Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA) of 2022. Among many other provisions, the IRA contains a new federal 30% tax credit for private construction, alteration or repair of qualifying clean energy projects, including solar, wind, geothermal, carbon sequestration, and electric vehicle charging stations. In order to qualify for the new tax credit, however, taxpayer owners/developers and their construction contractors and subcontractors are required to comply with the federal prevailing wage provisions of the Davis-Bacon Act. They are also required to employ pre-set work hour percentages of government-registered apprentices on all covered projects.
The IRA creates a significant expansion of federal prevailing wage and apprenticeship requirements onto private construction projects. It is possible that a significant percentage of the tax credit value will be eaten up by the increased cost of construction resulting from these new provisions. There is considerable uncertainty as to how the newly required provisions will be implemented by the Treasury and Labor Departments in future regulatory guidance. Nonunion contractors in particular are concerned that the increased costs and uncertainty will discriminate against the employers of 87% of U.S. construction workforce that is not unionized, thereby exacerbating the construction industry’s skilled labor shortage in the clean energy construction marketplace.
The prevailing wage and apprenticeship requirements do not go into full effect until 60 days after the Treasury Department issues new guidance or regulations. Projects starting construction before that (as yet unknown) date can claim the full 30% tax credit without complying with the new labor requirements.
The Treasury Department has only just begun the process of issuing its necessary guidance, publishing a set of questions to be addressed by stakeholder comments to help formulate the guidance. The initial industry comments are due on November 4, 2022. Though the Treasury Department maintains it will publish guidance “quickly” thereafter, there are many complex issues the Department will need to address. Also, the Labor Department is currently engaged in a total rewrite of its regulations governing enforcement of the Davis-Bacon Act independent of the IRA, adding to the uncertainty over compliance issues.
The Treasury Department’s requests for comments include the following topics, among others:
- How will the Davis-Bacon prevailing wage requirements apply (for the first time) to private clean energy construction covered by the IRA?
- What rules will govern the correction of deficiencies for failing to satisfy prevailing wage requirements?
- What documentation or substantiation should be required to show compliance with the prevailing wage requirements?
- How will changing prevailing wages apply to long-term projects, including alterations or repairs occurring years after the initial construction?
- Regarding the apprenticeship requirements, the Department has asked for comments on how to determine the duration of employment of apprentices that will count toward the new percentage of work hour tests on covered projects.
- How will the “good-faith efforts” exception to the apprenticeship requirement be applied?
- How will the work hours be tracked and reported and to whom?
- What documentation or substantiation will taxpayers, contractors, and subcontractors be required to maintain for the apprenticeship requirements?
The Treasury Department’s requests for comments are likely to raise many new questions not yet raised in the Department’s initial questions. These include the following frequently asked questions:
- “Green” tech construction jobs are not often listed in Davis-Bacon wage determinations. How will contractors know what the correct prevailing wage classifications and rates will be?
- Can new technology classifications be added to wage determinations via the existing conformance process, and what will that entail?
- Which fringe benefits can be credited towards the prevailing wage in light of the different definitions of “bona fide” fringes contained in past IRS and DOL guidance?
- Will certified payrolls be required as on government Davis-Bacon Act jobs?
- How will lines be drawn between covered “alteration and repair” versus non-covered maintenance?
- Does prevailing wage apply only to the site of the construction work?
- Will the expanded need for registered apprentices support new recognition of green technology apprenticeship standards?
The new law imposes significant penalties on those who claim the tax credits without fully complying with the prevailing wage and registered apprenticeship requirements (which many employers find to be burdensome and confusing). At the same time, those contractors and taxpayers who are able to comply with the new prevailing wage and apprenticeship requirements stand to increase their market share in the clean energy construction market.
Much will depend on the guidance to be issued by the Treasury and Labor Departments. Taxpayer owners, contractors and subcontractors should monitor and participate in the guidance comment process during the coming months and should begin training their project management and HR staff to manage implementation of the IRA requirements successfully. Littler Workplace Policy Institute (WPI) will be actively engaged in the comment filing process.