LEGAL ALERT©: Temporary staffing agencies may require contractor licensure, depending upon project location, and the answer in Virginia remains unclear

This alert summarizes a complex issue that is the subject of a more detailed overview prepared by Gretchen Ostroff, a member of the Vandeventer Black Construction and Government Contracts Practice Group. Gretchen’s detailed overview is available on the firm website.

THE ISSUE:              

Virginia’s contractor licensing requirements do not specifically address licensure of temporary staffing agencies; but several other states with similar licensing requirements have held that temporary staffing agencies must be licensed as contractors if they supply laborers to construction projects. Lack of licensure subjects the temporary staffing agencies, those hiring them, and potentially contractors at higher tiers, to potential criminal violations, as well as administrative penalties such as fines, suspension, or license revocation.  

WHY NOW?        

Responding to the Governor’s earlier Executive Order, the Virginia Department of Labor and Industry (“VDOL”) recently issued a policy memorandum outlining its commitment to prevent “worker misclassification” for “independent contractors”, who VDOL interpreted as actually being “employees”. An inter-agency task force was established in conjunction with that worker misclassification prevention effort, which includes the Virginia Department of Professional and Occupational Regulation (“DPOR”). 

Associated 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 acting in good faith. While independent contractors were specifically targeted, temporary laborers were not specifically addressed.

The prevalence of temporary labor in the construction industry is nothing new. Skilled or unskilled, temporary workers perform numerous roles on construction jobsites. Various contractors at all tier levels often wholly or partially outsource project labor, among other things 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 typically do not hold contractor licenses through DPOR. 

WHAT ABOUT VIRGINIA? 

There are some states that statutorily address temporary labor services for contracting purposes. For example, California law defines “contractor” as including temporary labor services. Typically, though, even if addressed such as in California, licensure is not required for the temporary labor company if the temporary employees work under the supervision of a licensed contractor. 

Two recent state courts, West Virginia and Alabama, have looked at the question where temporary labor services were not statutorily addressed. While using different analyses, both courts held that temporary staffing agencies required contractor licensure.  Of note, the contracting licensure requirements of those states were similar to Virginia’s statutes and regulations.

In the West Virginia case, the court took a broad view of temporary laborers, and concluded that since the temporary workers were engaged in construction work, it did not matter in what particular trade they were performing – licensure was required. The Alabama court took a more narrow view that focused on the particular “construction activity” involved, and indicated that, for example, menial labor might not require temporary agency licensure, but that for typical construction activities, licensure was required.

So where does that leave Virginia? That remains the unanswered question. In contrast to states like California, Virginia’s statutes and regulations are silent regarding temporary staffing and, unlike West Virginia or Alabama, there are no reported cases yet addressing this question. Nor, yet, has either VDOL or DPOR stated their positions. But it should be noted that the stated rationales of the task force for its worker misclassification concerns included similar rationales to those used by both the West Virginia and Alabama courts.

Until Virginia addresses the issue by statute, regulation, or case holding, the outcome in Virginia remains uncertain-- putting both temporary labor agencies and the contractors that use/allow them at risk.

THE OPTIONS:

Short of advocating for legislative or regulatory change, the options are limited. One option is for temporary labor agencies to obtain licensure. That is the most certain approach for both the temporary labor agency and any contractor using temporary labor. A second option is to presume licensure is not required until a contrary ruling is made, and hope licensure is deemed not required.

However, that second approach places both the temporary labor agency and the hiring contractor (and higher tier contractors) at significant risk. Even if the temporary labor agency and the contractor determine licensure is not required, DPOR may not agree. That puts them, and potentially contractors at higher tiers, at risk for violating the law; for which the fines and punishments can be severe, in addition to putting them at risk for associated contract breach damages.