Wage and Apprentice Guidance

Wage and Apprentice Guidance

October 25, 2022 | By Keith Martin in Washington, DC

Wage and apprentice guidance is expected by year end.

The guidance will start a 59-day clock to run for developers of renewable energy, storage, hydrogen, biogas and carbon capture projects to start construction to qualify for exemption from wage and apprentice requirements in the Inflation Reduction Act.

Developers whose projects will not be under construction in time are putting language not only in construction contracts, but also in operations and maintenance agreements to require compliance.

The Inflation Reduction Act restored tax credits to the full rates for projects that use renewable energy to generate electricity, increased tax credits for carbon capture and authorized new tax credits for such things as standalone storage and clean hydrogen, plus authorized bonus credits for projects in “energy communities” or that use domestic content.

The changes came with fine print.

Mechanics and laborers employed directly by the developer or by construction contractors or subcontractors to work on a project not only during construction, but also on “alterations and repairs” for the next five to 12 years after the project is in service, must be paid the same “prevailing wages” that are paid on federal construction jobs. These wages must be paid for five years after the in-service date on projects on which investment tax credits are claimed and for the period that production tax credits are claimed on other projects.

The required wages vary by job type and location. They are published on the US Department of Labor website.

However, there are no postings for many job types or locations. The US Treasury will have to explain what to do in such cases. Examples are a drilling rig operator to drill a geothermal well or workers on the US outer continental shelf constructing offshore wind projects. Developers can file a form with the Department of Labor for a wage determination, but the department was already receiving more than 1,000 such requests a year before the Inflation Reduction Act.

Qualified apprentices must also be used for at least 10% to 15% of total labor hours. The percentage is 10% for projects on which construction starts in 2022, 12.5% for projects starting construction in 2023 and 15% thereafter. At least one qualified apprentice must be used on any job that at least four individuals will handle.

The qualified apprentice program dates from the Great Depression when President Franklin Roosevelt hoped to have unemployed people learn construction trades by working alongside experienced workers. It will be interesting to see how the requirement works during a period of labor shortages. Registered apprenticeship programs are run mainly by labor unions and require certification by the US Department of Labor.

Projects that are unable to find qualified apprentices are excused. An example is where a project does not get a response from a program within five business days after making a request.

Tom West, the deputy assistant Treasury secretary for tax policy, told an American Bar Association tax section meeting on October 14 that the wage and apprentice guidance will be out by year end.

Projects that are under construction within 59 days after the guidance is issued are exempted from the wage and apprentice requirements.

There have been two ways since 2009 to begin construction. One is by starting “physical work of a significant nature” at the project site or at a factory on equipment for the project. The other is by “incurring” at least 5% of the total project cost. Costs are not considered incurred until the customer takes delivery of equipment or services, with one exception. A payment before the deadline counts if the equipment or services are reasonably expected to be delivered within 3½ months after the payment. Delivery can be at the factory.

The tax equity market has become comfortable relying on physical work, but requires developers to represent the project was under construction in time, as opposed merely to representing facts on which the investor can draw its own conclusion in cases where construction started under the 5% test.

The need to start physical work will put pressure on customers to place binding purchase orders promptly with manufacturers who have capacity to launch physical work on components in the next three to four months.

The IRS generally requires construction of the entire project to be completed within four years after the year construction starts. The industry is pressing for seven years. Projects on federal and Indian land and offshore wind projects have 10 years.

The Treasury could adopt a different standard for starting construction to qualify for exemption from the wage and apprentice requirements. However, any change in the existing tests would not be well received by renewable energy developers.