Seyfarth Synopsis: This alert summarizes the IRS’s recent notice of proposed rulemaking on complying with prevailing wage and apprenticeship requirements under the Inflation Reduction Act and explains key provisions including (i) identification of a qualifying project’s applicable wage determination(s), (ii) penalties for non-compliance, and (iii) the new exception for incorporating Project Labor Agreements. Understanding these requirements and the IRS’s proposed rule is important to businesses seeking to claim the enhanced tax credits under the Act, as failure to comply can result in not only monetary penalties, but also loss of eligibility for the enhanced credits.
On August 30, 2023, the Federal Register published the IRS’s notice of proposed rulemaking (“NPRM”), “Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements,” which provides compliance guidance to employers seeking enhanced tax credits under the Inflation Reduction Act (“IRA”). Earlier in the week, the IRS had announced its NPRM and issued FAQs on the IRA’s prevailing wage and apprenticeship (“PWA”) compliance requirements. In its press release, the Treasury Department explained the NPRM’s guidance “marks the end of the first phase of [the Department’s] implementation of the Inflation Reduction Act’s clean energy provisions.”
As we have discussed before, the IRA incorporates prevailing wage requirements from the Davis-Bacon Act (“DBA”) and extends those requirements to private businesses seeking to claim enhanced tax credits worth up to five times as much as base credits. The proposed rule seeks to clarify implementation of the PWA requirements in several important areas, such as: (i) the applicable wage determinations; (ii) enforcement and penalty provisions for failing to comply with PWA requirements when claiming the IRA’s enhanced tax credits; and (ii) waivers of PWA penalties, including through the use of Qualified Project Labor Agreements (“PLA”). While businesses may claim enhanced tax credits for projects dating back to January 1, 2023 in their upcoming tax filings, key aspects of implementation remained unclear until the NPRM’s publication. The NPRM should help employers better understand IRS’s approach to PWA compliance, so they can successfully claim the IRA’s valuable tax credits.
Applicable Wage Determinations
The proposed rule clarifies the wage determination applicable to a qualifying project as “the wage determination in effect for the specified type of construction in the geographic area when the construction, alteration, or repair of the facility begins.” NPRM at 1.45-7(b)(2). The proposed rule indicates the wage determination applicable at the start of the project generally remains valid for the duration of the work being performed. Id. at 1.45-7(b)(5). Locking in historical wage determinations appears in at least some tension with U.S. DOL Wage and Hour Division’s recent final rule, “Updating the Davis-Bacon and Related Acts Regulations,” which, as we wrote previously, will obligate government contractors to more frequently incorporate updated wage determinations after contract awards.
Similarly, for businesses seeking tax credits for alteration or repair of a facility, the applicable wage determination is the one in effect at the time the alteration or repair work begins. Id. That said, businesses would have to apply a new wage determination when (i) work on a facility is changed to include additional construction, alteration, or repair work not within the scope of the original project; or (ii) work is performed for an additional time period not originally obligated (this includes exercising an option to extend the term of the underlying contract). Id.
In addition, the proposed rule identifies entities that can request supplemental wage determinations when no general applicable wage determination exists, or the relevant determination does not list all needed labor classifications. According to the proposed rule, as well as published FAQs, taxpayers, contractors, and subcontractors can all make requests for supplemental determinations to U.S. DOL’s Wage and Hour Division. See id. at 1.45-7(b)(3); see also IRS Wage Determination FAQ No. 3.
Penalties and Cures
The proposed rule establishes opportunities for businesses to cure non-compliance with PWA standards to remain eligible for the enhanced tax credits. In the event a business claiming the enhanced tax credit did not meet the prevailing wage requirements, the business may correct its non-compliance and claim the credit if it:
1. pays the affected workers 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 plus 6 percentage points, and
2. pays a penalty to the IRS of $5,000 for each worker who was not paid at the prevailing wage rate in the year.
NPRM at 1.45-7(c)(1)(i)-(ii). If a business fails to meet the apprenticeship requirements, the business may correct its non-compliance and claim the credit if the business pays a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. Id. at 1.45-8(e)(2)(i). Penalties are more severe for non-compliance with PWA requirements when claiming the tax credit if the IRS determines a business intentionally disregarded its PWA obligations. See id. at 1.45-7(c)(3) and 1.45(e)(2)(ii).
However, penalties may be waived entirely if the business corrects the error within 30 days of becoming aware of its non-compliance or when the enhanced tax credit is claimed. Id. at 1.45-7(c)(6)(i). This option is only available in the event that the worker was being paid less than the prevailing wage for not more than 10% of all pay periods of the calendar year during the life of the project or if the difference between what the worker was paid during the calendar year and the amount they should have been paid is not greater than 2.5% of the amount the worker should have been paid. Id. at 1.45-7(c)(6)(i)(A)-(B).
While the NPRM maintains a good faith exception regarding meeting apprenticeship requirements, “[t]he taxpayer will not be deemed to have exercised a Good Faith Effort beyond 120 days of a previously denied request unless the taxpayer submits an additional request,” id. at 1.45-8(e)(1)(i)(A)(2), so “[i]f 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,” IRS Penalty and Cure Provisions and Recordkeeping FAQ No. 2.
Project Labor Agreement Exception
Businesses may also avoid penalties for non-compliance if there is a qualifying PLA for the project the business is claiming the enhanced tax credit. To qualify for this waiver, PLAs must:
1. Bind all contractors and subcontractors on the construction project through the inclusion of appropriate specifications in all relevant solicitation provisions and contract documents;
2. Contain guarantees against strikes, lockouts, and similar job disruptions;
3. Set forth effective, prompt, and mutually binding procedures for resolving labor disputes arising during the term of the project labor agreement;
4. Contain provisions to pay prevailing wages;
5. Contain provisions for referring and using qualified apprentices; and
6. Be a collective bargaining agreement with one or more labor organizations of which building and construction employees are members.
Having a PLA in place does not exempt a business from PWA requirements, but may allow the business to avoid penalties for non-compliance if the PLA meets the conditions listed above, and the business corrects the failure to pay the prevailing wage in a timely manner.
Employers should seek competent counsel when considering entering into collective bargaining with labor organizations.
Comment Period and Effective Date
The published NPRM lists a 61-day comment period, which will remain open until October 30, 2023. Comments and requests to appear at a scheduled November 21 public hearing must both be submitted by that date. After the comment period closes, the agency will review and analyze all comments it receives. This may result in changes to the NPRM – or it may not. In either event, the agency will eventually publish its final rule with an effective date no less than 30 days after its official publication in the Federal Register. The NPRM suggests there may be some nuanced differences between DBA and IRA PWA obligations, so impacted employers must remain aware of these compliance considerations.
For any clarification of the proposed rule, or assistance with submitting comments or requests prior to October 30, please do not hesitate to connect with Scott, Ted, or your friendly, neighborhood Seyfarth attorney.