On August 16, 2022, President Biden signed into law the Inflation Reduction Act, which marks the largest investment in clean energy in US history. Principally among its objectives, the IRA aims to (a) incentivize clean energy initiatives and (b) create access for Americans to high-quality jobs and registered apprenticeships in the clean energy industry.

To achieve these goals, the IRA offers long-term support for the construction of clean energy facilities or projects through extended tax credits and ties eligibility for the full amount of such tax credits to compliance with the IRA’s “prevailing wage” and registered apprenticeship requirements. Notably, the “prevailing wage” and registered apprenticeship requirements do not apply to any qualified clean energy facility or project with maximum net output of less than 1 megawatt or if construction begins on or before January 29, 2023.

Prevailing Wage Requirements

Before the passage of the IRA, only contractors and subcontractors working on federally-funded construction projects were subject to prevailing wage requirements, per the Davis-Bacon Act. Now, the IRA extends the prevailing wage requirements of the Davis-Bacon Act in order to provide tax credit incentives to all qualified facilities—and not just federal contractors—that pay prevailing wages to laborers and mechanics performing construction, alteration, or repairs on the facility. Notably, the IRA does not require all workers at a qualified facility to be paid prevailing wages. For example, workers who perform administrative functions do not need to be paid prevailing wages.

Under the IRA, the prevailing wage is the minimum wage rate that must be paid to laborers and mechanics and is comprised of the combination of the basic hourly wage rate and any fringe benefits rate. The Department of Labor dictates the actual rate, which is calculated based on the facility’s geographic area and the type of construction involved. The Department of Labor has published prevailing wage determinations for work eligible under the IRA at SAM.gov.

The term “employer” under the IRA is somewhat of a misnomer; a worker’s classification as an employee or an independent contractor is irrelevant for purposes of meeting the requirements for the tax incentives. For this reason, the statute uses the term “taxpayer” in lieu of “employer.”

Apprenticeships Requirements

The IRA further requires that taxpayers utilize qualified apprentices to perform meaningful work on the construction of clean energy projects or facilities. A “qualified apprentice” is someone who is participating in a registered apprenticeship program.

More specifically, qualified apprentices must perform no less than the applicable percentage of total labor hours on a qualified project or facility, subject to the apprentice-to-journeyman ratios promulgated by the Department of Labor or state apprenticeship agency, as applicable. The applicable percentages for total labor hours are:

• 10% for projects that begin construction before 2023,
• 12.5% for projects that begin construction in 2023, and
• 15% for projects that begin construction after December 31, 2023.

“Labor hours” include hours devoted to the performance of construction, alteration, or repair work by any individual employed by (or working as a contractor or subcontractor for) the taxpayer, but exclude those hours worked by foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity.

Additionally, each contractor and subcontractor that employs four or more individuals to perform construction on a project or facility must employ at least one qualified apprentice to perform the work.

The apprenticeship requirements are not without exception. Taxpayers who do not, in fact, meet the apprenticeship requirements may nonetheless take advantage of the available tax credits by (1) paying a penalty to the Secretary of the Treasury in an amount equal to $50 for every labor hour that should have been performed by an apprentice but was not (or $500 per hour if the taxpayer intentionally disregarded its apprenticeship obligations); or (2) making a “good faith effort” to comply by requesting qualified apprentices from a registered apprenticeship, even if that request was ultimately denied for some reason other than the taxpayer’s own noncompliance with the program standards or requirements, or if the apprenticeship program failed to respond within five business days after receiving the request.

Recordkeeping Requirements

To qualify for tax incentives under the IRA, a taxpayer must not only pay prevailing wages and meet apprenticeship requirements, but it must also adhere to recordkeeping requirements under the statute. At present, the IRS’s guidance on these recordkeeping requirements has been minimal, requiring only that taxpayers must retain records, including books of account or records of work performed by the taxpayer’s contractors or subcontractors, that demonstrate that (1) laborers and mechanics at the qualifying site have been paid the applicable prevailing wage rate for all hours worked and (2) the apprentice requirements have been met.

The IRS previously issued guidance on the prevailing wage and apprenticeship requirements of the IRA on November 30, 2022. As taxpayers work to implement prevailing wage and apprenticeship program policies and procedures, we anticipate that the Department of Labor and other federal agencies responsible for administering the IRA will continue to release additional guidance and/or promulgate regulations further detailing the requirements of the IRA. We will continue to monitor this new statutory scheme.