A Wolf in Sheep’s Clothing – Beware the Inflation Adjustment Act’s Prevailing Wage Requirements

Hey there, Little Red Riding Hood
You sure are lookin' good
You're everything a big, bad wolf could want

-- Ronald Blackwell of Sam the Sham & The Pharaohs, Li’l Red Riding Hood.

The Inflation Reduction Act (“IRA” or “Act”) contains certain tax credits for employers willing to comply with Davis-Bacon Act (“DBA”) labor standards requirements. (BTW, the new DBA regulations went into effect yesterday.) The IRA enacted various clean and other energy tax incentives that provide increased credit or deduction amounts if certain prevailing wage and registered apprenticeship requirements are met. The Act requires taxpayers to supervise their contractors and subcontractors and ensure  they pay prevailing wages and fringe benefits and to hire apprentices to laborers and mechanics engaged to work on their projects. In return they get an increased tax credit for up to 30% of the projects costs. We have writtenon this subject before, but given new developments we are returning to the well. See https://www.awrcounsel.com/blog/2022/12/19/2wphzoe5qfe6mhklash12atowlvbff.

The IRA's prevailing wage and apprenticeship provisions apply to the following tax benefits:

·                  Alternative Fuel Refueling Property Credit

·                  Production Tax Credit

·                  Credit for Carbon Oxide Sequestration

·                  Credit for Production of Clean Hydrogen

·                  Clean Fuel Production Credit

·                  Investment Tax Credit

·                  Advanced Energy Project Credit

·                  Energy Efficient Commercial Buildings Deduction

The IRA's prevailing wage provisions apply to these tax benefits as well:

·                  New Energy Efficient Home Credit

·                  Zero-Emission Nuclear Power Production Credit

Of course, the devil is in the details. Taxpayers, who may have little knowledge of the ins and outs of the wage and hour laws, have to determine the character of their projects (heavy, highway, residential or building) and then find the applicable wage determination (“WD”). And then they need to properly flow it down and supervise their contractors and subcontractors. That is a herculean task. And if their contractors mess up the classification of the workers, fail to pay the proper wages and benefits (or a cash amount in lieu thereof), or fail  to hire the necessary apprentices, then the taxpayer can lose the expanded tax credit. And recordkeeping obligations are thus imposed on the taxpayer, who isn’t even the employer.

The law is enforced by the Internal Revenue Administration (“IRS”) and not the US. Department of Labor (“DOL”). You don’t have to take the IRA’s expanded tax credit, and if you chose not to, then you don’t have to pay the Davis-Bacon wages and benefits or observe the apprenticeship rules. But if you want to take advantage of the expanded tax credit, you will need to comply.  

The IRS has published proposed regulations for comments. See 88 Fed. Reg. 60018 (Aug. 30, 2023). The deadline for comments is October 30, 2023. The Associated Builders and Contractors (“ABC”)  has requested that the IRS extend the time period for submission of comments for an additional 30 days.  

The proposed regulations are supposed to provide a safe harbor  in the interim for anyone starting work on one of these kinds of IRA eligible projects. This obviously includes  many solar, wind, and other alternative energy projects.

There are many issues addressed in the proposed regulations. Perhaps the most important is what happens if a taxpayer violates the DBA prevailing wage and fringe benefit requirement or the apprenticeship rules. The proposed regulations allow the taxpayer to cure violations for the apprentice rules -- there is a good faith exception or the contractor can pay a penalty. As for the prevailing wages and benefits, the proposed regulations provide that the taxpayer may cure violations by paying the affected laborers or mechanics 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 (as defined in IRC section 6621) plus 6 percentage points. The errant taxpayer also must  pay a penalty to the IRS of $5,000 for each laborer or mechanic who was not paid at the prevailing wage rate in the year. Under the proposed regulations, the penalty may not apply if the taxpayer quickly corrects certain limited errors or has a qualifying project labor agreement in place and timely corrects any failures to pay prevailing wages. The amount a taxpayer must pay to the laborer or mechanic as well as the penalty to the IRS is increased if the failure is determined to be the result of intentional disregard.

It would behoove taxpayers who are interested in claiming the IRA expanded tax credits to find themselves experienced  Davis-Bacon Act counsel to advise them on the arcane requirements of the law and help them stay in compliance. The dirty little secret is that few employers are in perfect compliance. There are always rogue supervisors  who don’t authorized the proper payments, workers working out of classification, missing  jobs on the WD and conformance disputes, and working time issues. Thus, for IRA projects, expect that there will be disputes, and line up your pay practices and apprenticeship policies with an eye to minimizing those disputes.

Don’t ever imagine the enforcement of this Acts going to be fair. Any law that calls for higher prevailing wages and benefits could not possibly be name the Inflation Reduction Act using any straight face test.  It is beyond cavil that this law is inflationary in its intent. For some taxpayers, this law will prove to be the proverbial wolf in sheep’s clothing.  They will end up paying significantly higher wages and benefits yet lose their expanded tax credits, or have to pay significant penalties and interest to avail themselves of the expanded tax credits.