Starting July 1, 2020 General Contractors are “Employers” for All Workers on Their Jobsite

Christopher G. Hill | Construction Law Musings

I have discussed the impactful legislation to the Virginia construction industry in prior posts here at Construction Law Musings.  One of those statutes that will take effect on July 1, 2020 will fundamentally change the relationships between general contractors and their subcontractors and suppliers.

Senate Bill 838 does the following on construction projects with a value of $500,000 or greater that are not single family residential construction projects:

  • Makes the general contractor, and all tiers of subcontractors on a particular project contractually liable to pay their subcontractors’ (at any tier) employees wages.
  • Requires that the payments are equal or exceed those required by other statutes.
  • Deems contractors to be the employers of their subcontractors’ employees for purposes of Va. Code Section 40.1-29 that imposes criminal and civil penalties for failure to pay wages when due, and
  • Grants employees a private right of action for any violations, including the right to a class or joint action, award of liquidated damages, reasonable attorney fees and possible treble damages for “knowing” violations by the contractor.

What does this mean? It adds a new liability for contractors for the failures of thier subcontractors and suppliers, entities over which contractors have no control aside from contractual provisions, to pay their employees.  It further encourages employees to bring these actions with its possible treble damages, class action rights and attorney fees provisions.  In short, it adds a whole lot more of a burden on contractors in Virginia to screen their subcontractors of every tier and all suppliers to those subcontractors, to assure that they are both willng and able to pay their employees and to keep tabs on all payments in the payment stream of a project.

If there is any good news in this new bill for general contractors, it is that the statute requires a subcontractor to indemnify the contractor for any damages paid by the contractor due to subcontractors failure to pay its own employees.  An exception to this requirement is where the non-payment of wages is due to the contractor’s failur to pay its subcontractor as required.  Of course, one reason for a subcontractor failing to pay wages it the subcontractors inability to due so because of financial difficulties due to anything from financial mismanagement to problems on other projects.  If that subcontractor simply can’t pay the wages, it certainly would have a difficult time paying any indemnification obligations.

What can you as a contractor in Virginia do to mitigate this risk?  Aside from working with a Virginia construction attorney to understand the various possible results of this new obligation, your contract will be key.  Among other steps you can take you should: take pre-qualification and identification of subcontractors and suppliers on your project a priority;  possibly require subcontractors to provide their own payment bonds; expand the contractual indemnity language to explicitly encompass payment of wages; require more explicit language relating to the payment of wages in your lien wavers and payment applications; and, look into expansions of your insurance coverages to protect against potential claims.

While the above list is far from exhaustive, and the true implications of this legislative change have yet to be seen, all contractors in Virginia should be aware of these new obligations.

Impactful Construction Legislation Enacted for 2020

Christopher G. Hill | Construction Law Musings

With COVID-19 dominating the news and planning for issues relating to it being a top priority for construction firms in Virginia, it is almost hard to remember that the Virginia General Assembly was in session and considering several bills with a direct effect on the construction industry.  I discussed several in prior posts and thought I’d put all of the latest updates and what has been signed into law by Governor Northam into one post.  My quick initial thoughts on the bills are in italics.

The following passed with the Governor’s recommended implementation date of May 1, 2021 due to the economic impact of COVID-19:

HB833 (identical to SB8)– Requires contractors and subcontractors under any public contract with a state agency, or with a locality that has adopted an ordinance requiring the payment of prevailing wages, for public works to pay wages, salaries, benefits, and other remuneration to any mechanic, laborer, or worker employed, retained, or otherwise hired to perform services in connection with the public contract for public works at the prevailing wage rate. The provisions of the bill would not apply to any contract for public works of $250,000 or less.

This bill essentially takes the prevailing wage requirements that are present on most federal projects and extends them to state projects.

SB182– Authorizes any public body, including any state or local government, when engaged in procuring products or services or letting contracts for construction, manufacture, maintenance, or operation of public works, to require bidders to enter into or adhere to project labor agreements on the public works projects.

This bill removes the long standing prohibition on union based PLA’s for Virginia public projects.  The economic impact of this on Virginia based contractors will not be known until this legislation becomes effective, but the AGC of Virginia and the ABC of Virginia both opposed the legislation.

The following bills have been signed by the Governor and are effective July 1, 2020:

HB1646– Provides that the Board for Contractors (the Board) shall require a contractor to appropriately classify all workers as employees or independent contractors, pursuant to law. Any contractor who is found to have intentionally misclassified any worker is subject to sanction by the Board.

This is one of many bills focussing on worker misclassification issues.  Virginia contractors should be even more diligent regarding the proper classification of those that work for and with them moving forward.

HB1300– Provides that an action against the surety on a performance bond shall be brought within five years after the completion of the contract. The bill further provides that the statute of limitations on construction contracts and architectural and engineering contracts is 15 years after completion of the contract. The bill specifies that completion of the contract is the final payment to the contractor pursuant to the terms of the contract, but that if a final certificate of occupancy or written final acceptance of the project is issued prior to final payment, the period to bring an action shall commence no later than 12 months from the date of the certificate of occupancy or written final acceptance of the project.  This seeks to address what has become known as the “Hensel Phelps” issue.

This bill is a good one and one that should create some certainty in the surety and construction fields relating to Virginia public projects.

SB838– Provides that an employee has a private cause of action against an employer who fails to pay wages to recover the amount of wages due plus interest at eight percent annually from the date the wages were due. If the court finds that the employer knowingly failed to pay wages to an employee, the court shall award the employee (i) reasonable attorney fees and other costs and (ii) an amount equal to triple the amount of wages due. Among other items, the bill further makes general contractors jointly and severally liable for its subcontractors of any tier’s failure to pay wages to employees for any instance where the general contractor knew or should have known that wages were not being paid.  In a bit of relief for contractors, this increased liability risk will not apply where the value of the construction project or aggregate of multiple projects under the same construction contract is below $500,000 or the project is the construciton of a single family residence.

This legislation is likely to increase costs for all construction projects because of the additional risk to general contractors that a remote employer outside of its control will fail to pay wages.  The construction cost increase from additional adminstrative burden alone could cause Owners to think twice before building anything. It could limit projects with a value of over $500,000.00 to only those larger general contractors that can absorb the additional costs or have the ability to get novel forms of bonding to hedge against this risk.

SB208– Specifies that the use of funds paid to a general contractor or subcontractor and used by such contractor or subcontractor before paying all amounts due for labor performed or material furnished gives rise to a civil cause of action for a party who is owed such funds. The bill further specifies that such cause of action does not affect a contractor’s or subcontractor’s right to withhold payment for failure to properly perform labor or furnish materials and that any contractual provision that allows a party to withhold funds due on one contract for alleged claims or damages due on another contract is void as against public policy.

A good change in the law for subcontractors and suppliers.  It further emphasizes the need for proper job by job acocunting and payment and decreases risk for subcontractors and suppliers that perform work on multiple projects for the same general contractor or subcontractor.

The actual effect of this legislation will show itself over time.  I highly recommend that you both read the actual bills (linked above) and consult with an experienced Virginia construction lawyer to discuss their effect on your construction businesses and contracts.

What OSHA’s New Guidance Means for the Construction Industry

Christopher Moore Sweeney | Cozen O’Connor

During the rise of the COVID-19 pandemic in the United States, OSHA provided standards for recording workplace exposures to COVID-19. These standards broadly require employers to record COVID-19 illnesses of its employees if three conditions are met:

  1. it is a “confirmed” case of COVID-19;
  2. the case is “work-related;” and
  3. it meets one or more general recording criteria (e.g., hospitalization, sick days).

In short, OSHA was not treating COVID-19 like a common cold or the flu. Instead, employers in the construction industry may have needed to include almost any confirmed case of COVID-19 on its recordable log. In response to these requirements and the resulting confusion, construction industry groups appealed to OSHA for more guidance.

On April 10, 2020, OSHA provided an Enforcement Memo that clarifies and loosens the requirements for employers to have to record COVID-19 infections. John Ho of Cozen O’Connor’s Labor and Employment group issued a blog post explaining OSHA’s new guidance and providing helpful tips for employers who may still need to record COVID-19 infections.

RECORDABLE REQUIREMENTS LOOSENED FOR CONSTRUCTION

OSHA now treats certain industries differently in terms of requirements for employers. Specifically, employers of workers in the health care industry, emergency response organizations (e.g., EMTs, firefighters, law enforcement), and corrections officers will still need to make work-relatedness determinations pursuant to 29 CFR § 1904 for COVID-19 infections. For now, employers of workers in all other industries, including the construction industry, are not required to make work-relatedness determinations except in two, more narrow circumstances:

  1. there is objective evidence that a COVID-19 case may be work related (e.g., a number of cases developing among workers who work closely together); and
  2. this objective evidence is reasonably available to employer (e.g., information given to employer by employees or information learned by employer in ordinary course of managing its business and employees).

OSHA made this clarification specifically because, other than those specific front-line industries, employers “may have difficulty making determinations about whether workers who contracted COVID-19 did so due to exposures at work.” OSHA also stated that this clarification was necessary to “help employers focus their response efforts on implementing good hygiene practices in their workplaces and otherwise mitigating COVID-19’s effects, rather than on making difficult work-relatedness decisions in circumstances where there is community transmission.”

The construction industry is not entirely relieved of any recordable requirements for COVID-19 infections, but this enforcement guidance from OSHA should allow construction companies to focus more on protecting their employees than on investigating infections.

For Developers and Owners: How COVID-19 Is Affecting Construction Projects and Actions You Should Consider

Robert C. Epstein, David C. Jensen, Zackary D. Knaub, Steven C. Russo and John L. Mascialino | GreenbergTraurig

The global spread of Coronavirus Disease 2019 (COVID-19) is generating unprecedented delays, disruptions and uncertainty on construction projects. Travel restrictions, social distancing and quarantines are increasingly disrupting supply chains, contractor workforces and the availability of governmental personnel for project inspections, with resulting delays and increased costs. This article offers guidance to developers and owners dealing with projects affected by COVID-19 and highlights actions they should consider to mitigate the project impacts.

Impact of COVID-19 on Construction Projects

COVID-19’s impact on construction projects is mixed and varies by state. Many states consider construction an “essential” service, following guidance from the federal Department of Homeland Security, which issued a non-binding list of 16 “critical infrastructure sectors.” Other states and some local municipalities take a narrower view, requiring virtually all construction to cease.

New York initially exempted most construction from state-mandated restrictions, but as of March 27, 2020 narrowed the definition of “essential” to shut down all projects other than the construction of roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing and homeless shelters, and allowing necessary work to safely secure and shut-down construction sites. In New York, determinations as to “essential” projects have been delegated to the Empire State Development Corporation and a process has been established for seeking this classification, which will provide further guidance on the boundaries of the current restrictions. The New York State Department of Environmental Conservation issued guidance on essential construction in support of cleanup activities, which is helpful to determine when a remedial construction activity can go forward, as covered in a GT Alert, New York Environmental Regulator Issues Guidance on Essential Construction in Support of Cleanup Activities.

While California has issued no orders specifically limiting construction activities, adopting the federal guidelines, many counties and cities within California have adopted much more restrictive guidelines limiting ongoing construction to housing (especially affordable housing), projects immediately necessary to the maintenance, operation, or repair of Essential Infrastructure, healthcare facilities, etc. and requiring all worksites observe strict construction site COVID-19 protocols.

Stay-at-home orders in Ohio, Illinois, Indiana, Minnesota and Wisconsin presently also generally exempt construction.

New Jersey initially exempted construction without specific limits, but on April 8, 2020 prohibited all “non-essential” construction, allowing only projects at hospitals and schools, in transportation and utility sectors, affordable housing, emergency repairs and other limited instances.

Pennsylvania’s mandate to close all “non-life sustaining businesses” effectively stops all construction, with exemptions available to construction supporting health care providers and for emergency repairs.

Boston, Cambridge and other Massachusetts cities halted all construction, but the governor overrode the local orders and deemed all construction “essential,” allowing all projects to continue provided workers follow social distancing, washing hands and other corona protocols. Later, the governor modified that stance, designating construction of office buildings, retail and hotels as non-essential.

In all cases, there may be evolving developments that may further define or change the restrictions and permitted exceptions.

ACTIONS OWNERS AND DEVELOPERS SHOULD CONSIDER

Whether totally shut-down or only delayed and disrupted, many construction projects are being impacted by the pandemic. The owner should consider the following actions to address and mitigate the project impacts.

Action #1: Identify and Assess Relevant Local and State Restrictions on Construction Activities

Initially, the owner should consult appropriate legal counsel and carefully examine the state and local government shut-down orders to identify restrictions on construction activities and only proceed accordingly.

Action #2: Identify and Assess Relevant Contractual Provisions

The owner should carefully examine the construction contract to identify key provisions implicated by the pandemic. Although this article discusses the commonly-used American Institute of Architects (AIA) form contract (A201-2017 edition), a critical caveat is that each situation is fact-specific and contract-specific. While standard contract forms are widely used, the forms often are modified and standard terms and conditions frequently are changed based upon negotiations. Crucial provisions such as those addressing force majeure, notice time limits, compensable costs resulting from delays, risk allocation and damages limitations may be significantly different from the AIA standard forms and therefore each contract should be carefully reviewed and analyzed.

Action #3: Communicate and Work with the Contractor to Identify, Assess, and Mitigate Project Impacts

The owner should communicate with critical contractors, designers, and suppliers to assess the actual and potential impacts on contract performance and discuss how to potentially mitigate project disruptions, in an effort to achieve the overriding objective – complete the project as soon as possible within or as close as possible to the budgeted costs. COVID-19 may impact design and construction contracts in a variety of ways, including impacts to supply chains, contractor workforces, designer personnel, and the availability of government inspectors.

The owner should consider directing its project management team to confirm that the contractor is taking appropriate site health and safety measures, including adhering to federal, state, and local guidelines as to distancing, cleansing, disinfecting, etc., and that sites are being properly manned and managed considering current circumstances.

The owner should request updated schedules from the contractor and consider setting flexible contract completion dates.

The owner should consider, with the contractor, possibly prioritizing and/or accelerating certain work areas and delaying others, as well as planning to recover delays once the COVID-19-based restrictions are lifted.

Action #4: Consider Contract Notice Requirements and Respond to Notices from the Contractor

Delay Notices from the Contractor

The standard contract requires the contractor to provide notice of delay claims “…within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later.”

In responding to delay notices, the owner should consider whether the notice qualifies as a “claim” or merely is an advance warning of potential delays, to which no formal response may be necessary and perhaps should not be given. The owner should not respond unnecessarily in a manner that portrays it as unsympathetic or which could be misconstrued as directing activity that puts anyone at risk or acknowledging a delay claim that has been neither properly submitted nor supported. The contractor bears the burden to establish how a delay has impacted the work and should be regularly informing the owner of project impacts as information becomes available.

Notices from the Owner to the Contractor

When sending notices to the contractor, the owner should consider the need for the notice, how it will be received, and how it may impact the future of the project.

Where concurrent delays exist, the owner should consider putting the contractor on notice of such delays at the earliest possible time.

A timely response by the owner to schedule updates that identify delays may avoid the appearance that the owner accepts the delay or has engaged in a “course of dealing” that modifies the express contract. 

The owner should consider putting the contractor on notice of observed safety violations, including deviations from governmental or trade association guidelines for maintaining a safe construction site during the pandemic. Under the standard contract, the contractor is responsible for site safety, compliance with all applicable laws and dealing with emergencies on the site “to prevent threatened damage, injury, or loss.” However, the owner also may be liable for dangerous conditions, at times under statutory or common law, or possibly where it exerts control over the construction site, directs the contractor’s means and methods, or otherwise contributes to an injury. In those instances, the owner may be liable for failing to maintain a safe site, irrespective of contract terms placing primary responsibility on the contractor.

Action #5: Consider Project Suspension and Termination Options

Suspension or Termination by the Owner

Depending upon a construction project’s specific circumstances, the owner may wish to consider suspending and/or terminating the project due to the impact of COVID-19. Each situation is different and must be considered individually.

The standard contract allows the owner to suspend the contract “for convenience…for such period of time as the owner may determine.” In a convenience suspension, the owner may be responsible for the “cost and time” caused by the suspension, delay or interruption including the contractor’s profit unless the contractor’s performance “…is, was, or would have been, so suspended, delayed, or interrupted, by another cause for which the contractor is responsible…”.  The standard contract also allows the owner to terminate the contract for convenience.

The owner should consider that a convenience suspension or termination may require it to pay the contractor’s resulting costs, which typically include demobilization costs and may include payment for goods and materials ordered or in fabrication, as well as lost deposits and termination fees, so the contract terms must be carefully considered. Further, the owner may need to consider the potential ability to quickly restart if the project is suspended or terminated with the intention of restarting later. It also will be critical to consider impacts on performed work, as a convenience termination may invalidate warranties and the owner’s ability to pursue the contractor for defective work.

Termination by the Contractor

Under standard AIA contract forms, the contractor may terminate the contract if the work is stopped for 30 consecutive days by government order or national emergency. In such circumstances, the contractor is entitled to recover “…payment for Work executed, as well as reasonable overhead and profit on Work not executed, and costs incurred by reason of such termination.” These provisions may incentivize the contractor to terminate the contract after a government-ordered 30-day shutdown by allowing recovery from the owner not just for work performed and termination costs, but also anticipated profit on work not performed, particularly where the contractor otherwise would be entitled only to a time extension due to COVID-19-based delays. 

Action #6: Consider Contractor Claims for Time Extensions and Delay Damages

The pandemic likely will unleash floods of contractor claims for time extensions, delay damages, project disruptions and labor inefficiencies.

The delays directly caused by COVID-19 may be “excusable” under the contract because the pandemic is a “cause[] beyond the contractor’s control,” A201 Art. 8.3, or under common law theories of frustration of purpose or impossibility/impracticability, see GT Alert “Risk Allocation for Economic Losses from Coronavirus Disease 2019,” entitling the contractor to a time extension to perform the work and potentially to delay and disruption damages.

“No damages for delay” (NDFD) clauses commonly found in construction contracts may or may not protect the owner from the contractor’s delay damage claims. Generally, these clauses are designed to protect the owner from a contractor’s delay damage claim by allowing a time extension, but no additional compensation, in the event of project delays. Courts generally enforce unambiguous NDFD clauses, but there are exceptions, one of which is for “delays not contemplated” by the parties.

Whether a NDFD clause protects the owner from pandemic-based delay damage claims will depend upon the clause’s exact language and is fact-dependent. In some instances, the delays may be deemed uncontemplated, rendering the NDFD clause entirely ineffective. However, a limited NDFD clause (e.g., allowing delay damages after the first 30 or 60 days of delay) might be enforced. Also, where the contract specifically allocates the risk of delays caused by a pandemic, those clauses may be upheld, although such provisions are uncommon.

The owner should consider the following steps to address contractor delay and disruption claims.  First, the owner should assemble key project documents, including daily reports, meeting minutes, RFI and change order logs, progress reports, etc.  These documents will be crucial in evaluating the contractor’s claims.

Second, the owner should consider whether concurrent delays affect the contractor’s claims for project impacts. Under standard contract forms, where a contractor suffers a compensable delay such as that caused by the pandemic, but the contractor is responsible for a concurrent delay, the net effect may be that the delay is excusable but non-compensable, entitling the contractor only to a time extension.

Third, the owner should determine whether the contractor’s delay damage claim is properly documented and limited only to permissible damages. Under standard contract forms, the contractor bears the burden to prove how the delay impacted its work and the steps it took to mitigate damages. Also, the contract may limit the contractor’s delay damages, such as by allowing payment for extended general conditions costs but not increased labor and material costs, or by waiving all “consequential damages” such as office, financing or personnel expenses or claims for lost profit.

Conclusion

These recommendations are offered as general guidance. The facts and circumstances of each project, including considerations such as financing documents, leasing, joint venture partnerships, market conditions and contract terms, may warrant deviations from the general guidance offered herein.

How States’ Interstate Commerce Restrictions Are Testing the Construction Industry and the Constitution

Sarah E. Carson | Smith Currie & Hancock

Imagine you are a contractor from New York where construction work is deemed nonessential, and your projects are being shut down. To stay afloat, your company begins exploring its options under the newly passed CARES Act. Knowing it is essential to keep working, the company also seeks opportunities in a locality where construction services are deemed essential, such as West Virginia.

Under West Virginia’s executive order, construction is permitted, and the Order explicitly states it is not “meant to impede commerce.” However, non-citizens of certain states – including New York – who seek, but have not secured, essential construction work may be required to endure a 14-day self-quarantine prior to the commencement of any work obtained. Construction companies from non-resident states can perform projects in states like West Virginia, but project commencement must be delayed by two weeks, something to keep in mind when negotiating your contracts.

By contrast, residents from other states where construction is also deemed nonessential, such as Pennsylvania, or states where construction is deemed essential, such as North Carolina, may take contracts for work in West Virginia and will not be required to endure a 14-day self-quarantine before commencing the work. Obviously, the opportunity to commence work without delay could be quite an advantage when competing for jobs in certain states. Not only are these limitations erecting barriers to economic opportunity, but they may also violate the Constitution.

In other words, in an effort to reduce an influx of non-residents from states with heavily concentrated out brakes of COVID-19, West Virginia, and states with similar orders, have restricted citizens of specific states from performing construction work within West Virginia without placing the same restrictions on all states or residents of their own state, cue the Dormant Commerce Clause.

Ultimately, the Dormant Commerce Clause provides that Congress has been given exclusive power over interstate commerce (through the Commerce Clause). States cannot discriminate against or unduly burden interstate commerce, even in the absence of federal legislation regulating the activity. For reference, interstate commerce includes traffic, transportation, exchanges, and transactions that occur between states within the U.S. The goal is to ensure states do not monopolize a specific industry within the state by prohibiting the involvement of outside states.

By restricting residents of New York from performing work in West Virginia, or any other state, it would appear the restricting state has burdened interstate commerce. West Virginia’s Governor, Jim Justice, acknowledged the possibility that his order may trigger the Dormant Commerce Clause stating, “[I want]] to be really respectful of constitutional rights, but people are dying all over this country right and left. … I may lose at the end of the day, but I’m going to try to protect our people.”

To be clear, this is by no means the first time a state action has been challenged on the basis that it violates the Constitution by usurping federal authority and going too far in restricting or regulating interstate commerce.

When a state law is neutral and does not affirmatively discriminate against citizens of a specific state, but still impacts interstate commerce, a balancing test is implemented to evaluate the legitimacy of the state action. Under this test, the court presumes the statute in question is valid unless the burden imposed on interstate commerce clearly outweighs the local benefits the state is attempting to facilitate through the legislation. The weight of each is determined by a judge, not by the court of public opinion nor by the declaration of a local public official.

However, when a state action appears to discriminate against selective states, impacting interstate commerce, the Supreme Court of the United States will apply the highest and most stringent standard of judicial review, the strict scrutiny analysis. Under this standard, a State must demonstrate 1) a compelling governmental interest, and 2) that the law in question is narrowly tailored to achieve that interest. In other words, when strict scrutiny is applied, very few laws will receive the constitutional stamp of approval from the Supreme Court.

This leaves us with three questions:

1) Do orders, such as West Virginia’s, impact interstate commerce?
The answer is almost undoubtedly, yes.

2) Are state powers to restrict interstate commerce enlarged in a time of emergency?
The law does not appear to explicitly allow this, but it is likely a state of emergency and the surrounding circumstances would factor heavily weighted when determining the reasonableness of the state action.

3) Would the strict scrutiny or balancing test standard apply?
     To be determined. Reading the plain language of the law, states with orders similar to West Virginia appear to have placed restrictions only on certain states, which would seemingly trigger strict scrutiny. However, under the circumstances, it may be found that the state has a compelling governmental interest in protecting its residents from potential exposure to COVID-19, especially when considering the various Declarations of a State of Emergency across the country, including a national declaration by the President. The analysis would then center on whether the restrictions were “narrowly tailored” to satisfy the compelling interest. 

While contractors wait for a determination on the legality of such states’ actions, they are encouraged to document their efforts to perform work in these restrictive states and to proactively identify states that do not impose time or other restrictions on construction activities and to focus their project procurement efforts there. In the words of Arnold Palmer, “[t]he road to success is always under construction.”

To be clear, we are not opining on whether the state orders are or are not constitutional. Many minds will differ on that point, but we are providing a basis for you to conduct your own analysis and then to seek informed legal advice tailored to your specific circumstances. With millions of people joining the unemployment lines, we know the construction industry is vital to getting America back to work.