate to how regular pay is calculated, a longer statute of limitations for employees to bring claims (three years versus two under FLSA), automatic liquidated damages, and potential damages for employees.

Hourly employees’ regular rate constitutes the hourly rate plus other wages paid or allocated to that workweek – for example, bonuses –divided by the number of hours the employee worked. Certain federal exclusions don’t apply. Salaried employees’ rate is equal to one-fortieth of all wages paid during the workweek. What this means is that straight-time wages and fluctuating workweek calculation methods are no longer applicable and, in most cases, a higher hourly rate for salaried employees must be used for purposes of calculating overtime pay.

Construction firms will need to reevaluate how they calculate and pay overtime to ensure they comply with Virginia’s new law.

Have questions about new Virginia wage and labor laws? Reach out to Jennifer French, CPA, Partner and Team Leader of the firm’s Construction and Real Estate practice.