Wage and apprentice negotiations

Wage and apprentice negotiations

June 23, 2023 | By Gabrielle Jacques in New York

Developers had until January 28 to start construction of projects to avoid being subject to wage and apprenticeship requirements in the Inflation Reduction Act. With the cutoff date now nearly five months in the past, developers are eager to get language into their construction contracts to make sure they meet the requirements and qualify for higher tax credits.

The wage and apprentice requirements are the fine print behind the new tax credits in the Inflation Reduction Act. (For more detail, see "IRS Issues Wage and Apprentice Requirements.")

Even with the initial IRS guidance published last November, questions linger. The eventual project owner claiming tax credits bears the burden of compliance under the statute. Contractors claiming to satisfy the requirements are charging owners higher prices to account for paying their employees prevailing rates.

Developers have a balancing act to ensure the wage and apprenticeship requirements are met while not incurring unnecessary costs. For example, the wage and apprentice requirements do not usually apply to construction work on gen-tie lines, so there is no need to pay prevailing wages or engage apprentices for such portions of a project.

However, carving out some parts of the work runs the risk of going too far. Developers do not want to be in a situation where they pay for bare minimum compliance, but are ultimately found to fall short and cannot claim full tax credits.

There are a lot of moving pieces and uncertainties as the market waits on more guidance. Developers are trying in the meantime to push as much of the responsibility as possible to comply with the new requirements on construction and O&M contractors.

Most developers attempt to describe the wage and apprentice requirements in construction and O&M contracts by repeating what is in the statute and leaving room for additional detail in future guidance.

Contractors want to know what they are getting themselves into. They are pushing back on references to the Internal Revenue Code and proposing the parties agree to static definitions that can be measured and understood when the contract is signed.

Proposed regulations are expected on the wage and apprentice requirements in late June or July.

Tax Credit Haircut

The Inflation Reduction Act changed the way tax credits are calculated. President Biden campaigned on a platform that green jobs would be well-paying jobs. To make sure that is true, most tax credits in the IRA require the same wages that are paid on federal construction jobs be paid to mechanics and laborers during construction and on alterations and repairs for a period after the project is in operation.

Developers also have to use "qualified apprentices" for 12.5% to 15% of total labor hours. The idea is train a larger green energy workforce by requiring apprentices be used to work along experienced construction workers. Labor compliance consultants report that, except in California and parts of Texas, apprentices are generally unavailable.

The prevailing wage and apprentice requirements apply not only to wind, solar and other new renewable energy power plants, but also to storage, hydrogen, biogas and carbon capture projects and electric vehicle charging infrastructure. Failure to comply leads to an 80% haircut in the tax credits that can be claimed on a project.

Prevailing wages must be paid not only to laborers and mechanics employed directly by the developer, but also to those employed by contractors or subcontractors.

The US Department of Labor publishes prevailing wage rates by job type and location. If the wage determination available online does not include all relevant labor classifications, or if there is no wage determination for the location and construction job, developers can ask by email to have a wage determination made. It is unclear how long it will take the wage and hour division to respond. It was receiving 1,000 requests for wage determinations a year, and had a backlog, before the Inflation Reduction Act was enacted.

Whether "qualified apprentices" must be used for 12.5% or 15% of total labor hours depends on the year construction started for tax purposes.

The figure 12.5% applies to projects that start construction for tax purposes in 2023, and 15% applies to projects that start construction thereafter. Projects that started construction by January 28, 2023 are exempted from the wage and apprentice requirements. There is a "good faith" exception for cases where apprentices are requested but are unavailable.


If a project is subject to the wage and apprentice requirements, meeting them is an all-or-nothing test. The project either qualifies for tax credits at the full rate or it does not.

Any failure, no matter the duration or extent, leads to the 80% haircut in the tax credits. However, the project owner can make cure payments to restore the full amount.

It would have to pay underpaid laborers and mechanics the difference between the actual wages paid and the then-prevailing wage rates plus interest. It must also pay a $5,000 per worker per year penalty to the US Treasury for each underpaid laborer or mechanic.

Some contractors believe they can cure a failure to pay prevailing wages within a year without incurring the $5,000 per worker penalty. In other words, the contractor believes it has complied if the annual wages paid are at least equal to the hours worked times the prevailing rate, even if an employee was underpaid during a portion of the year and overpaid to compensate during a later portion. The statute does not suggest this is the case. The statute says back pay and the penalty are due for any laborer or mechanic who was underpaid for any period during the year.

The cure amount for failing to comply fully with the apprentice requirement is $50 for each labor hour missed. There is no additional penalty per worker.

If a failure is found to be due to "intentional disregard" of the requirements, the penalties are significantly higher.

The penalties ultimately fall on the project owner claiming the tax credits, even if it is a contractor's act or omission that causes the failure. Contractors are generally agreeing to indemnify developers for back pay and cure penalty payments in instances where they fail to comply with the prevailing wage and apprentice requirements as understood as of the date the contract is signed.

Project owners want uncapped developer exposure for the full amount of the cure payments.

Some contractors demand limits on their liability for cure payments. Some argue the cure payments are liquidated damages and should be counted as such against the contractor's liquidated damage cap. Most project owners want at least a separate cap for cure payments.

The contractor's liability for cure amounts must survive for at least the statute of limitations for an IRS income tax audit for the return year the credits were claimed. Project owners have up to 180 days after a final IRS determination to cure a prevailing wage deficiency.

Beyond cure expenses, there is risk of lost tax credits if the labor requirements are not met and not cured in time. For example, if the contractor did not maintain the proper records to prove enough apprentice hours were worked, the project owner will not be able to claim tax credits at the full rate. This could require a massive amount be paid to the IRS on a large-scale project. Now that project owners have the option to sell renewable energy tax credits to other companies for cash, the risk can extend to parties beyond the developer and contractor. Few contractors are agreeing to liability for lost tax credits.

Recordkeeping and Reporting

Project owners must keep records to prove the prevailing wages were paid and the apprentice hours were worked.

However, in cases where laborers or mechanics are not directly employed by the developer, the contractor or subcontractor employing the workers is best positioned to prepare these records.

Contractors with experience doing business in the public sector are familiar with Wage Form 347. It is an optional form for contractors to submit certified weekly payrolls for contracts subject to the Davis-Bacon and related acts. Even though the Inflation Reduction Act is not a traditional Davis-Bacon related act, the IRS guidance implementing the wage and apprentice requirements incorporates certain Davis-Bacon concepts and requirements. Project owners are requiring contractors to provide certified payroll reports that would comply with Davis-Bacon requirements if asked by the project owner to do so.

Most contractors are agreeing to provide labor reports to project owners on a monthly or quarterly basis. Some contractors argue that it is the developer's responsibility to review the reports for errors. If an error is not communicated to the contractor within a stated review period, some contractors argue they should not be liable. There could be hundreds of laborers and mechanics performing work at a project site. Reviewing the labor detail for each worker would require extensive manpower on the developer's part. Most developers are rejecting a shift in liability to the developer for unidentified errors.

There is a debate about how long contractors should fill out labor records. This issue is ensuring that any warranty work performed that may be considered "alteration or repair" is covered. Most contracts require contractors to fill out labor reports during the full period production tax credits will be claimed or for at least five years for projects on which investment tax credits are claimed. It is important the contractor keep information on former employees. If back pay is required to cure a wage shortfall, a contractor must know how to reach the underpaid worker.

Beyond Construction Contracts

Developers are wondering whether they need also to address the prevailing wage and apprentice requirements in agreements beyond the construction contract. The answer depends on the work performed.

The prevailing wage requirements apply not only during construction, but also to repairs and alterations after the project is in operation. For production tax credit projects, the wage requirements apply through the full credit period, meaning 10 years for a solar or wind power plant on which PTCs are claimed or 12 years for a carbon capture project on which section 45Q credits are claimed. For investment tax credit projects, the wage requirements apply for the five years after the project is placed in service during which the ITC remains subject to recapture.

Project owners are adding prevailing wage provisions to their operations and maintenance agreements for alteration and repair work.

Application of the apprenticeship requirements after a project is in service is less clear. The prevailing wage subsections explicitly refer to the extended five-to-12-year compliance period after operation, but the apprentice requirement provisions do not. However, there are six references to "alteration or repair" work in the apprentice provisions in the statute. The IRS said the phrase "alteration or repair" has the same meaning as "construction, prosecution, completion, or repair" in 29 CFR § 5.2(j). Determining application of the apprentice requirements to post-operational work may require interpretation by the US Department of Labor.

The responses by project owners vary. Some are requiring O&M contractors to use qualified apprentices to make alternations and repairs. Others are not bothering unless the IRS says that the apprentice requirements apply.

What about supply contracts where the manufacturer installs the equipment at the project site or performs on-site commissioning work?

The answer again comes down to whether the work is "construction, alteration, or repair" within the meaning of the US Department of Labor regulations. Factors to consider include the nature of the work (for example, construction v. mere furnishing of materials), the techniques, materials and equipment used, the worker's skills (for example, a licensed engineer v. an electrician), and if union labor would customarily have been used pre-IRA to perform the work.

All contracts usually include including language to revisit the wage and apprentice issues in good faith after the IRS issues additional guidance and to adjust the contract price to account for unforeseen expenses.