Since the passage of the Inflation Reduction Act in 2022, US wind, solar and energy storage developers, and by extension their contractors, lenders and investors, have been planning for compliance with the IRA’s prevailing wage and apprenticeship requirements, the PWA Requirements. By Casey August, Russell Bruch and Laura Neumeister Wright, Morgan Lewis & Bockius LLP.
Failure to satisfy the PWA Requirements can result in the applicable project receiving an 80% reduction in or recapture of the applicable tax credit amount compared with the generally understood and expected amount of such tax credit. As a result, PWA Requirement compliance has become a critical element of eligibility for the Inflation Reduction Act's tax credits.
At a high level, the PWA Requirements consist of the following with respect to any construction and certain alteration or repair of a qualified facility: i) all laborers employed by the facility owner, any contractor or any subcontractor must be paid prevailing wages based on the US Department of Labor/Davis-Bacon Act published prevailing rates for such work in a particular locality; ii) a sufficient number or percentage of such laborers and labor hours must be with respect to persons enrolled in a registered apprenticeship programme; and iii) certain records must be kept in order to establish compliance with the PWA Requirements.
Critically, although there are some limited exceptions, the PWA Requirements apply with respect to individuals who, regardless of whether the individual is characterised as an employee or independent contractor, are performing the duties of a laborer or mechanic on a covered construction, alteration or repair project, regardless of whether the individual was engaged by the developer itself or a contractor or subcontractor to perform such work.
The IRS and Department of Treasury released a first round of guidance under the PWA Requirements in November 20221 and proposed Treasury regulations on August 29 2023, PWA Proposed Regulations.2 Taxpayers may generally rely on the PWA Proposed Regulations before they are published as final in the Federal Register. Now that developers have been living with these standards and the PWA Proposed Regulations, how should developers consider their impact on qualifying projects and their tax credit status?
Determine if the project is subject to PWA
The PWA Requirements apply to facilities with a maximum net output of at least 1MWac that are considered to have begun construction after January 28 2023. The longstanding begun construction analysis set forth in prior IRS guidance historically employed for navigating pre-IRA tax credit step-down or sunset dates applies for purposes of this PWA Requirement. Those rules, in sum, treat a project as having begun construction as of a particular date if either: i) onsite or offsite physical work of a significant nature is conducted with respect to the project, physical work test; or ii) 5% or more of the total cost of integral project property was paid or incurred, five percent safe harbour.
If the project can potentially meet one of these tests, the developer should produce supporting documentation in the same manner as it would have historically done under pre-IRA law. A separate continuity requirement (continuous efforts or continuous programme of construction) must also be met, which typically is accomplished through satisfaction of a safe harbour based on the project’s placed in service year – generally, placed in service must occur before the end of the 4th calendar year after the begun construction year.
Create and implement a plan
If a project is subject to the PWA Requirements, it is critical for a developer seeking the increased tax credits to establish and implement an action plan for compliance. Suggested steps for developing and implementing such a plan include:
* Identify the work on the project that would be covered by PWA Requirements – For all laborers and mechanics performing this work, have a consistent process to map them to the correct job classification on the applicable wage determination. After they are correctly mapped, make sure that the workers are paid the correct prevailing wages and that the registered apprenticeship requirements are satisfied.
i) For purposes of the IRA, prevailing wages, which includes a basic hourly wage rate and any fringe benefits rate, are established by the United States Department of Labor (DOL). Taxpayers can determine the prevailing wage rates through obtaining a general wage determination on https://sam.gov/content/wage-determinations. A general wage determination reflects wage rates determined by DOL to be prevailing in a specific geographic area, typically a county, for a particular type of construction.
If a wage determination does not exist for the county in which the work is being performed, taxpayers may request a supplemental wage determination from DOL. The wage determination will list a variety of job categories with the required prevailing wage and fringe benefits (both on an hourly basis) that must be paid to the workers who perform the covered work. If workers will perform work in multiple job categories, have a system in place that allows them to record all hours worked in each category so that they are paid the correct rate for the job performed.
ii) Each taxpayer or contractor or subcontractor who employs four or more workers to perform construction, alteration, or repair work on a facility must employ one or more qualified apprentices when the apprenticeship requirements apply. In addition, a minimum percentage of the total labor hours of the construction, alteration, or repair work must be performed by qualified apprentices from a registered apprenticeship programme. This percentage is 12.5% for facilities beginning construction in 2023 and it rises to 15% for facilities beginning construction in 2024 or after.
Taxpayers (or contractors or subcontractors) must also ensure that any applicable ratios of apprentices to journey workers established by the registered apprenticeship programme are met. An exception to the apprenticeship requirements may apply when a taxpayer (or contractor or subcontractor) has requested qualified apprentices from a registered apprenticeship programme and no apprentices are available. Companies can apply to an apprenticeship programme(s) via https://apprenticeship.gov/about-us/apprenticeship-system.
* Assess potential contractors and subcontractors on their ability to comply with the PWA Requirements and take this information into account when evaluating bid packages and awarding contracts.
i) If you decide to delegate any part of the project’s construction, alteration, or repair to contractors or subcontractors, negotiate with the contractor for assurances that they and any subcontractor they hire will comply with the PWA Requirements and they will be required to provide you with the records necessary to stratify the record-keeping obligations associated with the PWA Requirements. Make sure that they have the correct wage determination(s), that they have a process in place to classify workers correctly, and that they will flow down the PWA Requirements and wage determination(s) to any subcontractors they hire to work on the project.
ii) Consider whether to have an indemnification provision in the agreement with contractors and subcontractors that will offset losses resulting from their failure to comply with the PWA Requirements.
* Establish a method to demonstrate and document compliance with the PWA Requirements.
i) Developers are required to maintain and preserve sufficient records to establish that all laborers and mechanics including those of contractors and subcontractors were paid the applicable prevailing wages. These records include payroll records that reflect the hours worked in each classification and the actual wages and fringe benefits paid to each laborer and mechanic performing construction, alteration, or repair work on the facility. Taxpayers also are required to maintain records of any correction payments made to any laborer or mechanic.
ii) Developers also are required to maintain and preserve records to establish compliance with the IRA’s apprenticeship requirements. These records include copies of any written requests for apprentices by the taxpayer or contractor or subcontractor, any agreement entered into by the taxpayer or contractor or subcontractor with a registered apprenticeship programme, documents reflecting any registered apprenticeship programme sponsored by the taxpayer or contractor or subcontractor, documents verifying participation in a registered apprenticeship programme by each apprentice, records reflecting the required ratio of apprentices to journey workers prescribed by each registered apprenticeship programme from which qualified apprentices are employed, records reflecting the daily ratio of apprentices to journey workers, and the payroll records for any work performed by apprentices.
iii) Consider establishing a document management database to confirm compliance with PWA Requirements – eg, employee and contractor logs of individuals working at the project, type of work performed and the number of hours worked – and ensure that all subject workers and contractors are required to populate the database.
* Consider, especially for developers or contractors that are complying with the PWA Requirements for the first time, engaging counsel and/or a consultant to oversee and advise on strategies and systems to help with compliance.
Mitigate any past non-compliance
Even if the PWA Requirements were not met during any period of construction, alteration, or repair of a facility, the rules enacted by the IRA allow a developer to remain eligible to receive the increased tax credit by making certain correction and penalty payments. Specifically, a taxpayer will be deemed to satisfy the PWA Requirements for a project if it:
i) Pays the affected laborers or mechanics the difference between what they were paid and the amount they were required to have been paid, plus interest at the Federal short-term rate plus 6 percentage points, and
ii) Pays a penalty to the IRS of US$5,000 for each laborer or mechanic who was not paid the prevailing wage rate in the year. The PWA Proposed Regulations provide that this penalty may not apply if the developer quickly corrects certain limited errors or has a qualifying project labor agreement in place and timely corrects any failure to pay prevailing wages.3
The amount a taxpayer must pay to the laborer or mechanic as well as the penalty to the IRS is increased if the failure to pay the prevailing wages is determined to be the result of intentional disregard.
To cure a failure to meet the IRA’s apprenticeship requirements, a taxpayer must pay a penalty of US$50 multiplied by the total labor hours for which the apprenticeship requirements were not met. The amount of the penalty with respect to the apprenticeship requirement increases to US$500 per labor hour if the IRS determines that the failure was due to intentional disregard.
Given these hefty penalties, developers should take steps to ensure that any failure to satisfy the PWA Requirements is not due to intentional disregard. Under the PWA Proposed Regulations, factors that will be used for determining whether a taxpayer intentionally disregarded the prevailing wage requirements are listed below. The PWA Proposed Regulations provide a similar non-exclusive list of intentional disregard factors for apprenticeship non-compliance.
i) Whether the taxpayer failed to take steps to determine the applicable classification of and wages rate(s) for covered workers;
ii) Whether the taxpayer promptly cured any failure to pay covered workers less than the applicable prevailing wage rates;
iii) Whether the taxpayer undertook a quarterly, or more frequent, review of wages paid to mechanics and laborers to ensure that wages were not less than the applicable prevailing wage rate;
iv) Whether the taxpayer included any provisions in contracts with contractors that required the contractor and any subcontractor retained to pay covered workers at or above the prevailing wage and maintain records to ensure the taxpayer’s compliance with record-keeping requirements;
v) Whether the taxpayer posted in a prominent place at the facility or otherwise provided written notice to laborers and mechanics during the construction, alteration, or repair of the facility of the applicable wage rate(s) as determined by the DOL for all classifications of work to be performed for the construction, alteration or repair of the facility;
vi) Whether the taxpayer had in place procedures whereby laborers and mechanics could report suspected failures to pay prevailing wages and/or suspected failures to classify workers in accordance with the wage determination to appropriate personnel departments or managers without retaliation or adverse action; and
vii) Whether the failure is part of a pattern of conduct that includes repeated or systemic failures to ensure that laborers and mechanics were paid at least the applicable prevailing wage.4
Application of the PWA Requirements is still new to many working in US renewable project development, but for the stated reasons observing these requirements is critical. As market practice develops, lessons learned from other industries subject to similar requirements can provide a useful guide towards ensuring compliance.
1 - See IRS Notice 2022-61.
2 - See REG-100908-23. Separate proposed Treasury regulations under the investment tax credit released in November 2023 also provide guidance under the PWA Requirements. REG-132569-17. Among other matters, these more recent proposed regulations generally address the recapture of investment tax credits for post-operational failure to comply with the prevailing wage portion of the PWA Requirements during the 5-year period beginning on the date the applicable project is placed in service.
3 - See Prop. Treas. Reg. § 1.45-7(c). In addition, under the PWA Proposed Regulations, penalties for failure to satisfy the PWA Requirements may not apply to taxpayers employing laborers, mechanics, and apprentices under a qualifying project labor agreement that meets certain requirements.
4 - See Prop. Treas. Reg. § 1.45-7(c)(3)(iii); https://www.irs.gov/credits-deductions/frequently-asked-questions-about-the-prevailing-wage-and-apprenticeship-under-the-inflation-reduction-act#penalty.
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