Understanding Prevailing Wage and Apprenticeship Requirements: How to Maximize Your Tax Incentives

In general, a qualified facility is eligible for the five times multiplier under the PWA bonus if they meet one of three criteria:

• A facility with a maximum output of less than 1 mW. For example, a Section 48 solar project that is under 1 mW qualifies for a 30% Investment Tax Credit without needing to satisfy documentation requirements for PWA.
  1. Note: for Section 179D Energy Efficient Commercial Buildings deduction, there is no corresponding size exemption, so all projects claiming 179D must document PWA compliance to receive the corresponding bonus deduction.
• A facility that began construction prior to January 29, 2023.
• A facility that meetings the prevailing wage requirements, the apprenticeship requirements, and recordkeeping requirements as outlined by IRS in these final regulations.
  1. Prevailing Wage Requirements: Laborers and mechanics must be paid wages at or above prevailing local rates for construction, alteration, or repair, as per the Davis-Bacon Act, modified under these final regulations.
  2. Apprenticeship Requirements: Specified percentages of total labor hours must be performed by qualified apprentices, per these final regulations.
  3. Recordkeeping: Strict recordkeeping and reporting requirements are mandated for compliance.

 

Prevailing Wage Requirements

In general, except as provided for in the final regulations, a taxpayer claiming or transferring the increased credit amount with respect to a qualifying facility must satisfy prevailing wage requirements by ensuring that all laborers and mechanics employed by the taxpayer or any contractors or subcontractor are paid wages not less than the prevailing rates for that project type in the locality where the facility is located (Prevailing Wage Requirements).

General Wage Determination

Prevailing wage rates are determined by the U.S. Department of Labor and published on: https://sam.gov/content/wage-determinations

Timing of Wage Determinations

The applicable prevailing wage rates on a general wage determination are those in effect at the time a contract for construction, alteration, or repair of facility is fully executed by the taxpayer and a contractor.  These rates generally remain valid for the duration of the work performed related to the project.  A new wage determination may be applicable for major changes in scope.

Payment of Wages

A taxpayer may meet its wage obligations for payment of wages by paying the full amount in cash, by making payments or incurring costs for bona fide fringe benefits, or by a combination of cash and bona fide benefits.  The taxpayer is solely responsible for ensuring prevailing wages are paid, whether employed by the taxpayer, a contractor or subcontractor. 

 

Apprentices – Rate of Pay

Apprentices may be paid less than prevailing wages, as long as they are paid wages and bona fide benefits in accordance with the rates specified by the registered state apprentice program, and the Apprenticeship Ratio is met for that labor hour.  The Apprenticeship Ratio requirement mandates that each qualified apprentice hour needs to be performed with applicable journeyworker ratio for that type of work.  For any labor hour performed by an apprentice that does not meet the Apprenticeship Ratio requirement must be paid prevailing wages for that hour.

For most projects, the increased effort and cost of recordkeeping related to paying apprentices a rate lower than prevailing wages will likely be cumbersome.  For projects without a significant cost benefit of this reduction in ages, it is generally recommended to pay all workers, including apprentices, the prevailing wage amount for all labor hours worked.

 

Prevailing Wage Requirements – Corrections, Penalties, and Intentional Disregard

If a taxpayer fails to ensure that all labors and mechanics are prevailing wages, such taxpayer will be deemed to have satisfied the Prevailing Wage Requirements if the taxpayer makes correction and penalty payments in accordance with final regulations.  In lieu of making Correction and Penalty payments, the taxpayer may elect to not claim the increased credit or deduction amount. 

Correction Payment

The taxpayer must pay any laborer or mechanic the sum of:

• The difference between the amount paid and the prevailing wages for all hours worked.
• 6% interest on such payment.

 

Penalty Payment

The taxpayer must pay a penalty to the IRS of $5,000 multiplied by the total number of labors and mechanics who were paid below prevailing wages in each period. 

 

Intentional Disregard

If the IRS determines that any failure to satisfy the Prevailing Wage Requirement is due to intentional disregard, the correction payment, the correction payment and penalty payment are increased as follows:

• Correction Payment – increased to three times the sum of the wage shortfall.
• Penalty Payment – increased to $10,000 per laborer or mechanic underpaid.

The IRS publishes a long list of criteria that are evaluated to determine whether a taxpayer knowingly and willfully disregarded the Prevailing Wage Requirement on the project.  This list includes:

• Pattern of repeated or systemic failures.
• Steps taken by taxpayer to classify laborers and mechanics, at least quarterly review.
• Timing of making corrective payments.
• Timing of penalty payments to the IRS.
• Payroll review process, at least quarterly review.
• Contract provisions related to Prevailing Wage Requirements.
• Communication to workers (i.e. posted signs with applicable wage rates), methods used to allow for reporting of unpayments by workers, including whistleblower protection rights.
• Compliance with recordkeeping requirements.

 

Rebuttal presumption of no intentional disregard

If a taxpayer makes corrective and penalty payments required prior to receiving a notice from the IRS with respect to the claim, the taxpayer will be presumed to have no intentional disregard. 

For a project that has not met the Prevailing Wage Requirements as outlined in the final regulations, extra penalties for intentional disregard can be avoided by promptly making corrective and penalty payments prior to receiving notice from the IRS.

 

Waiver of Penalty

The final regulations outline three (3) waivers of the penalty.  If one or more of these criteria are met, the penalty payment is waived for the taxpayer. 

 

Waiver 1: Availability of Waiver

The penalty payment noted above is waived if the correction payment is made to all applicable laborers and mechanics no later than the last day of the calendar month following the quarter in which the failure occurred, and:

• Laborer or mechanic was underpaid in not more than 10% of the pay periods of the calendar year.
• Amount underpaid to laborer or mechanic is more than 5% under the applicable prevailing wage.

 

Waiver 2: Project Labor Agreements

The penalty payment is waived for the taxpayer if the work is done pursuit to a pre-hire collective bargaining agreement with one or more labor organizations specific to the project, a Qualified Project Labor Agreement.

To be considered a Qualifying Project Labor Agreement, such agreement must contain at a minimum:

• Bind all contractors and subcontractors on the project.
• Contain guarantees against strikes, lockouts, and similar job disruptions.
• Set forth binding procedures for labor disputes.
• Contain provisions to pay wages at not less than prevailing wage rates.
• Contain provisions for referring and using qualified apprentices.
• Be a collective bargaining agreement with one or more qualifying labor organizations.

 

Waiver 3: Transition Waiver

The penalty payment is waived for the taxpayer for work that was performed on the project after January 29, 2023 and prior to June 25, 2024 if the taxpayer makes correction payments required within 180 days of June 25, 2024. 

Through the Transition Waiver, projects that make all corrective payments related to underpayment of wages between January 29, 2024 and June 25, 2024 no later than December 21, 2024 will be waived from making the $5,000 per laborer or mechanic penalty payment.  Correction payments for any work after June 25, 2024 will need to follow Waiver 1 or Waiver 2 or penalty payment will apply.

 

Apprenticeship Requirements

In general, except as provided for in the final regulations, a taxpayer claiming or transferring the increased credit amount with respect to a qualifying facility must satisfy the Labor Hours Requirement, the Ratio Requirement, and the Participation Requirement (collectively the Apprenticeship Requirements) as outlined in the final regulations.  The taxpayer is solely responsible for ensuring that the Apprenticeship Requirements are satisfied.  A taxpayer is exempt from these requirements if construction began prior to January 29, 2023.

 

Labor Hours Requirement

Qualified apprentices are required to perform not less than the applicable percentage of total labor hours of the construction, alteration or repair work.  The percentage of total hours is calculated on a per qualified facility basis, aggregating all hours worked by all laborers and mechanics (including by qualified apprentices) during the construction of the facility and dividing the total hours worked by qualified apprentices. 

For projects that commenced construction between January 1 – December 31, 2023, the applicable Labor Hours Requirement is 12.5%.  For projects that commence construction on or after January 1, 2024, the applicable Labor Hours Requirement is 15.0%.

Ratio Requirement

Labor hours must meet the Ratio Requirement to be eligible to be eligible to meet the Labor Hours Requirement.  To meet the Ratio Requirement, the taxpayer must ensure compliance with the applicable apprentice-to-journeyworker ratio of the registered apprenticeship program that governs the applicable apprentices.  For example, if an electrical apprenticeship program requires 1 journeyworker for every 2 apprentices, if apprentices for a day are working in a ratio that exceed that ratio (i.e. 3 apprentices to 1 journeyworker), only the apprentices that meet the Ratio Requirement can be counted towards the Labor Hours Requirement for that day.

Participation Requirement

Each taxpayer, contractor, or subcontractor who employees four (4) or more individuals to perform construction with respect to a qualified facility must employee one or more qualified apprentices to perform work prior to the facility being placed in service. 

Apprenticeship Requirements – Exceptions, Penalties, and Intentional Disregard

If a taxpayer fails to satisfy the Apprenticeship Requirements as outlined in the Labor Hours Requirement, Ratio Requirement, and Participation Requirement, the taxpayer is nevertheless deemed to have satisfied the Apprenticeship Requirements if they meet the requirements for the Good Faith Effort Exception or the Apprenticeship Cure Provision.

Good Faith Effort Exception

A taxpayer is deemed to have satisfied the Apprenticeship Requirements if the taxpayer meets the following requirements:

• Request for qualified apprentices: Taxpayer, contractor or subcontractor must submit a written request to at least one (1) registered apprenticeship program that operates in project’s geographic region at least 45 days before apprentices are requested to start work. This request must specific content as outlined in final regulations. 
• Denial of request: After submitting compliant request for qualified apprentices, if request is denied by the registered agency, in a manner compliant with the final regulations, the Apprenticeship Requirements are deemed to have been satisfied.

 

Apprenticeship Cure Provision

A taxpayer is deemed to have satisfied the Apprenticeship Requirements if the taxpayer it pays the IRS a penalty equal to $50 per hour multiplied by the total labor hours for which the Labor Hours Requirement were not satisfied. 

For example, if a project that commenced construction in 2024 (thus having an apprenticeship Labor Hours Requirement of 15%) has 1,000 total labor hours, the Labor Hours Requirement would dictate that at least 150 qualified apprenticeship hours are required.  If this project had only 100 qualified apprenticeship hours, the taxpayer could satisfy the Apprenticeship Requirements by making a penalty payment to the IRS equal to 50 hours (150 Labor Hours Required minus 100 Labor Hours qualified) times $50/hr.  With this payment of $2500 to the IRS, the taxpayer will be deemed to have satisfied the Apprenticeship Requirements. 

 

Intentional Disregard

If the IRS determines that any failure to satisfy the Apprenticeship Requirements is due to intentional disregard, the correction payment, the correction payment and penalty payment are increased as follows:

• Penalty Payment – Increased to $500 per labor hour where Apprenticeship Requirements are not met.
  

The IRS publishes a long list of criteria that are evaluated to determine whether a taxpayer knowingly and willfully disregarded the Prevailing Wage Requirement on the project.  This list includes:

• Pattern of repeated or systemic failures.
• Steps taken by taxpayer to classify laborers and mechanics related to apprenticeships.
• Timing of penalty payments to the IRS.
• Labor hours and apprenticeship review, at least quarterly review.
• Contract provisions related to Apprenticeship Requirements
• Communication to workers (i.e. posted signs with applicable apprenticeship requirements), methods used to allow for reporting of unpayments by workers, including whistleblower protection rights.
• Compliance with recordkeeping requirements.

 

Rebuttal presumption of no intentional disregard

If a taxpayer makes penalty payments required prior to receiving a notice from the IRS with respect to the claim, the taxpayer will be presumed to have no intentional disregard. 

For a project that has not met the Apprenticeship Requirements as outlined in the final regulations, extra penalties for intentional disregard can be avoided by promptly making penalty payments prior to receiving notice from the IRS.

 

 

Recordkeeping and Reporting

In general, the increased credit amount must be claimed in such form and manner as prescribed by the IRS in this final regulation and other IRS documentation.  Taxpayer must maintain and preserve records sufficient to establish compliance with applicable prevailing wage and apprenticeship requirements.  At a minimum, those records include payroll records for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor related to the project.  If work is done pursuant to a Qualifying Project Labor Agreement, the taxpayer should also maintain and preserve records related to that agreement.

Recordkeeping – Prevailing Wage Requirements

In addition to payroll records otherwise maintained by the taxpayer, records sufficient to demonstrate compliance with Prevailing Wage Requirements may include:

• Forms WH-347 completed fully and correctly with information for each laborer and mechanic (including each qualified apprentice) with respect to the project.
• Identifying information for each laborer or mechanic including name, last four digits of SSN, address, telephone number and email address.
• The location and type of the qualified facility.
• The labor classifications the taxpayer applied to each laborer and mechanic, and documentation supporting the applicable classification, including applicable wage determination and copies of executed contracts for construction.
• The hourly rate(s) of wages paid (including rates of contributions or costs for bona fide fringe benefits) for each labor classification.
• The total number of hours worked by each laborer and mechanic per pay period.
• The total wages paid to each laborer and mechanic for each pay period (including identifying any deductions from wages).
• Records to support wages paid to any qualified apprentices at less than applicable prevailing wage rates, including records reflecting an individual’s participation in a registered apprenticeship program and the applicable wage rates and apprentice-to-journeyworker ratios prescribed by the registered apprenticeship program.
• The amount and timing of any correction and penalty payments and documentation reflecting the calculation of the correction and penalty payments, including records to demonstrate eligibility for penalty waiver, if applicable.
• Records to document any failures to pay prevailing wages and the actions taken to prevent, mitigate, or remedy the failure (for example, records demonstrating that the taxpayer regularly reviewed payroll practices, included requirements to pay prevailing wages in contracts with contractors, and posted prevailing wage rates in a prominent place on the jobsite.
• Records related to any complaints received by the taxpayer, contractors, or subcontractor of wages paid less then prevailing wage rates.

 

Recordkeeping for Apprenticeship Requirements

Taxpayer must maintain and preserve records sufficient to demonstrate compliance with the Apprenticeship Requirements, which may include:

• Any written requests for the employment of qualified apprentices from registered apprenticeship programs, including any contacts with Department of Labor regarding requests related to registered apprenticeship programs.
• Any agreements entered into with registered apprenticeship programs with respect to the project.
• Documents reflecting the standards and requirements of all applicable registered apprenticeship programs, including the applicable ratio requirements prescribed by each program.
• The total number of labor hours worked with respect to the project.
• Records reflecting the daily ratios of apprentices to journeyworkers.
• Records demonstrating compliance with the Good Faith Effort Exception, including requests for qualified apprentices, correspondence with registered apprenticeship programs and denials of requests.
• The amount and timing of any penalty payments and documentation reflecting the calculation of the penalty payments.
• Records to document any failures to satisfy the apprenticeship requirements and actions taken to prevent, mitigate or remedy the failure.
• Records related to any complaints received by the taxpayer, contractor or subcontractor was not satisfying Apprenticeship Requirements.

 

Satisfaction of the Recordkeeping Requirements

Taxpayer may satisfy the recordkeeping requirements as follows:

• Taxpayer may collect and physically retain relevant records from every contractor or subcontractor. The records may have personally identifiable information (PII) redacted to comply with applicable privacy laws.  Unredacted copies must be made available to the IRS upon request.
• Taxpayers, contractors and subcontractors may provide relevant records to a third-party vendor to physically retain on behalf of the taxpayer. The records may have PII redacted to comply with applicable privacy laws.  Unredacted copies must be made available to the IRS upon request.
• Taxpayers, contractors, and subcontractors may each physically retain the relevant unredacted records for their own employees. Unredacted copies must be made available to the IRS upon request.

 

Rules related to specific sections

In general, these final regulations codify that Prevailing Wage and Apprenticeship Requirements must be satisfied during construction of a qualified facility, and that Prevailing Wage Requirements must be satisfied for any repair or alteration related to the qualified for facility for a period of 10 years following substantial completion.  The final regulations provide some Section-specific clarifications and exceptions to these requirements, summarized in the chart below.

 

Conclusion

Under the Inflation Reduction Act of 2022, many of the applicable credits offer a five times multiplier if projects meet prevailing wage and apprentice requirements.  In the final regulations issued on June 25, 2024, the IRS has provided the roadmap for compliance and recordkeeping related to the PWA requirements.  The IRS is clear that the taxpayer has the sole responsibility to maintain compliance related to any claim for an increased credit or deduction amount.  Projects that are already underway need to act quickly to assess their situation and document compliance, including potential corrective payments and penalty payments, to avoid missing the window for penalty waivers and intentional disregard.