- The IRS issued initial guidance on prevailing wage and apprenticeship requirements for energy projects commencing construction on or after January 29, 2023. See our blog post on the details of and applicable tax credit implications of the guidance here.
What you should know about the labor impacts of the guidance:
- The prevailing wage requirements are largely derived from the prevailing wage regime established by the federal Davis Bacon Act.
- The apprenticeship framework requires developers and their contractors or subcontractors to employ apprentices in the development and construction of projects and assign a proportion of the overall construction work to apprentices.
On November 30, 2022, the Internal Revenue Service (IRS) published Notice 2022-61 (the Notice), providing initial guidance on the prevailing wage and apprenticeship requirements applicable to certain provisions of the Internal Revenue Code (the Code), as amended by the Inflation Reduction Act (the Act). The Act amended the Code to provide increased tax credits and deductions to certain taxpayers constructing and installing alternative energy projects, provided that those taxpayers satisfy various prevailing wage and apprenticeship requirements. The Notice presents novel tax and effective cost implications to developers sponsoring the creation of alternative energy projects, such as onshore and offshore solar, wind and hydroelectric installations.
Prevailing Wage Requirements
With respect to the prevailing wage requirements, the Notice largely derives from established prevailing wage regimes in the federal Davis Bacon Act and its State corollaries. Practically, prevailing wage laws establish a “minimum wage,” comprehensive of an hourly base wage rate and fringe benefit rate, for workers performing construction on a public works project. The threshold determination for whether a project is subject to a prevailing wage law is typically the source of funds for that project. For example, if federal tax dollars are used to fund a construction project, the requirements of the Davis Bacon Act apply; if Massachusetts tax dollars are used to fund a construction project, the requirements of the Massachusetts Prevailing Wage Law apply. This new Notice brings a sea change, however, because these prevailing wage requirements will apply to new alternative energy projects regardless of the funding source. This means fully privately-funded projects (and publicly-funded projects) will be subject to government-established wage rates, if the developer seeks to take advantage of these tax credits and deductions. We expect this application of prevailing wage rates to many private projects will be a first-of-its kind initiative.
As for how this will work, the Notice previews that process to some degree. The U.S. Department of Labor (DOL) is currently responsible for setting prevailing wage rates. This entails, among other tasks, determining what is construction in the first instance; publishing prevailing wage rate sheets which notify employers of the “prevailing wage” to be paid to different classifications of workers performing construction on site; responding to inquiries from employers concerning the proper classification of workers; and setting forth documentary requirements for employers to demonstrate compliance with the applicable prevailing wage law. It is worth noting that the DOL sets prevailing wage rates by geographical region and by worker classification (as compared to a one-size-fits-all minimum wage, for example). The Notice encourages developers inquiring about worker classifications to contact the Wage and Hour Division of the DOL for resolution. And developers should consider to what extent they may want the DOL’s input, in terms of verifying that appropriate rates are and have been paid on a particular project, and best practices for documenting such compliance.
The Notice also establishes certain apprenticeship requirements for taxpayers to be eligible for additional tax credits and deductions. In particular, the Notice calls for taxpayers and their contractors or subcontractors with four or more employees to employ at least one apprentice to perform construction work, and requires that a specific percentage of work (quantified as a percentage of total labor hours required for construction) to be performed by apprentices to be eligible for the increased tax credits and deductions. The Notice also provides a “Good Faith Effort Exception” to the apprenticeship requirements for taxpayers who fail to satisfy those requirements but have requested qualified apprentices from a registered apprenticeship program, as defined in the Code.
The apprenticeship provision is also a major shift for developers, especially those on non-union and privately funded projects. Historically, apprenticeship requirements are established via collective bargaining agreements or through licensure requirements. By adopting these requirements here, the onus will shift to developers to plan for and implement apprentice roles on a project, or at least make good faith efforts to do so. The DOL currently operates ApprenticeshipUSA, which is recognized as one resource developers can rely on to fund such workers for their projects. This particular requirement will likely require considerable planning, depending on the location and the trades needed for a given job. A national movement is underway to develop the trades for the future, which may mean limited resources are available for projects planned in the near term.
The Notice only applies to facilities if construction of the facility begins on or after the date 60 days after the publication of the guidance, or January 29, 2023. The Notice provides taxpayers with two different methods to determine whether construction begins on or after January 29, 2023: (1) the physical work test, and (2) the five percent safe harbor test. For more information, see our prior blog post here.
The Notice brings big changes for developers seeking to lower their effective cost of construction and development on alternative energy projects. For developers who may not be familiar with construction on public works projects, they will now need to become acquainted not only with prevailing wage requirements, but the best processes for documenting compliance. This may present challenges in the alternative energy industry, given that existing prevailing wage rates are based on traditional scopes of work, and these construction projects will involve building new technologies. The Notice requirements are also likely to change the labor costs for a project, particularly in areas where unionized construction labor is less common. At the same time, these requirements will also likely impact union labor agreements, which usually include privately negotiated wage rates and apprenticeship requirements. All in all, the incorporation of these robust labor regimes within the tax code will present new challenges requiring good planning. Foley Hoag can help developers and contractors navigate through these new requirements in an effort to achieve the greatest tax savings contemplated by the Notice.