On November 30, 2022, the Internal Revenue Service (the “IRS”) released Notice 2022-61 with initial guidance (“Guidance”) on the prevailing wage and apprenticeship requirements and beginning of construction standard under the Inflation Reduction Act (the “IRA”). Shortly after, the Department of Labor (the “DOL”) published on its website Frequently Asked Questions (“FAQ”) and hosted a webinar providing additional guidance. Taxpayers meeting the prevailing wage and apprenticeship requirements may claim enhancements to various tax credits under the IRA. Under these provisions, a taxpayer seeking enhanced tax credits is required to pay prevailing wages to any laborers and mechanics employed in the construction, alteration, or repair of a qualified facility, and is required to meet certain labor hours, journeypersons-to-apprentices ratio, and participation requirements with regard to the use of apprentices at such facilities. For additional information on these requirements, please see our prior alert on this topic.
The Effective Date of Prevailing Wage and Apprenticeship Requirements
Publication of Notice 2022-61 constitutes “guidance” for purposes of triggering commencement of the 60-day period after which the prevailing wage and apprenticeship requirements of the IRA take effect. Accordingly, these requirements will apply to any qualified facility the construction of which begins on or after January 29, 2023. Under the IRA, a qualified facility the construction of which commences prior to January 29, 2023 is not required to meet the prevailing wage and apprenticeship requirements in order to claim enhanced credits. However, to establish that construction began before January 29, 2023, taxpayers will need to meet one of two tests: the Physical Work Test, or the Five Percent Safe Harbor Test. Under either test, taxpayers also must demonstrate either continuous construction or continuous efforts (Continuity Requirement).
Under the Physical Work Test, construction begins when physical work of a significant nature begins. Although the Guidance does not set forth a quantifiable threshold, it clarifies that “preliminary activities,” such as planning, designing, financing, obtaining permits, licensing, engineering studies, or clearing a site are not considered when determining the beginning of construction. Under the Five Percent Safe Harbor Test, construction will be deemed to have begun once the taxpayer incurs five percent (5%) or more of the total cost of the qualified facility. As noted, under either test, the taxpayer is required to make continuous efforts to advance toward completion of the qualified facility.
Recordkeeping Requirements
The Guidance clarifies that, consistent with the recordkeeping requirements under the Internal Revenue Code, taxpayers are required to maintain contemporaneous records, and are required to retain such records as long as they may become material in the administration of applicable law. Specifically, taxpayers must maintain records sufficient to establish that laborers and mechanics were paid at least prevailing wage rates, and to establish that the labor hours and participation requirements of qualified apprentices have been satisfied. Taxpayers may also need to maintain relevant pay and time records for contractors and subcontractors in order to satisfy these requirements. The Guidance does not mandate that taxpayers maintain specific types of records to establish compliance with the prevailing wage and apprenticeship requirements, but does provide a few examples of relevant information, including records identifying the applicable wage determination, the laborers and mechanics who performed construction work on the facility, the classifications of work they performed, their hours worked in each classification, and the wage rates paid for the work.
Taxpayers aiming to establish that they began construction of their project before the January 29, 2023 cutoff will need to maintain sufficient records to demonstrate that they meet the Physical Work Test, and/or the Five Percent Safe Harbor Test. Under either test, they also will need to have records establishing that they meet the Continuity Requirement.
Prevailing Wage Requirements
The Guidance directs interested parties to a website, www.sam.gov, at which taxpayers may access DOL prevailing wage determinations. In the event the DOL has not published a prevailing wage determination for a geographical area, type of construction, or relevant labor classification, the taxpayer must contact the Wage and Hour Division of the DOL via email at IRAprevailingwage@dol.gov and provide the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classification. The Wage and Hour Division will then issue the applicable labor classifications and wage rates. The Guidance clarifies that prevailing wage rates for apprentices may be less than the prevailing rates for journeypersons of the same classification.
Apprenticeship Requirements
The Guidance clarifies the “good faith effort exception” to the apprenticeship requirements. Specifically, the taxpayer will be deemed to have made a good faith effort to satisfy the apprenticeship requirements if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with the usual and customary business practices for registered apprenticeship programs in a particular industry. Registered apprenticeship programs can be located at https://www.apprenticeship.gov/partner-finder and https://www.apprenticeship.gov/about-us/state-offices. The taxpayer must maintain records sufficient to document the request for qualified apprentices from a registered program and the program’s denial or lack of response to the taxpayer’s request. The Guidance, however, does not address scenarios in which existing registered apprenticeship programs are not available within reasonable geographic proximity to the site of a qualified facility. It also does not address whether a taxpayer, its contractors, or subcontractors are required to sponsor apprenticeship programs under these circumstances.
FAQs
The DOL’s FAQs offer additional guidance on various topics, including:
- definitions for various material terms, including “laborers and mechanics,” “construction, alteration, or repair,” “wage determination,” and “apprentice;”
- the types of facilities eligible to receive the enhanced tax credits if the applicable labor requirements are satisfied;
- circumstances under which more than one wage determination may be applicable to a qualified facility;
- the applicable wage determinations and labor classifications for construction, alteration, or repair of a solar farm and wind turbine; and
- the payment of appropriate wage rates for apprentices.
The DOL also recently hosted a webinar on the IRA’s prevailing wage and apprenticeship requirements. Although the DOL discussed the good faith effort exception to the apprenticeship requirement, it did not address many of the open questions, including whether an employer would be required to sponsor its own program. However, it did provide information regarding the steps required to establish such a program and the benefits of doing so. The DOL also clarified that the project labor agreement requirement under Executive Order No. 14063 does not apply to IRA covered projects. Neither the Guidance, the FAQs, nor the webinar has provided any insight into the enforcement of the labor requirements, including what constitutes “intentional disregard” of the requirements meriting an enhanced penalty and the respective roles of the IRS and DOL in investigating and enforcing these requirements.
Takeaways and Action Items
The Guidance and FAQs start the clock on the 60-day beginning of construction window, but leave many questions unanswered. Taxpayers and contractors planning to begin construction of a qualified facility on or after January 29, 2023 should prepare to satisfy the prevailing wage and apprenticeship requirements.
Below are some action items that bear consideration to negotiate the most advantageous contractual terms to effectively allocate risk and obligations and navigate these labor standards requirements:
- determine whether the beginning of construction standard was met before January 29, 2023 and marshal evidence the Physical Work and/or Five Percent Safe Harbor Test, as well as the Continuity Requirement, were met;
- evaluate and improve where necessary existing payroll and recordkeeping policies and practices to determine whether they are sufficient to comply with the prevailing wage and apprenticeship and related recordkeeping requirements;
- determine trades to be utilized in construction and identify whether labor classifications and registered apprenticeship programs currently exist for those trades;
- determine whether applicable wage determinations and/or registered apprenticeship programs are available for planned construction projects;
- assess current fringe and other benefit plans to determine whether they are sufficient to meet the prevailing wage requirements;
- assess feasibility of compliance with the participation, ratio, and labor hours apprenticeship requirements;
- assess the availability and feasibility of requiring surety bonds to mitigate against risk of non-compliance;
- develop and implement contract provisions to ensure compliance; and
- consider potential dispute resolution procedures regarding underpayment or other compliance issues.
On January 11, 2023, Crowell & Moring LLP will be holding a webinar entitled “Prevailing Wage and Apprenticeship Requirements under the Inflation Reduction Act” to discuss these requirements and provide additional recommendations regarding compliance. An invitation to this webinar will be distributed separately following the publication of this alert.
For further information, please contact:
David B. Blair, Partner, Crowell & Moring
dblair@crowell.com
