General contractors and subcontractors often retain companies and individuals to perform part of their scope of work. This can be done, obviously, by hiring employees or by hiring independent contractors. The question of whether an “independent contractor” is in fact an independent contractor is a repeat arena for disputes and risk in the form of wage and hour claims, regulatory enforcement, and exposure to tax liability and penalties.

A recent high-profile case illustrates the stakes for builders and contractors and offers some specific guidance on how to address these thorny issues. Village Concrete Inc., a Manassas-based contractor, was ordered to pay nearly $1.2 million in back wages, damages, and penalties after allegedly misclassifying 29 employees and failing to pay proper overtime. As Virginia continues to strengthen its enforcement of worker classification laws, construction companies must navigate this evolving landscape with care.

Why Use Independent Contractors?

Construction companies often turn to independent contractors for strategic and operational advantages, including:

• Cost Savings: Employers avoid paying payroll taxes, unemployment insurance, workers’ compensation, and employee benefits such as health insurance or retirement contributions. Eliminating these mark-up costs can reduce overall labor costs by as much as 20–30%.
• Workforce Flexibility: Independent contractors offer increased scalability. Construction companies can quickly ramp up or down based on project timelines, seasonal or marketplace demand, or budget constraints without the obligations of hiring or terminating employees.
• Specialized Skills: Contractors often bring niche expertise (e.g., electrical, HVAC, masonry) they may not need full-time on a project. Hiring them on a per-project basis allows firms to access specialized talent without long-term commitments.
• Reduced Administrative Burden: Construction companies avoid employee onboarding, training, HR management, and other responsibilities typically associated with employees.
• Risk Transfer: Independent contractors are expected to carry their own liability insurance and assume responsibility for safety compliance, reducing the company’s direct exposure.
• Competitive Bidding: Using independent contractors enables construction firms to submit more competitive bids by lowering labor overhead and offering flexible staffing models.

These potential benefits come with legal and financial risks.

The Cost of Misclassification

Misclassification is seen as denying workers access to critical protections such as overtime pay, workers’ compensation, unemployment insurance, and employer-sponsored benefits. For employers, the consequences of misclassification can be severe. Misclassifying employees as contractors can result in significant liability for unpaid wages, taxes, penalties, and damages—especially under federal law and Virginia’s increasingly strict enforcement regime. Depending on the facts, wage and hour claims can include liability for multiples of claimed damages and exposure to attorney’s fees recovery. In addition, Virginia law presumes that anyone paid for services is an employee unless the employer can prove otherwise using IRS guidelines. This presumption shifts the burden of proof squarely onto the employer, making misclassification a costly gamble.

Federal and State Legal Frameworks

At the federal level, the Fair Labor Standards Act (“FLSA”) governs worker classification. In 2024, the U.S. Department of Labor reinstated the “economic realities” test, replacing the more lenient 2021 rule. The economic realities test evaluates whether a worker is economically dependent on the employer, considering factors such as control over work, opportunity for profit or loss, and the nature of the working relationship. Employers should keep in mind that this standard has been subject to changes by the courts, becoming more or less restrictive over time, a trend that is likely to continue.

The Fourth Circuit’s Six-Factor Economic Realities Test

The Fourth Circuit Court of Appeals, which covers Virginia, recently reaffirmed the importance of the economic realities test in the case of Chavez-Deremer v. Medical Staffing of America, LLC. In this case, Medical Staffing of America (“MSA”), a healthcare staffing agency, was found to have misclassified over 1,100 nurses, resulting in a $9.3 million judgment for unpaid overtime and damages.

In the case, the Court applied the six-factor economic realities test to determine whether the nurses were employees:

1. Degree of Control
   • MSA dictated nurse schedules, attire, conduct, and disciplinary procedures.
   • Nurses had to report absences or tardiness to MSA, not the client facility.
   • Construction Industry Implication: If your company controls when, where, and how contractors work — including safety protocols, shift timing, and site behavior — this suggests employee status.
2. Worker’s Opportunity for Profit or Loss
   • Nurses could not negotiate their pay or influence profitability beyond working more hours.
   • MSA set fixed rates and retained a portion of the client’s payment.
   • Construction Industry Implication: Contractors should manage their own profit/loss—e.g., by negotiating rates, hiring helpers, or managing expenses. Fixed pay with no entrepreneurial discretion leans toward employee status.
3. Investment in Equipment or Materials
   • MSA provided insurance and did not require nurses to invest in their own tools or liability coverage.
   • Construction Industry Implication: Contractors should supply their own tools, vehicles, and insurance. If your company provides these, it may suggest an employment relationship.
4. Special Skill Required
   • While nursing requires licensure, the court emphasized that the nurses’ skill set was not used in an independent business capacity.
   • Construction Industry Implication: Skilled trades (e.g., electricians, masons) may qualify as independent contractors if they operate independently. But if your company assigns tasks and supervises work, this factor may not support contractor status.
5. Permanency of Relationship
   • Many nurses worked with MSA for years. MSA maintained employment-style records and enforced non-compete clauses typically found in employment agreements.
   • Construction Industry Implication: Long-term, exclusive relationships with independent contractors — especially if it is for work full-time or restricts the contractor from working elsewhere — suggest employee status.
6. Integral Part of Business
   • Nurses were deemed central to MSA’s business model. Contracts referred to nurses as “employees” and barred facilities from hiring them directly.
   • Construction Industry Implication: If contractors perform core functions of your business (e.g., framing, roofing, plumbing), they may be deemed employees. Peripheral roles (e.g., occasional consultants) are less likely to trigger this factor.

No single factor of the economic realities test is decisive, according to the Fourth Circuit; courts assess the totality of circumstances using all six factors. In Chavez-Deremer, the court found that MSA exercised significant control over the nurses, set their pay rates, and enforced workplace policies—hallmarks of an employment relationship.

Good Faith Defense Rejected

MSA argued that it relied on legal advice and believed its classification was lawful. The court rejected this defense because:

• MSA ignored Department of Labor warnings.
• Continued using employment-style contracts and non-compete clauses.
• Failed to adjust its practices after receiving legal advice.

Best Practices and Recommendations for Virginia Construction Companies

To navigate the complex legal landscape surrounding worker classification, Virginia construction firms should adopt proactive compliance strategies. Here are key best practices to reduce the risk of misclassification and its costly consequences:

• Conduct Regular Classification Audits
  Review all independent contractor relationships periodically. Use both IRS guidelines and the economic realities test to assess whether workers are properly classified. Document the rationale for each classification decision. Consider using either legal counsel or outside HR consulting expertise to review these decisions carefully.

• Use Clear, Written Contracts
  Ensure that contracts with independent contractors clearly define the scope of work, payment terms, and the contractor’s autonomy. Avoid clauses that suggest employer-like control, such as mandatory schedules or exclusive service requirements.

• Avoid Employer-Like Control
  Independent contractors should control how, when, and where they perform their work. Avoid providing tools, equipment, uniforms, or training that would suggest an employment relationship.

• Train Supervisors and Project Managers
  Educate staff on the legal distinctions between employees and contractors. Supervisors should understand what behaviors—such as directing daily tasks or enforcing company policies—could trigger reclassification.

• Consult Legal Counsel
  Before engaging contractors for long-term or integral roles, consult with legal counsel familiar with Virginia and federal labor laws. Legal review can help ensure contracts and working arrangements comply with the latest standards.

• Stay Informed on Legal Developments
  Monitor updates from the Virginia Department of Labor and Industry (DOLI) and the U.S. Department of Labor. Laws and enforcement priorities can shift, especially in response to court rulings like Chavez-Deremer.

• Consider Using a Third-Party Compliance Service
  For larger firms or those with complex subcontracting arrangements, third-party services can help manage classification, payroll, and benefits compliance.

Conclusion

Worker misclassification remains a pressing issue in Virginia’s construction industry, with significant legal, financial, and reputational consequences for businesses that fail to comply with federal and state labor laws. As enforcement intensifies and legal standards evolve, construction firms must take proactive steps to ensure proper classification of their workforce. By understanding the applicable laws, applying the economic realities test, and implementing best practices, companies can mitigate risk, protect workers, and maintain compliance. The stakes are high, but with diligence and informed decision-making, Virginia’s construction businesses can navigate this complex landscape successfully.

If you have questions about any DMV construction issues, please feel free to reach out Timothy Hughes at Bean, Kinney & Korman, P.C. at (703) 526-5582, thughes@beankinney.com. Please reach out to Doug Taylor on employment and immigration issues, (703) 526-5586, rdtaylor@beankinney.com. Our firm practices in Virginia, Maryland, and the District of Columbia in addition to various other jurisdictions.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.