Renewable energy developers and contractors have been anticipating the Treasury Department and IRS’s initial guidance on what is required to satisfy the prevailing wage and apprentice requirements under the Inflation Reduction Act (IRA). To take advantage of these tax incentives, renewable energy developers and contractors must ensure their projects meet certain requirements, including paying a “prevailing wage” to workers, employing certain percentages of apprentices, and maintaining required ratios through registered apprenticeship programs.
On November 30, 2022, this guidance was published in the Federal Register. Under the IRA, the prevailing wage and apprenticeship requirements go into effect sixty days after publication, which is January 29, 2023.
While this date is fast approaching, there is no need to panic yet. As an initial matter, the guidance confirmed that projects for which construction begins before January 30, 2023 will be exempt from prevailing wage and apprenticeship requirements and automatically qualify for the 30% investment tax credit. The guidance reaffirmed longstanding pre-IRS rules for determining when “construction begins” – either when physical work of a significant nature begins or, under the safe harbor, when 5% or more of the total cost of the project or facility is incurred subject to continuous construction or efforts requirements.
While many in the renewable energy industry hoped the guidance would provide much needed practical instructions and directives as to how to comply with the prevailing wage and apprenticeship requirements, it is largely a recitation of the IRA provisions themselves, and provides little clarity on implementation. However, the guidance does indicate that the Treasury and IRS may issue later regulations and additional guidance about the prevailing wage and apprenticeship requirements.
So, what does this initial guidance say?
The IRA states clearly that laborers and mechanics employed by the taxpayer (the owner of the project when placed in service) and all contractors and subcontractors engaged by the taxpayer must be paid prevailing wages of the locality for the specific profession and classification during construction, alteration, or repair of a covered facility. “Employed” for purposes of prevailing wage requirements is broadly defined, and includes any individual who gets paid money for their services, regardless of whether the individual is an employee or independent contractor under the IRS or other traditional tests. Importantly, based on this initial guidance, and unlike the requirements of the Davis-Bacon and Related Acts (DBRA), the IRA does not appear to require certified payroll be submitted to the U.S. Department of Labor (DOL) – but the guidance otherwise adopts the definitions of some fundamental terms including “wages,” “laborer,” and “construction” from the DBRA.
In describing how stakeholders will determine the applicable prevailing wage, the guidance directs taxpayers to wage determinations published by the U.S. Secretary of Labor at www.sam.gov. If a particular type of construction project, geographic area, job, or classification is not listed there, taxpayers are instructed to request a wage determination or rate from the DOL via email at IRAprevailingwage@dol.gov, making sure to provide enough information in the email (type of construction, geographic area, job description and duties) to assist the DOL in providing a determination. There is no indication in the guidance as to how much time the DOL will be given to respond, or whether there will be a deadline, nor is there indication as to whether the DOL’s judgment calls will be published for other taxpayers who may have similar requests. It does not appear that the process will be as formal as the current Opinion Letter process, and the guidance does not contain the same advisement not to include privacy, trade secretion or confidential commercial information as it may be incorporated into the DOL’s response, which is made available to the public, as the Opinion Letter process dictates.
The guidance admonishes taxpayers to maintain scrupulous records to support or establish that prevailing wage requirements have been satisfied. Although it is unclear whether the records will be subject to an audit initiated by the DOL, developers and contractors should maintain sufficient records in the event of such audit – or more likely, an IRS audit of claimed tax credits.
Opportunity to cure prevailing wage shortfalls
Although the guidance does not expound on the topic, the text of the IRA itself allows a taxpayer to cure a failure to satisfy prevailing wages through catch up payments, with interest, to each worker paid below the prevailing wage and penalty payments to the IRS that amount to $5,000 per affected worker. Higher payments to workers (3x the difference between actual and prevailing wages) and higher penalties ($10,000 per affected worker) apply where the failure to pay prevailing wages is the result of an intentional disregard of the regulations and payments and penalties are due within 180 days of a violation determination.
This opportunity to cure is likely to be a key element of many project agreements during initial implementation of IRA prevailing wage requirements, as developers and contractors negotiate allocation of the risks around assumptions of wage rates prior to DOL determinations.
The apprenticeship provisions generally require (1) that a certain percentage of the total labor hours for construction, alteration or repair of a covered facility must be performance by qualified apprentices; (2) taxpayers (and their contractors and subcontractors) who employ 4 or more individuals must also employ at least 1 qualified apprentice; and (3) taxpayers must maintain the required ratio of journeymen to apprentices for the duration of the project. The following journeyman to apprentice ratios apply based on when construction begins:
- Where the construction begins before January 1, 2023: at least 10% qualified apprenticeship labor;
- Where the construction begins after December 31, 2022, and before January 1, 2024: at least 12.5% qualified apprenticeship labor; and
- Where the construction begins after December 31, 2023: at least 15% qualified apprenticeship labor.
Notably, these percentages exclude management and administrative personnel (for example, foremen, superintendents, and owners or persons employed in bona fide executive, administrative or professional capacity).
Like the prevailing wage provisions, “employ” under the apprenticeship requirements is broadly defined and means any individual who gets paid money for their services, regardless of whether the individual is an employee or independent contractor under the IRS or other traditional tests. And, consistent with the prevailing wage provisions, taxpayers are admonished to maintain sufficient records to support that apprenticeship requirements have been met or a good faith effort exception, as described in further detail below, applies.
The guidance further provides that to comply, taxpayers must employ apprentices through a “registered apprenticeship program” meaning one registered under the National Apprenticeship Act or by the DOL. Thus, the taxpayer’s options for apprenticeship compliance are: (1) utilize an established state-registered apprenticeship program; (2) establish your own proprietary program that meets the necessary requirements; or (3) work with industry associations who have existing registered apprenticeship programs.
Good faith effort exception to apprenticeship requirements
A taxpayer will be deemed to have satisfied apprenticeship requirements if the taxpayer requests qualified apprentices from a registered program and receives either no response within five business days of receipt, or the request is denied if such denial is not the result of the taxpayer’s, or its contractors and subcontractors, refusal to comply with the standards of the registered apprentice program.
Overall, while this initial guidance starts the clock toward required compliance with IRA prevailing wage and apprenticeship provisions, it still leaves renewable energy developers and contractors with significant uncertainty in practical compliance.
Remaining uncertainties include:
- What is the process for assessing whether a penalty is owed?
- Is there a timeline within which to expect a response from the DOL regarding wage determination/rate request?
- Will the DOL publish determinations provided in response to individual requests for the benefit of the full industry?
- Are there reporting requirements or new forms or schedules that will be required to certify compliance with prevailing wage and apprenticeship requirements?
As these requirements begin to go into effect, the renewable energy industry will be dependent upon DOL response times to fill in remaining compliance questions and gaps. And we can also expect additional, forthcoming regulations and guidance from Treasury and the IRS.
But for the time being, renewable energy developers and contractors should take note of the following practical points:
- If your project begins before January 30, 2023, you are exempt from the prevailing wage and apprenticeship requirements.
- The beginning of construction can be established based on the physical work test or the 5% safe harbor subject to continuous efforts or continuous construction requirements.
- The DOL has published FAQs for apprenticeship requirements here; and for prevailing wage requirements here.
- You should keep meticulous records to support that prevailing wage and apprenticeship requirements have been satisfied or that a good faith exception applies. Your records should, at minimum, include the names of workers, duties and responsibilities, work performed, and wages paid for all workers employed on the project.
Now that initial guidance has been issued, renewable energy developers and contractors can put plans in place to implement appropriate structures for compliance with IRA prevailing wage and apprenticeship requirements. Parties should pay particular attention to incorporation of these requirements in EPC and O&M agreements, as well as all downstream subcontracts. Sophisticated developers and contractors should create and implement compliance programs to ensure appropriate record-keeping to substantiate their payment of prevailing wages and use of appropriate apprenticeship programs.
Republished with permission. This article, "The clock is ticking on the IRA’s prevailing wage and apprenticeship requirements," was published by PV Magazine on December 8, 2022.