On November 30, 2022, the U.S. Treasury Department published in the Federal Register its guidance on the Inflation Reduction Act’s (IRA) new prevailing wage and apprenticeship requirements.1 Taxpayers seeking to qualify for tax credits under the IRA for certain clean energy and infrastructure construction, alteration and repair projects must ensure that they and their contractors and subcontractors satisfy the prevailing wage and apprenticeship requirements of the IRA. The publication of the Treasury Department’s guidance, according to the Notice, started the 60-day clock for the prevailing wage and apprenticeship requirements to take effect on any new construction projects covered by the IRA, i.e., projects beginning construction on or after January 29, 2023.
As further discussed below, the Treasury Department guidance leaves many questions unanswered. The Department anticipates issuing proposed regulations and other additional guidance with respect to the prevailing wage and apprenticeship requirements in the coming months. Meanwhile, construction projects undertaken after January 29, 2023 are expected to comply with the prevailing wage and apprenticeship requirements, leaving project owners seeking the IRA’s tax credits, together with their potential construction contractors and subcontractors, uncertain as to how to protect their investments in clean energy projects.
The prevailing wage portion of the Treasury Department guidance outlines the process for determining the relevant wage levels for specific occupations and geographic areas, initially referring taxpayers to a Department of Labor website for the applicable wage determinations and job classifications. However, many of the new clean energy construction classifications are not yet posted in the Department of Labor’s wage determinations covering many areas of the country. If that information is not made available online, the guidance instructs taxpayers to contact the Department of Labor’s Wage and Hour Division directly via email to request a wage determination or wage rate. In doing so, the taxpayer must provide the Wage and Hour Division with type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications. It is unclear how long that process will take or how project costs can be estimated properly or work begun under the current guidance.
The apprenticeship portion of the Treasury guidance addresses apprenticeship labor hour, ratio and participation requirements mandated by the IRA. By way of example, the guidance explains that the percentage of labor hours to be performed by apprentices on a qualified job in 2023 is 12.5%. Therefore, for a job beginning and ending in 2023, with a total of 10,000 labor hours, the Treasury guidance indicates a taxpayer will satisfy the labor hour requirement where apprentices work at least 1,250 hours on the job (whether the apprentices are employed directly by the taxpayer, by a contractor/subcontractor, or by the taxpayer, contractor and/or subcontractor combined). Regarding ratios, at least one qualified apprentice must be used by each taxpayer, contractor or subcontractor that employs four or more individuals to perform construction work on that project. Thereafter, the guidance calls for apprentice/journeymen ratios to comply with each entity’s government-registered program standards.
The Treasury guidance tracks the IRA’s “good-faith effort” exception under which a taxpayer, contractor, or subcontractor will be excused from meeting apprenticeship requirements so long as qualified apprentices are requested from a registered apprenticeship program without that request being fulfilled. The guidance, however, provides no further explanation and simply states that the exception applies if the taxpayer requests qualified apprentices “in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.”
In addressing recordkeeping requirements, the guidance states that taxpayers must maintain books of accounts or records for themselves, their contractors and subcontractors, in sufficient form to establish that prevailing wages are paid and that apprenticeship requirements are met. The prevailing wage recordkeeping requirements do not appear to require taxpayers, contractors, or subcontractors to submit certified payrolls to the Department of Labor or any other government agency, as is required for government-funded projects covered by the Davis-Bacon Act and many state prevailing wage laws. But the Treasury guidance offers no further explanation as to what records should be kept or exchanged among the various entities involved in clean energy projects.
The Treasury Department’s guidance left many questions unanswered, including but not limited to the following:
- How will clean energy construction classifications be determined in a timely manner?
- What fringe benefit costs will be considered bona fide by the Treasury Department?
- How will the “site of the [covered] work” be defined; and how will non-covered “maintenance” be differentiated from covered “repair” (among other definitions)?
- What accounts or records will be deemed to be “sufficient”?
- How will the prevailing wage and apprenticeship requirements be enforced?
- How will the narrow “good-faith efforts” exception to the apprenticeship requirement be applied in practice?
- How will inevitable fluctuations in the percentages of “total work hours” performed by apprentices be managed among taxpayers, contractors, and subcontractors over the life of covered projects?
- Will the Treasury Department be subject to legal challenge for attempting to implement the tax credit requirements without providing any meaningful guidance on these and other issues?
- How much will the new requirements increase project construction costs and reduce the pool of contractors and subcontractors willing to accept the risks imposed by the new labor requirements?