Key Takeaways:

• The U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) have issued proposed regulations interpreting the Inflation Reduction Act’s (IRA) prevailing wage and apprenticeship requirements (Labor Requirements).
• Taxpayers who comply with the Labor Requirements with respect to clean energy projects can avail themselves of increased tax credits. 
• Taxpayers who fail to comply with the Labor Requirements but nonetheless claim increased tax credits under the IRA face steep penalties.
• The proposed regulations are not yet final and are subject to public review and comment prior to their finalization. There is no timeline as to when the regulations might become final.  

On August 29, 2023, the Treasury and the IRS formally proposed rules on the IRA’s prevailing wage and apprenticeship requirements. The new regulations mark the first time developers have received guidance on complying with the IRA’s requirements since November 29, 2022, when the IRS released its initial guidance on the IRA’s requirements and notified the public that those requirements would go into effect for qualified facilities beginning construction on or after January 29, 2023. A public hearing on the new regulations will be held on November 21, 2023 at 10:00 a.m. Eastern Standard Time, where the Treasury and the IRS will consider any public comments submitted.

The IRA’s Prevailing Wage Requirements
For nearly a century, the federal government has set minimum wages to be paid to certain workers on public works projects. These wages, colloquially referred to as “prevailing wages,” are determined by the U.S. Department of Labor (DOL) and are based on similar projects in the geographic region where the work is to be performed. Prevailing wages include a basic hourly rate and fringe benefit hourly rates, as set forth on rate sheets issued by the DOL. Historically, prevailing wages have only been relevant to projects covered by the Davis Bacon Act, or projects that are funded by public tax dollars.

The IRA brings a sea change to the development of certain clean energy projects by expanding the reach of prevailing wages to non-public projects. Specifically, the IRA provides taxpayers who comply with the IRA’s Labor Requirements with economic incentives through increased tax credits. The new regulations respond to certain open questions about those requirements.

Identifying the Proper Prevailing Wage 
Under the proposed regulations, prevailing wage rates are determined by the DOL in accordance with federal law. In most circumstances, taxpayers can identify the applicable prevailing wage rate by referring to the DOL’s general wage determinations, which can be found here. The regulations provide that taxpayers should use the general wage determination in effect when the construction of the qualified facility begins, and the taxpayer has no obligation to continue to update the prevailing wage to be paid based on successive general wage determinations. However, the proposed regulations do require the taxpayer to obtain a new general wage determination from the DOL’s website if the contract is modified to include additional substantial construction or to provide additional time for completion of the project.

Where, however, the work to be performed is not covered by the DOL’s general wage determination (e.g., work being performed on the qualified facility does not fall within one of the job classifications on the DOL’s general wage determination), the proposed regulations require that the taxpayer submit a request to the DOL for a supplemental wage determination or for an additional worker classification. The proposed regulations specify that the procedures for such a request will mirror the existing procedures utilized by contractors working on public works projects.

The proposed regulations also recognize that construction of some qualified facilities may span two or more geographic regions, and that one or more general wage determinations may apply to a particular project. Under these circumstances, the regulations provide that the taxpayer will be able to satisfy the IRA’s prevailing wage requirements by ensuring that laborers and mechanics are paid wages at the highest rate for each job classification provided under the conflicting general wage determinations. For offshore projects located within the outer continental shelf of the United States, the regulations permit taxpayers to use the general wage determination for the geographic region that is closest to the area in which the project will be located. The proposed regulations also provide that where the taxpayer will be utilizing a secondary construction site, laborers and mechanics working at the secondary site must be paid the prevailing wage applicable to the geographic region in which the primary site is located, provided that the secondary site was either established for, or dedicated exclusively for, the construction of the primary facility. 

Corrections and Penalties
The IRA permits taxpayers to correct certain noncompliance if the taxpayer makes correction and penalty payments. Upon the filing of a tax return containing the increased tax credit, the taxpayer is responsible for demonstrating that it has complied with the IRA’s prevailing wage requirements or has remediated any violations thereof. The proposed regulations provide that the taxpayer may make correction payments to workers who did not receive prevailing wages at any time in advance of the tax return’s filing to avoid the continued accrual of interest on the amount of any underpayments, but the taxpayer is not eligible to make the penalty payment to the IRS until the tax return’s filing. The regulations also provide that the deadline to make the correction payments to workers is the date in which the tax return is filed, and the deadline to make any penalty payments is 180 days after the date in which the tax return is filed.

The IRA provides that if a taxpayer’s failure to comply with its prevailing wage requirements is due to the taxpayer’s “intentional disregard,” then the amount of the correction payments to workers is tripled and the amount of the penalty payments to the IRS is doubled. While the IRA does not define intentional disregard, the regulations provide that a violation is due to intentional disregard if the violation is knowing or willful. The regulations contain a non-exhaustive list of factors that might be relevant to this determination, including whether the failure was part of a pattern of conduct and whether the taxpayer has made the penalty payments to the IRS in previous years. Taxpayers can rebut a finding of intentional disregard if they can demonstrate they took appropriate steps to comply with the IRA’s prevailing wage requirements, including by (i) posting prevailing wage rates in prominent places in the workplace, (ii) incorporating provisions requiring payment of prevailing wage in contracts and subcontracts, and (iii) auditing their wage payment practices on a regular basis.

Taxpayers may also utilize project labor agreements to help ensure compliance with the IRA. A project labor agreement, or PLA, is a labor agreement between contractors and unions setting the terms and conditions of employment for a particular construction project. PLAs are typically agreed to prior to the commencement of construction, and can be used to avoid construction delays, labor disputes, and mitigate project costs. The proposed regulations provide that the taxpayer need not make the penalty payment to the IRS for any prevailing wage violations for workers who are subject to a compliant PLA.  

The IRA’s Apprenticeship Requirements
In addition to complying with the IRA’s prevailing wage requirements, taxpayers seeking the increased tax credit must satisfy the IRA’s apprenticeship requirements. Under the IRA, an apprentice is an individual who is employed or engaged by the taxpayer or any contractors or subcontractors working on the project and who is participating in a registered apprenticeship program.

Apprentices are normally paid at the rates expressed by the registered apprenticeship program, which tend to be less than the applicable prevailing wage. In determining whether the taxpayer can pay an apprentice at the lower rate and remain in compliance with the IRA, the proposed regulations require the taxpayer (or its contractor or subcontractors) to enter into a written apprenticeship agreement with the registered apprenticeship program expressing the terms and conditions of the employment and training of the apprentice. Where no such agreement is entered into, the proposed regulations require that the apprentice be paid the applicable prevailing wage.

Additionally, taxpayers must comply with three requirements under the IRA’s apprenticeship provisions: (i) the Labor Hours Requirement, (ii) the Ratio Requirement, and (iii) the Participation Requirement.

The Labor Hours Requirement
The Labor Hours Requirement obligates the taxpayer to ensure that the “applicable percentage” of the total labor hours on the project are performed by qualified apprentices. The IRA ties the applicable percentage to when the construction on the project began: (i) 10% for projects beginning before January 1, 2023; (ii) 12.5% for projects beginning after December 31, 2022 and before January 1, 2024; and (iii) 15% for projects beginning after December 31, 2023.

The Ratio Requirement
Under the Ratio Requirement, the taxpayer must ensure that any applicable apprenticeship-to-journeyworker ratios, as determined by the DOL or any applicable apprenticeship agency, are satisfied on the worksite daily.  The proposed regulations make clear that the ratio is intended to ensure adequate supervision on the worksite.  The regulations further provide that on any date in which the Ratio Requirement has not been met, the apprentices on site that exceed the ratio must be paid prevailing wages for the taxpayer to remain in compliance, and that any hours worked on that day by such apprentices cannot be counted towards the Labor Hours Requirement.

The Participation Requirement
The proposed regulations provide that the Participation Requirement – which requires all taxpayers, contractors, and subcontractors performing construction with more than 4 employees or other workers employ or engage an apprentice – is designed to prevent taxpayers from satisfying the Labor Hours Requirement by only hiring apprentices to perform one type of work. The proposed regulations note that the Participation Requirement is not a daily requirement.

Remediating Apprenticeship Violations
Taxpayers who do not meet the Apprenticeship Requirements can still qualify for the increased tax credit by satisfying the Good Faith Effort Exception or by paying a penalty.

The Good Faith Effort Exception treats taxpayers as compliant with the apprenticeship requirements if they have requested qualified apprentices from a registered apprenticeship program, and that request has been denied.  The regulations clarify that for the Good Faith Effort Exception to be available, taxpayers must make a written request to at least one registered apprenticeship program that contains (i) the dates of employment, (ii) the occupation or job classifications needed, (iii) the location and type of work to be performed, and (iv) the name and contact information of the persons requesting apprentices. The written request must also contain a statement that the request for apprentices be made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the standards of the registered apprenticeship program.  

Even after receiving a first denial, the proposed regulations provide that this does not automatically qualify the taxpayer for the Good Faith Effort Exception. Rather, the taxpayer must submit an additional request to another registered apprenticeship program within 120 days of receiving the first denial. Moreover, a partial fulfillment of the request does not constitute a denial of the request for the parts of the request that can be fulfilled. Nor does a response to the request providing that the registered apprenticeship program can fulfill the request subject to the program’s standards and requirements.  

With respect to the penalty provisions, the proposed regulations provide that the amount of the penalty is equal to $50 multiplied by the total labor hours for which the taxpayer failed to meet the Labor Hours Requirement or the Participation Requirement. As for the latter requirement, the proposed regulations clarify that the number of labor hours must be calculated by dividing the total number of labor hours performed on the project by the total number of workers on the site. The Secretary of Treasury retains the discretion to enhance the penalty payment, from $50 to $500 per labor hour, if he or she determines that the taxpayer’s failure to comply is the result of intentional disregard. The intentional disregard standard is similar to the standard set forth above with respect to the IRA’s prevailing wage requirements. The regulations also provide that these penalty provisions are not in effect if the taxpayer has in place a compliant PLA.  

Transferring Tax Credits
The Internal Revenue Code permits certain taxpayers to transfer increased tax credits earned pursuant to the IRA to unrelated taxpayers. The transferor retains the burden of demonstrating compliance with the IRA. To state it differently, the transferor is responsible for complying with the IRA’s prevailing wage and apprenticeship requirements, as well as any recordkeeping requirements and the correction and penalty provisions of the IRA. 

Recordkeeping Requirements
The proposed regulations provide that taxpayers are required to establish compliance with the IRA’s prevailing wage and apprenticeship requirements at the time in which the taxpayer or its transferee files a tax return claiming the increased tax credit. At the time of filing, the taxpayer must report to the Treasury and the IRS (i) the location and type of qualified facility, (ii) the applicable wage determinations for the type and location of the facility, (iii) the wages paid, including any correction payments, and hours worked, (iv) the number of workers who received correction payments, (v) the wages paid to qualified apprentices, (vi) the total labor hours on the project, and (vii) the total credit claimed.

The taxpayer must retain sufficient records to establish compliance with the IRA, including payroll records for laborers, mechanics, and apprentices. While the regulations do not require taxpayers to maintain certified payroll records, as required by federal law for jobs funded with federal tax dollars, a taxpayer’s retention of certified payroll records would satisfy significant portions of the IRA’s recordkeeping requirements. In addition, the regulations provide that the taxpayer should preserve records sufficient to document the taxpayer’s actions to remedy any failures to comply with the IRA’s requirements, such as records reflecting the taxpayer’s auditing payroll practices, written requests to qualified apprenticeship programs, agreements entered into with such programs, and records reflecting the daily ratios of apprentices to journeyworkers on the jobsite.

The IRA brings wholesale changes to the clean energy space. Those developers seeking to take advantage of the increased tax credits should carefully examine the IRA’s requirements and any regulations issued thereunder.  We will provide further updates on the new regulations, including when they become final.