Prevailing Wage and Apprenticeship Requirements

Cross References

irs.gov The IRS has posted on their website frequently asked questions about the prevailing wage and apprenticeship requirements under the Inflation Reduction Act of 2022 (IRA). The IRA amended and enacted various clean energy tax incentives that provide increased credit or deduction amounts if certain prevailing wage and registered apprenticeship requirements are met. The IRS released proposed regulations on August 29, 2023, providing proposed rules and definitions for taxpayers seeking to satisfy the prevailing wage and apprenticeship requirements. These frequently asked questions and answers are based on the proposed regulations. The proposed regulations and the answers may change when the regulations are finalized following a public comment period.

General requirements: Q1. What credits or deductions may be increased if prevailing wage and apprenticeship requirements are satisfied?

A1. The IRA makes several clean energy tax incentives available to taxpayers that satisfy certain prevailing wage and apprenticeship requirements. In general, a taxpayer that meets the prevailing wage and apprenticeship requirements will multiply the base amount of the tax incentive (credit or deduction) by five. Increased credit and deduction amounts are available for taxpayers satisfying prevailing wage and apprenticeship requirements under the following sections of the Internal Revenue Code (IRC):

IRC section 30C alternative fuel vehicle refueling property credit.

IRC section 45 renewable electricity production credit.

IRC section 45Q credit for carbon oxide sequestration.

IRC section 45V credit for production of clean hydrogen.

IRC section 45Y clean electricity production credit.

IRC section 45Z clean fuel production credit.

IRC section 48 energy credit.

IRC section 48C qualifying advanced energy project credit.

IRC section 48E clean electricity investment credit.

IRC section 179D energy efficient commercial buildings deduction. Increased credit amounts are available for taxpayers satisfying prevailing wage requirements under:

IRC section 45L new energy efficient home credit (apprenticeship requirements do not apply)

IRC section 45U zero-emission nuclear power production credit (apprenticeship requirements do not apply)

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Q2. What are the prevailing wage requirements of the IRA?

A2. The prevailing wage requirements of the IRA provide that taxpayers must ensure that all laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) on the construction, alteration, or repair of a qualified facility, project, property, or equipment (hereafter referred to as facility) are paid wages at rates that are not less than the prevailing rates determined by the Department of Labor in accordance with subchapter IV of chapter 31 of title 40 of the U.S. Code (the Davis-Bacon Act) for the type of work performed in the geographic area of the facility.

Q3. What are the apprenticeship requirements of the IRA?

A3. The apprenticeship requirements of the IRA include three components —a labor hours requirement, a ratio requirement, and a participation requirement. Under the labor hours requirement, the taxpayer must ensure that, depending on when construction began, 12.5% or 15% of the total labor hours performed in the construction, alteration, or repair of the facility are performed by qualified apprentices from a registered apprenticeship program. Under the ratio requirement, the taxpayer must ensure that the applicable ratio of apprentices to journey workers established by the registered apprenticeship program are met for apprentices working on the facility each day. Under the participation requirement, any taxpayer (or contractor or subcontractor) that employs 4 or more laborers or mechanics in the construction, alteration, or repair of the facility must also hire at least one qualified apprentice.

Q4. Are there exceptions to the prevailing wage and apprenticeship requirements enacted as part of the IRA? A4. Yes, there are two statutory exceptions: the one-megawatt exception and the beginning of construction exception.

Under the one megawatt exception for the credits available under IRC sections 45, 45Y, 48, and 48E, a facility that has a maximum net output of less than one megawatt of electrical energy (as measured in alternating current) may be eligible for the increased credit amount without satisfying the prevailing wage and apprenticeship requirements. The one-megawatt exception may also apply to qualified projects under IRC section 48 with a maximum net output of less than one megawatt of thermal energy; and to energy storage technology under IRC section 48E with a capacity of less than one-megawatt.

Under the beginning of construction exception for the credits under IRC sections 30C, 45, 45Q, 45V, 45Y, 48, 48E, and the deduction under IRC section 179D, a taxpayer that began construction or installation of a facility before January 29, 2023, may be eligible for the increased credit or deduction amount without needing to satisfy the prevailing wage and apprenticeship requirements.

Q5. What does construction, alteration, or repair mean for purposes of the IRA prevailing wage and apprenticeship requirements?

A5. Under the proposed regulations, the term construction, alteration, or repair generally means all types of work performed at the location of the facility. Construction, alteration or repair also includes, but is not limited to:

Constructing, altering, remodeling, or installing of items fabricated offsite,

Painting and decorating; and manufacturing or furnishing of materials, articles, and supplies or equipment at the location of the facility.

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Construction, alteration, or repair does not include maintenance work that occurs on the facility.

Maintenance is work that is ordinary and regular in nature and designed to maintain existing functionality of a facility as opposed to an isolated or infrequent repair of a facility to restore specific functionality or adapt it for a different or improved use. Q6. Who is considered employed for purposes of the IRA prevailing wage requirements? A6. The proposed regulations provide that a laborer or mechanic would be considered employed by the taxpayer (or contractor or subcontractor) if the individual performs the duties of a laborer or mechanic for the taxpayer (or contractor or subcontractor) regardless of whether the individual would be characterized as an employee or an independent contractor for other federal tax purposes. The definition of employed for purposes of the prevailing wage requirements would generally be different and broader than the definition used elsewhere in the Internal Revenue Code, for example with respect to employment taxes, as well as the associated reporting and withholding obligations. Laborers and mechanics who are independent contractors for employment tax purposes may be considered employed for purposes of the IRA prevailing wage requirements.

IRA prevailing wage requirements: Q1. To whom must prevailing wages be paid to satisfy the prevailing wage requirements? A1. Prevailing wages must be paid to all laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) in the construction, alteration, or repair of a facility. The requirement to pay prevailing wages applies to work performed at the location of the facility as well as any secondary work site that is established specifically for or dedicated exclusively for a specific period of time to, the construction, alteration, or repair of the facility. The prevailing wage rates for work performed at any secondary work site is determined based on the geographic area in which the secondary site is located. Under the proposed regulations, the terms laborer and mechanic mean those individuals whose duties are manual or physical in nature (including those individuals who use tools or who are performing the work of a trade). The terms laborer and mechanic include apprentices and helpers. The terms do not include individuals whose duties are primarily administrative, executive, or clerical, rather than manual.

Q2. Are taxpayers that claim increased tax credit and deduction amounts responsible for ensuring that employees of contractors and subcontractors are paid prevailing wages? A2. Yes. Unless an exception applies, taxpayers that are seeking an increased credit or deduction amount must ensure that laborers and mechanics employed by the taxpayer, or any contractor or subcontractor in the construction, alteration, or repair of a facility are paid prevailing wages (wages at rates that are not less than the prevailing rates determined by the Department of Labor in accordance with the Davis-Bacon Act). Wage determinations: Q1. What is a prevailing wage?

A1. Under the statute and the proposed regulations, a prevailing wage is the combination of the basic hourly wage rate and any fringe benefits rate paid to workers in a specific classification of laborer or mechanic in the geographic area where construction,

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alteration, or repair is performed, as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40 of the United States Code, also known as the Davis-Bacon Act.

Q2. Where do I find a general wage determination?

A2. General wage determinations are published by the Wage and Hour Division of the US Department of Labor’s (DOL) System for Award Management. If a taxpayer, contractor or subcontractor would like more information on wage determinations, the Wage and Hour Division has published a guide to understanding wage determinations. For more information, please visit DOL’s Prevailing Wage and the Inflation Reduction Act: https://www.dol.gov/agencies/whd/IRA Q3. What should a taxpayer do if there is no general wage determination for the geographic area of the facility or if the applicable general wage determination does not include all of the labor classifications that will be needed for the construction, alteration, or repair of the facility?

A3. The proposed regulations provide a process for taxpayers (or contractors or subcontractors) to request a supplemental wage determination from the Wage and Hour Division of the Department of Labor. To request a supplemental wage determination, the taxpayer, contractor, and or subcontractor should contact the Wage and Hour Division by emailing iraprevailingwage@dol.gov. For further details, please see guidance from DOL’s Prevailing Wage and the Inflation Reduction Act: https://www.dol.gov/agencies/whd/IRA IRA apprenticeship requirements: Q1. Where can I learn more about finding apprentices?

A1. The Department of Labor’s Office of Apprenticeship, as well as state apprenticeship agencies, routinely provide technical expertise on registered apprenticeship program matters, including identifying registered apprenticeship programs, and assisting employers seeking to register their own programs. More information on finding apprentices is available at ApprenticeshipUSA: https://www.apprenticeship.gov/about-us/apprenticeship-system Q2. What is an apprentice’s rate of pay?

A2. Under the proposed regulations, apprentices must be paid at not less than the rate specified by the registered apprenticeship program for the apprentice’s level of progress for the apprentice’s classification in the applicable wage determination. Apprentices may be paid at less than the prevailing rate for work performed consistent with the occupation of the registered apprenticeship program if they are: 1) Qualified apprentices from a registered apprenticeship program who perform work with respect to the construction, alteration, or repair of a qualified facility, or 2) Individuals in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program who have been certified by the U.S. Department of Labor’s Office of Apprenticeship or a state apprenticeship agency to be eligible for probationary employment as an apprentice. In addition, the applicable apprentice to journey worker ratio must be met in order to pay apprentices at less than the prevailing rate. Additionally, to satisfy the prevailing wage requirements, apprentices must

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be paid bona fide fringe benefits in accordance with the provisions of the registered apprenticeship program. If the registered apprenticeship program does not specify the payment of bona fide fringe benefits, apprentices must be paid the full amount of bona fide fringe benefits listed on the wage determination for the applicable classification in cash or in kind. Penalty and cure provisions and recordkeeping: Q1. How can a taxpayer correct a failure to meet the IRA prevailing wage or apprenticeship requirements during the construction, alteration, or repair of the facility? A1. Even if the prevailing wage or apprenticeship requirements were not met during any period of the construction, alteration, or repair of a facility, the statute allows a taxpayer to still be eligible to get the increased credit or deduction amounts by making certain correction and penalty payments. A taxpayer will be deemed to satisfy the prevailing wage requirements if the taxpayer: 1) 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 (as defined in IRC section 6621) plus 6 percentage points, and 2) Pays a penalty to the IRS of $5,000 for each laborer or mechanic who was not paid at the prevailing wage rate in the year. Under the proposed regulations, the penalty may not apply if the taxpayer quickly corrects certain limited errors or has a qualifying project labor agreement in place and timely corrects any failures to pay prevailing wages, as detailed in the proposed regulations. The amount a taxpayer must pay to the laborer or mechanic as well as the penalty to the IRS is increased if the failure is determined to be the result of intentional disregard.

To cure a failure to meet the apprenticeship requirements, a taxpayer must pay a penalty of $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 requirements is also increased to $500 per labor hour if the IRS determines the failure was due to intentional disregard. Q2. What is the good faith effort exception to the apprenticeship requirement? A2. Under the good faith effort exception, taxpayers are deemed to satisfy the apprenticeship requirements if they have requested qualified apprentices from a registered apprenticeship program and either: 1) The request was denied for reasons other than the taxpayer, contractor, or subcontractor’s refusal to comply with the program’s standards and requirements, or 2) The program failed to respond within five business days of receiving a request. To satisfy the good faith effort exception, the taxpayer (or contractor or subcontractor) must make a written request to at least one registered apprenticeship program that has a geographic area of operation that includes the location of the facility, or that can reasonably be expected to provide apprentices to the location of the facility; trains apprentices in the occupation(s) needed by the taxpayer (or contractor or subcontractor) performing construction, alteration, or repair with respect to the facility; and 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 to its standards and requirements.

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The good faith effort exception is limited to the request for apprentices made by the taxpayer (or contractor or subcontractor), including the number of apprentice hours for which the request for apprentices has been made to a registered apprenticeship program. The good faith effort exception only applies to the specific portion of the request for apprentices that was not responded to or was denied. If a request was not responded to or was denied, the taxpayer must submit an additional request(s) to a registered apprenticeship program after 120 days to continue to be eligible for the good faith effort exception.

Q3. How are project labor agreements treated for purposes of the IRA prevailing wage and apprenticeship requirements?

A3. In general, the requirements to ensure payment of no less than the applicable prevailing wage rates and to satisfy the apprenticeship requirement applies to all taxpayers that claim an increased credit or deduction amount. Penalties for failures to pay prevailing wages may not apply if a taxpayer employs laborers, mechanics, and apprentices under a qualifying project labor agreement that meets certain requirements, and the taxpayer timely corrects the failure to pay prevailing wages.

Q4. What recordkeeping requirements apply with respect to the IRA prevailing wage and apprenticeship requirements?

A4. Taxpayers are required to maintain and preserve sufficient records to establish compliance with the requirement that all laborers and mechanics (including those of contractors and subcontractors) were paid wages at rates not less than the applicable prevailing rates. 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 are also required to maintain records of any correction payments made to any laborer or mechanic. Taxpayers are also required to maintain and preserve records to establish compliance with the apprenticeship requirements. These records include copies of any written requests for apprentices by the taxpayer (or contractor or subcontractor), any agreement entered by the taxpayer (or contractor or subcontractor) with a registered apprenticeship program, documents reflecting any registered apprenticeship program sponsored by the taxpayer (or contractor or subcontractor), documents verifying participation in a registered apprenticeship program by each apprentice, records reflecting the required ratio of apprentices to journey workers prescribed by each registered apprenticeship program 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.