The Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) issued proposed regulations on August 29, 2023 for prevailing wage and apprenticeship (“PWA”) requirements applicable to clean energy projects seeking to qualify for the 5x increased tax credit amounts under the Inflation Reduction Act of 2022. Among other things, the regulations:

• provide further clarification on determining prevailing wage compliance, including in cases where the available data is incomplete;
• clarify that “construction, alteration or repair” would exclude routine maintenance work after a project is placed in service;
• provide further clarification on how the apprenticeship requirements are met;
• clarify that the “good faith” apprenticeship exception is limited to 120-day periods and requires more significant effort than many had anticipated;
• clarify that the Ratio Requirements (defined below) are tested on a daily basis;
• provide more in-depth reporting requirements for both prevailing wage and apprenticeship; and
• confirm that sellers in transferability transaction under section 6418 of the Internal Revenue Code (the “Code”) remain obligated to make cure payments to correct PWA failures.

Below is a more detailed summary of key provisions in the Proposed Regulations as well as our initial observations.

Background on prevailing wage and apprenticeship

• Significance of PWA: The tax credit rate for most clean energy tax credits is increased by 5x if the underlying project meets the PWA requirements, has a maximum net output of less than 1 MWac, or commences construction before January 29, 2023.
• Prevailing Wage Requirement: The project owner (and its contractors and subcontractors) must ensure that laborers and mechanics employed in the construction, alteration or repair of the project are paid wages at prevailing rates for similar work in the location of the project site as determined by the Department of Labor (the “DOL”). The focus is on physical work during construction and alterations and repairs after the project is placed in service.
• Apprenticeship Requirement: Each project owner (and its contractors and subcontractors) who employs four or more individuals in construction, alteration or repair must:

(i) participate by employing one or more “qualified apprentices” (the “Participation Requirement”);

(ii) satisfy the required ratio of journeyworker-to-apprentice based on the location of the project and as determined by the DOL or the applicable state agency (the “Ratio Requirement”); and

(iii) ensure that at least the “applicable percentage” of total labor hours in the construction, alteration or repair of the project are performed by qualified apprentices (the “Labor Hours Requirement”).²

The prevailing wage regulations

• How to Determine Wages:

• General Wage Determinations: If the DOL has published a wage determination on www.sam.gov (or another approved website): (i) for the geographic area and type or types of construction applicable to the facility, and (ii) the determination includes all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics, then:

• taxpayers (and their contractors and subcontractors) can rely on the general wage determinations in effect when construction begins, and generally do not need to update rates even if a new general wage determination is published by the DOL while construction is ongoing; and
• new wage determinations are only required for alteration or repair work after construction is complete (i.e., after placement in service), when a contract is extended for an additional period, or when the scope of services is expanded from the original contract.

• Supplemental Wage Determinations: If the DOL: (i) has not published a wage determination on www.sam.gov (or another approved website) for the geographic area and type or types of construction applicable to the facility, or (ii) one or more labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics is not listed, then the taxpayer is required to contact the Department of Labor, Wage and Hour Division via email at IRAprevailingwage@dol.gov to ask for a supplemental classification. The proposed regulations permit any interested party to appeal any such determination in accordance with existing Davis-Bacon Act procedures.

• The DOL believes that most taxpayers will not need to use this process.
• Taxpayers should make a request no more than 90 days before the beginning of construction, alteration, or repair of a facility, or, if after work has begun, they should submit the request as soon as possible.
• Taxpayers who receive a DOL determination after work has begun are not subject to the penalty procedures, described subsequently, if they make corrective payments to the applicable workers within 30 days of receiving the determination.

Observation

Because any interested party can appeal a DOL determination, it is not clear how a taxpayer proceeds if there is such an appeal, and if the answer differs if the taxpayer or another interested party makes the appeal. If the taxpayer is required to pay the wages determined by the DOL, the taxpayer may want to consider including a contractual clawback of any wages that are later reduced upon an appeal to the DOL.

• Scope: The term “construction, alteration, or repair” does not include maintenance work after placement in service that is ordinary and regular in nature (e.g., basic maintenance); the terms are more focused on work that improves, adapts or restores functionality to a facility.

Observation

The clarification of the term “construction, alteration, or repair” is helpful because many had assumed that virtually any post-placement in service site work under an operation and maintenance agreement would be subject to the prevailing wage requirements. This term applies equally to the apprenticeship requirements.

• Facilities spanning multiple geographic locations: If a project spans two or more geographic locations that each have published wage determinations, the taxpayer may request a supplemental wage determination or ensure that laborers and mechanics are paid wages at the highest rate for each classification provided under the general wage determinations. Otherwise, a taxpayer may pay the highest of the potentially applicable rates.

• Some facilities could have more than one PWA determination apply if there is a secondary construction site (i.e., a site where a significant portion of the project is constructed that was either established specifically for the performance of the construction or is dedicated almost exclusively to the project). In such cases, the taxpayer must pay prevailing wages to the workers at such site in accordance with the prevailing rates for that geographic location.

• Paying prevailing wages: Payment must be made in accordance with the regular payroll practices of the taxpayer, contractor or subcontractor.
• Recordkeeping Requirements: The proposed regulations list 9 items of information that constitute sufficient documentation of prevailing wage compliance. Examples include the applicable wage determinations, wages paid and hours worked for the applicable worker classification, and correction payments (described subsequently) made. Taxpayers are expected to maintain payroll records substantiating this information.

Observation

The items above are described as what sufficient records “may include” to ensure compliance. The list does not appear intended to be exhaustive or to necessarily require taxpayers to keep records of each item. Nonetheless, project owners concerned about PWA compliance will likely want to keep as comprehensive a set of these items as reasonably practicable.

• Penalties: Failing to satisfy prevailing wage requires two types of “cure” payments to maintain eligibility for the 5x credit: (i) the applicable workers must be paid the difference between what they received and what they should have been paid according to the prevailing wage rates, plus interest, and (ii) a penalty payment to the IRS on a per-worker basis. In the case of intentional disregard, corrective payments are tripled and penalties are doubled.

• Although the wage and penalty payments are not due until the taxpayer claims the increased credit (or transfers it as part of a transferability transaction) on its tax return, a taxpayer may make cure payments at any time in order to reduce interest owed. Otherwise, a taxpayer is obligated to make the cure payments on or before the date the tax return is filed, and to make penalty payments with its return.
• If a taxpayer is unable to locate the workers to make the corrective payments, the taxpayer must comply with the rules established by the applicable State for payments to workers who cannot be located.
• The project owner is ultimately responsible to ensure that prevailing wage requirements are satisfied, which means that it is the entity responsible for any cure payments. This is the case even where the project owner sells the tax credits in a transferability transaction.

Observation

State compliance costs likely vary; the proposed regulations note that they could include diligence, information reporting, or compliance with unclaimed property procedures. A taxpayer must also be able to satisfy the IRS that it complied with the applicable state rules on audit, which may require educating the auditor on such requirements. Given the uncertainty in this area and the potential variance from state to state, hopefully Treasury will provide more certainty about what a taxpayer must do and the information it must retain with respect to these workers in the final regulations.

• Effect of Pre-Hire Project Labor Agreements: They allow a project owner to defer penalties until the tax return is filed for purposes of claiming an increased credit amount; however, interest will accrue on such wages, and any corrective payments to underpaid workers must be made before the date the project owner claims the increased credit on its tax return.

Observation: The rule for project labor agreements is intended to encourage upfront compliance on a programmatic basis. However, the requirement that any corrective cure payments be made before the tax return is filed for the credit effectively limits the benefit of this rule to the first 3-10 months after the year in which the project is placed in service.

The apprenticeship regulations

• Apprenticeship Requirements: The guidance confirms that the Labor Hour Requirements, Ratio Requirements, and Participation Requirements are each independent parts of the test. Failure to satisfy one will cause a project owner to fail the apprenticeship requirements.
• Daily Testing for Ratio Requirement: The ratio of apprentices-to-journeyworkers on the job site “on any day” must satisfy the applicable requirements of the DOL.

Observation: Daily testing for the Ratio Requirements seems potentially draconian considering that an entire day’s worth of apprentice hours is potentially wasted for PWA purposes if a single journeyworker (i.e., an apprentice supervisor) calls out sick, throwing the ratio off balance, in which case the apprentice would also have to be paid prevailing wages for any work performed. That said, it is unclear how much leeway Treasury has in deviating from labor requirements that are presumably intended to ensure safety and adequate supervision at the job site.

• Clarification of Good Faith Effort Exception:

• To meet the exception, the project owner, contractor, or subcontractor must make a written request to a registered apprenticeship agency (a “RAP”) which:

(i) is located in the geographic location of the project or can reasonably be expected to provide apprentices to the location of the project;

(ii) trains apprentices in the occupations needed by the project owner, contractor or subcontractor for the construction; and

(iii) has a usual and customary business practice of entering into agreements with employers for the placement of apprentices in the occupation for which they are training, pursuant its standards and requirements.

• Requests to multiple RAPs are required if the RAP does not train apprentices in the needed trade or if the RAP would not have enough apprentices to satisfy the request.
• Written requests must include the following information with respect to apprentices requested:

(i) Dates of employment;

(ii) Occupation(s) or classification(s) needed;

(iii) Location and type of work to be performed;

(iv) Number of apprentices needed;

(v) Number of hours the apprentices will work;

(vi) Name and contact information of the person requesting the apprentices; and

(vii) Statement that request for apprentices is made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program.

Observation

The written request requirements effectively require the project owner (or its contractor or subcontractor) to ascertain its workforce needs in advance to: (i) determine how many qualified apprentices it needs to employ in order to meet the apprenticeship requirements; (ii) identify RAPs in the occupations needed for the work; and (iii) demonstrate capacity to employ apprentices in the occupations for which apprentices are requested.

• Good Faith Effort Exception is deemed satisfied if the taxpayer has requested qualified apprentices from a RAP as set out above and the request has been denied or the RAP does not respond within five business days—an acknowledgement of a request is not considered a denial – but the denial only applies for 120 days (four months), after which time a new written request must be submitted.

Observation

The good faith effort exception as clarified in the proposed regulations is much narrower than many in the industry had anticipated. It is only available for a short period of time (120 days), and is limited by the sufficiency of the request (e.g., if the project requires three electricians apprentices, but the taxpayer only requests two, then the exception would not apply with respect to the hours required from the third apprentice).

• Recordkeeping Requirements: As with the prevailing wage requirements, the taxpayer must maintain and preserve sufficient records to establish that the Labor Hour Requirements, Ratio Requirements, and Participation Requirements have all been met. Likewise, a taxpayer relying on the good faith effort exception must maintain and preserve sufficient records to show that the good faith effort exception applies. The regulations list five items as sufficient to demonstrate compliance.
• Penalties: The clarifications described above with respect to prevailing wage also generally apply to cure payments for apprenticeship, including that the project owner is ultimately responsible for penalties in cases where it sells the tax credit in a transferability transaction.

Footnotes

1. The prevailing wage and apprenticeship requirements apply to tax credits under sections 30C (alternative fuel vehicle refueling property credit), 45 (production tax credit), 45L (energy efficiency home credit), 45Q (carbon sequestration tax credit), 45U (nuclear power production tax credit), 45V (hydrogen tax credit), 45Y (clean energy production tax credit), 45Z (clean fuel production tax credit), 48 (investment tax credit), 48C (advanced energy project tax credit), 48E (clean electricity investment tax credit), and the energy efficient commercial buildings deduction under section 179D. Note that as drafted section 45Z provides an exception to the prevailing wage requirements but does not provide an exception to the apprenticeship requirements. The proposed regulations do not appear to address this discrepancy or comments that have been submitted regarding same (see our comment letter of June 15, 2023)

2. The “applicable percentage” is 10% for projects beginning construction before 2023, 12.5% for projects beginning construction in 2023, and 15% thereafter.