WHAT YOU NEED TO KNOW:

Virginia law is unclear, but temporary staffing agencies may require contractor licensure from Virginia DPOR.  In other states with similar laws, courts have held that temporary staffing agencies must be licensed as contractors if they supply laborers to construction projects.  If temporary staffing agencies must be licensed in Virginia, contractors doing business with these agencies may violate Virginia’s licensing laws by contracting with “unlicensed entities”, which could result in fines or suspension or revocation of the contractor’s own license.  Until Virginia clarifies whether temporary staffing agencies require contractor licensure, contractors who subcontract for temporary labor should understand the risks and address such issues in their agreements with staffing agencies. 

In June 2015, in response to Governor McAuliffe’s earlier-issued Executive Order 24, Virginia’s Department of Labor and Industry (the “Department”) issued a policy memorandum outlining the Department’s commitment to preventing “worker misclassification”, i.e. the classification of workers as “independent contractors” when they are in fact “employees”. i  The Commonwealth is so concerned about the issue that Governor McAuliffe established an inter-agency task force to centralize the efforts of state agencies in preventing worker misclassification.  

Among other things, this new policy requires a contractor working in a “multi-employer worksite situation” to provide proof of its DPOR contractor’s license and proof of the DPOR license for all subcontractors.  The policy also eliminates penalty reductions for small companies and companies who acted in good faith.  Although seemingly well-intentioned, this new initiative is causing concern for contractors doing business in Virginia.  As general contractors scramble to send “flow down” letters, requiring subcontractors of all tiers to produce evidence of DPOR licensing, one unanswered question affects jobsites around the Commonwealth: how does this new policy affect the use of temporary staffing agencies?  

The prevalence of temporary labor in the construction industry is nothing new.  Skilled or unskilled, temporary workers perform numerous roles on construction jobsites.  As the economy has fluctuated, some smaller contractors have outsourced their entire labor forces to temporary staffing agencies, enabling them to reduce overhead while maintaining a ready supply of workers on an as-needed basis.  Because most temporary staffing agencies do not consider themselves “contractors”, they do not hold contractor’s licenses through DPOR.  However, if temporary staffing agencies are indeed “contractors” requiring licensure, then entities who contract with them risk fines and jeopardize their own licensure. ii  Contractors who use temporary staffing agencies (or who use subcontractors who use such agencies) are becoming increasingly concerned about potential penalties for engaging unlicensed subcontractors.  

  1. Virginia’s Definition of a “Contractor”:  

There is no Virginia authority regarding whether temporary staffing agencies must possess contractor’s licenses.  Other states, such as California, by statute define “contracting” to include temporary labor services, but exempt these entities from licensure as long as the temporary employees work under the supervision of a licensed contractor.  Virginia’s contractor licensing statutes and regulations do not similarly state whether temporary staffing agencies fall within the definition of “contractor” or otherwise require licensure.  iii  There also are no Virginia court decisions on the issue, iv and neither the Department nor DPOR have clarified whether they consider temporary staffing agencies to be “contractors” requiring licensure.  Presently, the only guidance regarding whether Virginia courts will require contractor licensure for temporary staffing agencies comes from look at how other jurisdictions have answered the question.  Courts in two other states, West Virginia and Alabama, have found that temporary staffing agencies were required under applicable state law to possess contractor’s licenses.  

  1. In West Virginia, a temporary staffing agency supplying workers to a construction project must have a contractor’s license.  

In Personnel Temporary Services v. West Virginia Division of Labor Contractor Licensing Board, v the Supreme Court of West Virginia found a temporary staffing agency to be a “contractor” within the meaning of West Virginia’s Contractor Licensing Act. 

The Court focused, not on the specific trades the employees were performing (in that case, building demolition), but on the more general consideration that they were engaged in construction work, which the Court viewed as inherently “more risky than traditional temporary agency services such as secretarial work.”  The Court noted that because workers performing construction are more likely to be injured on the job, contractors are required to contribute at a higher rate to West Virginia’s Workers’ Compensation Fund (the “Fund”).  By misclassifying its workers, PTS was evading higher taxes while simultaneously exposing its employees to a high risk of injury.  The Court based its finding that PTS was a “contractor” requiring licensure on three policy considerations:  the inherent unfairness to the state of West Virginia, which would be forced to pay workers’ compensation benefits to injured PTS workers despite receiving fewer Fund contributions from PTS; unfairness to other subcontractors who were economically disadvantaged in bidding against PTS because they contributed to the Fund at a higher rate “commensurate with the risky nature of construction work”; and unfairness to the public, “who ultimately bear the burden of unfair rate shifting and unfair bidding practices”.

  1. In Alabama, a temporary staffing agency supplying “non-menial” labor to a construction project must hold a contractor’s license.  

The Supreme Court of Alabama found in White-Spunner Construction, Inc. v. Construction Completion Company, LLC vi that a “labor broker” who provided temporary employees to a subcontractor on a construction project located in Alabama required licensure pursuant to the state’s contractor licensing laws.

The Alabama court took a narrower approach than the court in Personnel Temporary Services, focusing on the type of construction work the temporary laborers were performing.  Because the temporary workers were framing a building, which the Alabama Licensing Board for General Contractors recognized as a “construction activity”, the staffing agency was required to possess a license.  The court suggested its ruling would be different if the employees were instead working as “consult[ants], equipment installers, or performers of menial labor.”  The Court also rejected the theory that the temporary employees were covered under the subcontractor’s own contractor’s license.

  1. A Virginia Court deciding whether a temporary staffing agency requires a contractor license might look to Personnel Temporary Services and White-Spunner for guidance.  

Although Virginia courts are not required to follow decisions by courts in other jurisdictions, they often refer to such decisions when no Virginia court has ruled on an issue.  A Virginia court considering whether a temporary staffing agency requires licensure under Virginia law—which has not yet been decided in Virginia—might look to Personnel Temporary Services and White-Spunner for guidance, especially because all three states have similar contractor licensing statutes.    

Personnel Temporary Services, could be particularly influential to a Virginia court because the policy considerations relied upon by the court in that case mirror the Department’s reasons for combating worker misclassification in Virginia.  For example, the Department has underscored that worker misclassification “cheats honest employers and contractors who property classify employees, since employers who misclassify can undercut their bids due to lower operating costs,” “deprives the Commonwealth of millions of dollars in tax revenues, and prevents workers from receiving legal protections and benefits.” vii  Executive Order 24, which establishes the joint task force, cites similar concerns. viii  Additionally, a Virginia court might be persuaded by Personnel Temporary Services because both Virginia and West Virginia are located in the federal Fourth Circuit.  

In Personnel Temporary Services, one stated purpose of contractor licensure is ensuring that employers are held accountable for the increased risk of injury associated with sending employees to a construction site, an inherently dangerous workplace.  Under this theory, temporary staffing agencies should hold Virginia contractor’s licenses if their employees work on construction sites at all, regardless of the specific types of work they perform.  However, Alabama’s approach in White-Spunner was to require licensure only for temporary labor agencies that supply workers skilled in a particular trade.  Applying this philosophy, Virginia staffing agencies supplying general laborers ix who perform “menial” work may not require licensure.  

  1. What Should Virginia Contractors Do?  

Until the Department, Virginia General Assembly, or Virginia judiciary clarifies whether and in what circumstances temporary staffing agencies fall within Virginia’s contractor licensing laws, it is unclear whether temporary staffing agencies supplying employees to construction projects in Virginia must be licensed contractors.  Absent such clarification, Virginia contractors can only speculate whether they can legally contract with unlicensed temporary staffing agencies to provide labor for construction projects.  In the meantime, there is little contractors can do to entirely insulate themselves from liability, other than the extreme and impractical decision to refrain from contracting for temporary labor altogether.  

One option is for contractors to require temporary staffing agencies to certify in writing that they are not required to have a contractor’s license and to indemnify the contractor for any financial damages it suffers related to the certification.  In requiring such a certification, contractors should explain in writing that they will rely on the agency’s affirmations regarding licensure for their own licensure compliance.  However, even if temporary staffing agencies are willing—and financially able—to provide such certifications and indemnity, this option may be of limited benefit to contractors.  First, it is unclear whether certifications from staffing agencies will be of any value during Department audits, given that the new policy eliminates penalty reductions for “good faith” violations.  Second, while indemnification could be sufficient to cover fines imposed on the contractor by DPOR or other state agencies, in most cases it cannot compensate a contractor for the devastating effects of losing its own contractor’s license.  

Given all of the uncertainty surrounding this issue and the considerable penalties for violating Virginia’s contractor licensing laws, construction contractors who do business with temporary staffing agencies in Virginia should consider all associated risks, and may consider requesting that their representatives in the General Assembly take action to clarify this important issue.