Starting January 1, 2023, Virginia law mandates specific payment terms in agreements between owners and contractors, and agreements between contractors and subcontractors of any tier. New code provisions effective this year also eliminate the enforceability of “Pay-when-paid” or “Pay-if-paid” clauses frequently found in subcontract agreements. These changes in Virginia law, coupled with the general contractor wage guarantee provisions effective since 2020, require that all general contractors and home builders review their form agreements to confirm compliance. Non-compliance could result in interest assessments and penalties for what was, until this year, perfectly legal and standard contract administration.
The 2020 changes to Virginia Code Section 11-4.6 make general contractors jointly liable for the wages of their subcontractor’s employees and could result in the imposition of penalties and fines against general contractors if the subcontractor’s employees are not paid their contract or minimum wages. While the statute requires subcontractors to indemnify general contractors for their failure to pay these wages to their employees, that will serve little comfort to general contractors facing these claims from their subcontractors’ employees. General contractors should strongly consider requiring subcontractors to include in their applications for payment affidavits that the subcontractor has paid their employees their due wages through the date of submission.
As indicated above, the 2023 changes to Section 11-4.6 dictate that project owners include in their construction agreements with their general contractors “a provision that requires the owner to pay the general contractor within 60 days of receipt of an invoice following satisfactory completion of the portion of work for which the general contractor has invoiced.” In turn, general contractors must pay their subs (and subcontractors must pay sub-subs, etc.) within 60 days of the receipt of an invoice for completed portions of work, or within seven days after the general contractor has been paid by the owner, whichever is sooner. Though the code includes some exceptions, contract provisions requiring payment by the higher tier as a condition of payment to the lower tier are no longer enforceable. Failure to make payment in the time period required could result in interest penalties applied to the payor.
Again, the 2023 amendments to Section 11-4.6 mandate that contracts made after January 1, 2023, contain the 60-day payment provisions. If your organization utilizes a form construction agreement, either as a property or project owner, general contractor, or higher-tier subcontractor, it is critical that it be reviewed for compliance on all new contracts. Well-advised general contractors and higher-tier subcontractors very likely are utilizing form agreements with pay-when-paid provisions that are no longer enforceable and should have those forms reviewed for compliance with these changes. Contractors of all tiers should also modify agreements to include new “wage payment confirmations” when receiving applications for payment from lower tiers to avoid wage claims from non-employees.
Finally, the effect of these statutory changes could result in an increased likelihood of a general contractor having to pay a subcontractor for work performed, despite non-payment by the owner. General contractors must be wary of this possibility and ensure that their agreements enable them to terminate for cause in these situations.