Laura Fraher is a partner and Mikayla Sciscente is a law clerk in Barclay Damon’s Washington, D.C., office.
The Inflation Reduction Act of 2022 ushered in significant opportunities for growth in the power industry, offering meaningful increases to tax credits to encourage the construction of green energy projects. To take advantage of these opportunities, owners must comply with various requirements of the IRA, including the prevailing wage and apprenticeship, or PWA, requirements, unless the project meets a limited exception for certain small facilities that produce clean energy under 1 MW.
The PWA requirements
The PWA requirements are designed to ensure that workers involved in qualifying green energy projects receive fair compensation and that a skilled workforce is cultivated through apprenticeship programs. The PWA requirements stipulate:
Payment of prevailing wages: All workers employed on the project — whether by the owner, a contractor or a subcontractor — must be paid at least the prevailing wage rates determined by the Department of Labor, which vary by location and type of work.
Apprenticeship utilization: The apprenticeship requirements of the IRA include three components — a labor hours requirement, a ratio requirement and a participation requirement. First, a minimum percentage of hours worked on the project must be performed by qualified apprentices registered in a recognized apprenticeship program. For construction beginning in 2024 and thereafter, the percentage is 15%. Further, the workforce on the project each day must comply with apprentice-to-journey worker ratios established by registered apprenticeship programs. Finally, every owner, contractor or subcontractor who employs four or more individuals to perform work on a qualified facility must employ one or more qualified apprentices. The apprenticeship requirements only apply to work on a project prior to the project being placed in service.
Recordkeeping and reporting: Detailed records demonstrating compliance with these requirements must be maintained and made available to the IRS upon request.
Common challenges encountered
The IRA has undeniably presented owners with new and significant opportunities connected to building new clean energy projects, but taking advantage of these opportunities has also presented considerable challenges. These challenges include limited access to qualified apprenticeship programs, ongoing skilled labor shortages in many areas of the country and increased costs associated with higher wages. The most prevalent challenges stem from the complex compliance and documentation requirements and the administrative burden associated therewith. Essential to navigating those challenges is drafting and negotiating engineering, procurement and construction, or EPC, contracts that obligate the contractors performing work on the projects to fully comply with the PWA requirements.
Incorporating PWA requirements into EPC contracts
Define clear obligations
EPC contracts should explicitly state the PWA requirements. This clarity will help ensure compliance and establish accountability. Include provisions that:
- Specify the applicable prevailing wage rates based on the project location.
- Identify the labor hours, ratio and participation requirements relating to apprenticeship utilization, ensuring both parties understand their responsibilities.
Incorporate recordkeeping and reporting compliance clauses
Effective recordkeeping is a cornerstone of compliance. Your EPC contract must allow for regular audits and assessments. These provisions provide owners the opportunity to review and verify adherence to the PWA requirements throughout the project lifecycle. The EPC contract should include clauses that:
- Mandate quarterly or more frequent review of wage rates and apprentice utilization.
- Allow for inspections or audits to confirm compliance with PWA standards.
- Require that all laborers and mechanics are provided with paystubs or access to individual payroll records.
- Require that all relevant records are maintained and preserved to ensure compliance with recordkeeping requirements. These should include:
- Detailed records of hourly rates charged, hours worked, labor classification and wage deductions.
- Detailed records of wages paid to all workers, categorized by job title and work location.
- Documentation of hours worked by apprentices, including their registration in recognized programs.
- Keeping copies of any project labor agreements that establish compliance with prevailing wage and apprenticeship requirements.
- Regular reports detailing compliance with PWA requirements, including the steps taken to remedy any compliance issues.
- Maintaining records of any correction payments made to any laborer or mechanic.
Specify penalties for noncompliance
While the aim is to comply with PWA requirements, it is crucial to anticipate potential failures. Include provisions in the EPC contract that outline the consequences of noncompliance, such as financial penalties. This approach reinforces the importance of compliance and incentivizes contractors to uphold the PWA standards.
Compliance and failures
The EPC contract should include explicit obligations to ensure that contractors fully comply with PWA requirements. In the event of noncompliance, IRS regulations allow taxpayers to cure certain compliance failures, helping to maintain eligibility for valuable tax credits. The EPC contract should obligate contractors to take all necessary steps and to cooperate with the project owner to support all steps taken by the owner to navigate the curing process.
Facilitating compliance
Project owners seeking to meet the prevailing wage and apprenticeship requirements are encouraged to take additional actions that can facilitate compliance. In addition to the actions suggested above, project owners are encouraged to:
- Regularly review payroll records.
- Post information about paying prevailing wages in a prominent and accessible location or otherwise provide written notice regarding the payment of prevailing wage rates.
- Establish procedures for individuals to report suspected failures to comply with the prevailing wage and apprenticeship requirements without retaliation or adverse action.
- Investigate reports of suspected failures to comply with the prevailing wage and apprenticeship requirements.
- Contact the Department of Labor’s Office of Apprenticeship or relevant state apprenticeship agency for assistance in locating registered apprenticeship programs.
Cure provisions
Upon identifying any noncompliance, take prompt corrective actions. Under IRS regulations, penalties may be minimal or waived under certain circumstances. However, penalties increase if a taxpayer intentionally disregards noncompliance. Depending on the nature of the failure, this may involve:
- Past-due wages: If there were failures in the level of wage payments, ensure that all affected workers receive back wages and interest to meet prevailing wage standards.
- Penalties: Taxpayers who fail to meet prevailing wage requirements may need to make penalty payments to the IRS.
- Apprentice hours: To cure a failure to meet the apprenticeship requirements, a project owner must pay a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. The penalty for failures concerning apprenticeship requirements may not apply if the project owner satisfies the good faith effort exception or has a qualifying project labor agreement in place. If the project falls short of the minimum apprentice hours, adjust the workforce to incorporate more apprentices until compliance is achieved.
- Improving recordkeeping: Ensure that any recordkeeping deficiencies are rectified by updating records and establishing robust tracking systems to prevent future issues. These records will be essential if the IRS requires proof of corrective measures or if there are inquiries into your compliance history.
Conclusion
As the green energy landscape continues to evolve, compliance with the PWA requirements under the IRA presents both challenges and opportunities. By thoughtfully incorporating these requirements into EPC contracts, maintaining diligent recordkeeping and being prepared to address compliance failures, project owners can position themselves to take full advantage of the increased tax credits available. This proactive approach not only enhances project feasibility but also contributes to the broader goal of advancing sustainable energy initiatives
