Understanding IRA Labor Requirements

Good morning, everyone. I see we have folks joining. Our participant number is climbing. I think we're ready to go, and I'm going to kick us off in the interest of time. So welcome. Good morning, good afternoon, depending on where you are in the country. I'm Collins. I am a tax partner here at Vincent & Elkins. I work primarily in the renewables, energy transition, and all things IRA space. This morning, this afternoon, we're talking about the IRA labor requirements. As many of you probably know, regulations came out recently. We're going to hit on a lot of those details and what they mean practically. Today's speakers, you've got myself. I've introduced myself. I'm joined this morning by Heather Barron. She is a counsel in our tax practice located in New York. She and I work in the energy transition space. and have been very focused on all other IRA contracts. He is a counsel in our labor and employment group. He has significant experience with prevailing wage and DBA contracts, and he's used that experience to quickly become one of the foremost experts on these PWA requirements. He's been in the trenches with us the past few months negotiating EPC and supply contracts. assisting clients prepare record keeping forms, working on behalf of investors to diligence, satisfaction of the labor requirements, and preparing comment letters. I'm probably leaving stuff out that he's working on, but he's the man if you have questions. So with that, let's set the stage a little bit. If you are on this Zoom, you know what the IRA is, but I will tell you anyway. The IRA is one of the most... sweeping pieces of climate legislation that has been enacted in the U.S., if not the most sweeping piece of legislation. It hits all sorts of different areas, technologies, project types, and it does that through the tax code, basically. It provides the number of subsidies and it extends existing subsidies. It also has a number of different policy goals. The one that we're going to spend a lot of time talking about today is the goal of... I'm basically establishing and building up a skilled, highly trained and well-paid domestic workforce in the energy transition space. And the way that it does that is with a new credit structure. This hits many of the tax credits that you find in the IRA. And basically what it says in many of these credits. is that if you want the full credit rate, so for example, if you're looking for an ITC, if you want a full 30% ITC, you have to meet these prevailing wage and apprenticeship requirements. If you don't, then you only get 20% of the otherwise available credit. So using our example for ITC, that would be 6%. There are exceptions to these requirements, but they are limited and they're not available for all the credits. But if we're thinking about ITC and PTC, where a lot of folks are playing these days, the exceptions are for small projects, those with a maximum output of one megawatt, and for projects that were able to begin construction prior to January 29, 2023. So we always get questions, what does it mean to begin construction? Thankfully, that is a concept that's been in the tax code for at least a decade, if not more. And so we have some guidance and Treasury was kind enough to confirm that that guidance will continue to apply in this construct. So to begin construction and be exempt from these requirements, basically it means you've begun physical work of a significant nature or you've met a 5% safe harbor. Essentially, you've paid enough amount of costs prior to January 29th to have been deemed to begin. construction. We're not going to spend any more time on beginning construction today. It is a highly nuanced area full of all sorts of terms of art that, you know, only the tax code can kind of decipher. Again, if you have questions on beginning construction, please don't hesitate to reach out to anyone on the B&E team. All right. And so let's say you're not exempt. What are the prevailing wage and apprenticeship requirements? It's twofold. The first, you have to pay prevailing wages to all laborers and mechanics for construction, alteration, and repair. before the project is placed in service, and during the credit period. So again, for ITC, you're thinking about a five-year period. For 45 PTC, you're thinking about a 10-year period. For 45 Q, a 12-year period. So it depends on the credit. The second piece of the requirements is the apprenticeship requirements. As Alex is going to explain today, that actually is a little bit harder than the prevailing wage requirements in some respects. The idea there is you need to make sure a minimum number of apprentices are used in the construction of your project. We're going to hit on this a few times. There's open questions as to what extent you need to use apprentices after construction of a project. I know Alex has thoughts about that. So we'll talk further. And then the other piece of this that that isn't in the title PWA, but is just as important is the record keeping requirements. This is one that requires a lot of thoughtfulness. And frankly, the market is still developing on how this is best going to be established. But, you know, do not sleep on the record keeping requirements. The taxpayers are responsible for maintaining these records, establishing that they've satisfied them. And if they do not, then they could be subject to penalty or audit. So, Alex, turning to you to get into. the details sure yeah so we've got proposed regulations that came out on august 29th and i mean they gave us a lot of details about how some of this is going to work but there are also some questions that remain that were raised by the proposed regulations and some that it just didn't cover questions that we already had um there are were comments are open until october 30th so if you're thinking about any comments um you know few more days to get those in. And there are certainly some areas that we'll talk about where we hope to see movement based on comments. So we hope a lot of comments come in on those subjects. We'll start, though, with some more of the basics, just what are prevailing wages. So for those of you that are kind of new to this, haven't already dived into how this works, prevailing wages are wages that are set, essentially minimum wages. that are set by the Department of Labor, historically for compliance with the Davis Bacon Act, which applies to federally funded construction projects. But now, of course, it applies to these IRA projects for people who want to get the tax credits. And we'll see that in a lot of these areas, things don't line up perfectly, but I think that we're finding how it's going to fit together, especially with the prevailing wage requirements, as more and more guidance is issued as the regulations have come out. But these are not minimum wages that are like your regular state or federal minimum wage that apply across the board. You have minimum wages that apply based on job category and essentially locality or county in which the project is taking place. So you're going to have a different prevailing wage for someone who's an electrician in Harris County, Texas, than you would for someone who's a heavy machinery worker in Harris County, Texas. And then again, a different prevailing wage for someone who's an electrician in Harris County versus who's an electrician in Kings County, New York. And so you always have to look at what's called a wage determination, which is where the Department of Labor publishes these prevailing wages. And the prevailing wage that you look at is set at the time that the construction, alteration, or repair begins. So if you have entered into contracts with long lead times, You might need to update prevailing wages as you get closer to actually working on the project. And that can present some difficulties because you bake in those costs at the time you are entering into those contracts. And there could be some level of cost increase that you aren't anticipating as you get closer to construction. And you have to think about how you want to handle that and how you want to budget for that. Often, you know, we'll see change order relief. or price adjustments as we see if there are, in the case there are any changes in the prevailing wage. But that's something you need to think about both in your contracts and in your budgeting. Another thing to consider here is fringe benefits. So a prevailing wage includes both a cash amount and a fringe benefit amount. A fringe benefit is something like health insurance, 401k contributions, or vacation or sick pay. And you can use those to meet the prevailing wage. Now, you can pay the fringe benefit amount in cash if you want to, but you can also receive some payroll tax benefits by paying for by using the fringe benefits. I mean, on the downside is proving that you're paying the fringe benefit amounts is a little bit more difficult in the record keeping area of this because you have to show what those amounts are and showing how much the 401k contribution is for each of your individual laborers can be an added step to the record keeping requirement that is a little challenging. And another aspect is that so say you have a worker that declines health insurance, you don't get to count the amount that you offered. So you have to look at what they actually receive. And so you have to make sure you're meeting that amount for every worker, regardless of whether they participate in your benefits programs. And so there's just a lot of pros and cons that you can think about with these that are really in the weeds, but are something you need to address when you're trying to meet the prevailing wage requirements. Alex, if you're using union labor, can you assume that you've met those requirements or is there still more to do? There's still more to do. I mean, you're more likely to have met those requirements based on because a lot of these prevailing wages are set based on wage surveys. And the people who answer those wage surveys are often union members. And so that is also the prevailing wage is often similar to or pegged to the union rate. But there is a possibility that a union rate is below the prevailing wage and you have to double check that you're paying the right amount. And if you're not, that can be difficult because you might have to open up. bargaining with the union in order to make sure that you get to the right amount. You can't just decide, I want to pay someone more. Now, unions typically agree when you say you want to pay someone more. But there are a lot of, there might be other factors, especially if you have a contentious relationship with your union. Now, you might ask, what if I look at a wage determination and see that there's not the job I need on this list? And what do I do? So there's a process that In the context of the IRA, it was called a supplemental wage determination. For people who are familiar with government contracting, this is similar to conformance. Essentially, you would ask the DOL to issue a wage determination for the job. And, you know, in the green energy space, in the clean energy space, a lot of times you're not going to find the job that you're looking for on a wage determination. So you have a solar technician that's typically not going to be on there. A wind turbine blade technician also typically not going to be on there. And so you would submit a request with the requirements that include the information that's listed here to the Department of Labor and they would issue you a wage determination. Now, sometimes the Department of Labor doesn't want to create a new job category and they'll try to lump your worker into one of the existing job categories. Now, there are pros and cons in that because maybe it's a lower rate than. you would otherwise be, but maybe it's higher. And it also just creates a lot of questions and uncertainty about where you want to put these people. So something that we've seen in the industry and have been talking to some industry groups about are working to create kind of accepted job categories in the field. So say it's a solar energy group going to the Department of Labor together as a group and saying, we think there should be X, Y, and Z job categories. So that when you submit one of these requests, you don't have to convince the Department of Labor that a new job category is warranted every single time. You can instead just ask them for a wage determination for that area in a job category that's already been recognized. Now, the timing of these requests, you can't submit them more than 90 days out from when the construction alteration or repair of the facility is going to begin. And it does take the Department of Labor time to get back to you. And so I would say that the best approach is probably to submit as close to the 90 days as you possibly can, because, again, you probably have contracted out prior to this 90 days. So you need to get the appropriate wage determination so you can start paying that to people. But in the meantime, you can use what you think is the best wage determination, what the appropriate wage determination is. And then after you're issued a supplemental wage determination, you have 30 days to retroactively pay people the difference, if any. And you don't have to pay any penalties for that time period. And so there is a method to correct. But again, it's something you might have to consider as an expense that you're going to incur. And I think that really so far we've we have not seen a lot of new job categories created. And. They've been lumped into a lot of general labor, which tends to be a lower paying job category than some specialized work. But I don't know that I would anticipate that to continue because I do think that the Department of Labor is starting to recognize that, hey, maybe lumping this into existing job categories isn't going to work. And I know you're going to hit on this closer to the end, Alex, but, you know, it goes without saying that this creates significant uncertainty in the cost to construct a project. Right. If you don't know the labor cost yet, you can't even find out until 90 days before construction. It's obviously putting people in a bit of a pickle. Yeah. Definitely. So then the next major requirement, I guess, next category of requirements is the apprenticeship requirements. And there are three separate apprenticeship requirements, each of which needs to be satisfied. The there's the labor hours requirement, which refers to the total percentage of labor hours, not number of workers that need to be performed by apprentices on a project. And that's 10 to 15 percent, depending on when the project began. This is something that you look at for the project as a whole, not on a job category by job category basis or on a contractor by contractor basis. So if you can't satisfy the 15 percent, say, of apprentices or with electricians, you could make some of that up with a different job category. Or if one of your contractors does not cannot obtain apprentices for the kind of work they do, they don't necessarily need to get to 15 percent. You can make again, make up that work in a different job category where it's easier to easier to obtain apprentices. The second apprenticeship requirement is called the ratio requirement. This is refers to something called the apprentice to journey worker ratio, which is something you would get with an apprenticeship program who you engage. And it's the minimum number of journey workers or essentially regular workers, fully trained workers that. are on a project on any given day compared to the number of apprentices that are there on that day. And this is designed to make sure that the apprentices on site are getting the appropriate training supervision that is needed. And you can pay apprentices less than you pay a journey worker. So this also ensures that you are not trying to load up on apprentices to reduce your labor costs. Now, this is a day by day. requirement. So you need to make sure that it's satisfied for every day that you're using apprentices. If on October 26th, you have apprentices on site, you need to check that for each job category, you are satisfying the ratio for each job category on every single day. But if you don't have any apprentices the next day on October 27th, you don't need to worry about this that day. It really is something that unfortunately from a record keeping perspective is... daily, but does mean that you have some flexibility with the dates on which you are using apprentices. And I think that overall, this is a pretty manageable requirement because the ratios are typically reasonable. And the last one is the participation requirement. This says that each taxpayer, contractor, and subcontractor all the way down the chain who employs four or more individuals. performing construction, alteration, or repair must use at least one apprentice. And so this is preventing you from loading up all of the apprentices in one job category, but not using any in the others. And so really, this is designed to spread out the training that the labor force is getting for all the job categories that the administration believes we need. And so if you have a contractor who employs four people, And they're electricians. And those are the only four electricians on the job. They're going to need to go and find an apprentice and they'll need to use at least one. Maybe you have one that uses hundreds of people, but we really are having a hard time finding enough apprentices. They still need to use at least one and you could make up hours elsewhere. Obviously, it's easier to make up the hours when it's a smaller amount of total workers. If you they employ three or fewer individuals performing. construction, alteration, or repair, you don't need to use any apprentices with that group. But based on the way that the examples are calculated and the proposed regulations, the work done by those people does seem to count towards the total labor hours. And so you need to make up those labor hours somewhere else, even if that particular contractor did not need to use apprentices. And I think that this... good faith efforts exemption is maybe the most complicated or it has the most gray area remaining of all the areas of the PWA requirements in the IRA. So this is how you handle it if you can't find apprentices. And this isn't just general good faith we put in an effort. There are specific things that you need to do. You need to make a request to an apprenticeship program. And now the statute just says an apprenticeship program. But in the proposed regulations, they add some characteristics to the kind of apprenticeship program you need to make that request to. It needs to be in the geographic area of operation that includes the facility or the project. And it needs to. or it needs to be able to provide apprentices to the location of that facility. It needs to train the kind of apprentices that you need for the work, and it has to have a practice of entering into agreements with employers for the placement of apprentices. Now that third one's going to be pretty easy to meet because if they're a registered apprenticeship program, that's the kind of thing they do. But those first two, you know, sometimes it's not going to be easy to find someone like that. If you have a specialized worker, then Are you going to be able to ask for a solar technician or what kind of laborer do you need to get? Is it could you hire a general laborer to just work alongside your solar technicians in order to meet this apprenticeship requirement? I think some of that's still pretty unclear. And one of the major areas for comments that we'll talk about later is how you demonstrate good faith efforts when there isn't such an apprenticeship program that you can ask. And I think that's a pretty. big area that to me seems like should qualify because if there's no apprenticeship program that you can use how you you shouldn't lose the ability to gain the tax credit but we don't know exactly how you're going to demonstrate that you put faith good uh put forth good faith efforts when there isn't such a program you can ask now the apprenticeship requests that you make have again specific requirements that need to be included in them that you'll need to talk to a lawyer or look in the proposed regs to find out. But they also need to be made every 120 days if you get a denial of your request. And so this is something that was added in the proposed regulations. It's not in the statute. And so say you've requested apprentices. Again, I'll use electricians. And they say, no, we can't provide you electricians at this time. All of our apprentices are booked up. You can't just say we've now satisfied the requirement for the entire project. You might need to request again and you'll need to request again every 120 days of the project to see if you can meet the labor requirements or the apprenticeship requirements. If the response is more, no, we don't have these kinds of apprentices, we are too far away, we don't train these people, then you can kind of expect a similar answer. every time, assuming that that's the kind of thing that's going to ultimately satisfy the good faith efforts exception. Because right now, it's not clear that that would, if they respond and say, we don't train the kind of apprentices you need, have you made the request that's required under the proposed regulations? And it doesn't seem like you have. So that's some area where we're hoping for a little bit more guidance and help. And Alex, in the unlikely event that you get a... no response the first time and then a yes response after 120 days when you resubmit, do we still have uncertainty as to whether you have to hit the minimum threshold for all hours? Or do you think we can just look from that point forward? So there might be some uncertainty, I think, but I do think that they've given some guidance that at least suggests that you're looking for that point forward. When you get a, it says when you get a denial, that you're relieved for the portion. of a denial. Now, the way they've written it kind of seems like they're talking about kind of worker more so than time period. But I think that I do think that that apply that that at least looks like it should apply to the you're looking at that point forward for the total labor hours. So now we're going to talk about what kind of work you have to satisfy the PWA requirements We've already mentioned construction, alteration and repair. Now, this is a term of art that comes from the Davis-Bacon Act. And you look at the construction, alteration, repair that's performed by laborers and mechanics, another term of art that comes from the Davis-Bacon Act. Laborers and mechanics tend to be what we might call wrench turners. You know, it's physical labor. So someone who works in an office related to the project, they're not covered for this. Someone who's on the site but is a supervisor, that person is not. covered unless they perform at least 20 percent of their work is actual manual labor something that would be construction alteration or repair um now it's not always simple what's construction alteration or repair because so in the most recent DBA final rule that was published and went into effect three days ago, they said that flaggers, so people near a construction site who are directing traffic around the construction site, those people are covered laborers under the DBA. But you might not think of that kind of work as being typically construction. There's also a lot of debate about whether surveyors are always covered. And it really depends on the kind of work that an individual surveyor is doing. And so it's not going to be the whole survey crew, but it might be some of them, especially if they're clearing brush. That's the kind of thing that is physical labor that is typically covered and guidance has said is covered for surveyors. So you can't always easily tell what is construction even. And it's even more difficult when you're talking about what is repair versus what is maintenance. Now, maintenance is not covered. and repair work is. And that can sometimes be a blurry line. I guess an easy way to talk about it would be maintenance is routine. It's regular. It's the kind of thing you can predict. It tends to not look like the initial construction of a project in what the work is. Some examples from regular, I guess, building construction that the DBA had in mind when it was created would be light bulbs, HVAC. filters, mowing grass, like those are some examples of things that everyone agrees are maintenance. You could say that it's things that keep it in regular operation rather than return it to operation after something is broken or failed. Repair work, on the other hand, are things that look like the initial construction of the project tend to be heavier in labor content, I guess, a way to say it would be. But it's also things that restore functionality. So if something breaks, bringing it back to a working order would be repair and not construction or sorry, not maintenance. And those are like the helpful legal framework. Right. But there's also the practical realities of constructing a project. How do you ensure that you can pay worker a prevailing wages, but not worker B? And maybe they're doing covered work on one day, but not the next. So I think, you know, Alex, correct me if you feel differently, but sometimes the best bet is to just err on the side of it's covered if it seems like it's a gray area. I think that's that's correct, where especially if there are people who are going to be doing both kinds of work, you're probably just going to want to pay prevailing wage for all of it. Because then you also introduce the problem of tracking the hours for different kinds of work that they're doing. And that's not easy. And the difference between what you're paying them and the prevailing wage may not be a large amount. And so you might just bump it up for all the work that they do to not have to worry about the administrative hassle of timekeeping. I think where it gets a little more tricky is when you're talking about different contracts that you have. So if you have someone who's essentially an O&M service provider for your facility. You want to look closely at what kind of work they're doing, because maybe most of what they do is not covered, but there are a few tasks they do that are, such as if they do correct something that's often called in contracts corrective maintenance. It's something that's only done once something fails, but it's performed under an O&M contract. Based on the title of the contract, you'd say that's maintenance and that it's not covered. But the reality is if it's this corrective maintenance where they're repairing things that have... broken, it's covered in the title of your contract, doesn't matter. So we also have the concept of where, we also have the question, I guess you'd say, of where the prevailing wage requirements apply. And the proposed regulations say that they're using the DBA concept of site of the work. And this concept was updated again in the most recent rules that went into effect a few days ago. So the two parts of this that have historically... always been included are the actual site of the facility or project, which makes sense, and then adjacent or virtually adjacent dedicated support sites that are right or very close to the site itself. So like a tool yard, a lay down yard where you're doing things that are a lot like construction right by the facility, but not necessarily within the fence. The new part of this is what's called secondary construction sites. And this was something that was added to the site of work definition. to address modular construction. So where a lot of the really traditional construction work is done away from the facility and then a nearly completed component or part of the facility is shipped and just has to be put into place. And there's not a lot of additional work that needs to be construction work that needs to be done once it arrives. Now, this can start to look a little scary, but the DBA regulations do say that it's supposed to be a narrow expansion of coverage targeted at modular construction. There is some question because it's so new about how far this applies. But we know, for example, that it's not applying to does not apply to material suppliers so when you're uh you know you're ordering wire or you're ordering cement or any of those or a kind of smaller components definitely not covered we know that's not covered it's a question of when you start to build bigger and bigger things what starts to fall into a secondary construction site and now i don't think that this is actually going to apply to many things but it might apply to some and so you do have to check a secondary construction for something to be a secondary construction site all of the following need to be true a significant portion of the building or work needs to be constructed at the secondary site and when we're talking about a significant portion we're really talking about again the modular element of things where it's something that's nearly completed and just needs to be put into place without significant work at the at the project site that significant portion needs to be constructed for specific use in the building or work and not a product that's made to the general public. So if this is not something that has any customized features, it is probably not part of the secondary construction site. So a question I like to ask is, you know, could the manufacturer turn around and sell this to someone else without making any changes? If they could, then it's probably not for specific use in that building or work. But again, even if it's like a customized connection, you start to get into a gray area here where, no, they couldn't turn around and sell this to someone else without making changes. It does seem like the design of this component is something that is specifically for that site. And then the last thing, which I think is probably the easiest way for a lot of these facilities to get out of it, is that the site has to be either established specifically for the performance of the contract or the project. or it's dedicated exclusively or nearly so for a specific period of time to the project. So there are you're making you know solar panels for multiple projects all at the same time, then this out you're not going to satisfy this element and it's not going to be a secondary construction site. But if you are making maybe a entire wind turbine for one customer and not necessarily looking at the different components at different facilities, Then this is where you might have to ask questions. Are we covered? And so I do think that if you have to, like when we're really talking about a specific period of time, it's not just it's not a couple of days. It has to be a matter of weeks in order to qualify for this. It's not going to be like you're rushing at the end to satisfy a contract. So you dedicate an entire facility to one project. It is a larger. time period that this needs to be specifically dedicated to one customer more or less. And you probably just freaked out a bunch of people, but I tend to think of the secondary construction site rule is almost an anti-abuse rule. Like, you know, don't think you're going to get out of these requirements by moving something elsewhere off of the project site. But if, you know, you're really buying components or equipment. from a third-party supplier who, you know, maybe they're going to spend a significant portion of time at their facility manufacturing items for the project, so long as it's not dedicated entirely for that project, even if it's going to be a few months, say, that they're building wind turbines for the project. Doesn't sound fatal, but something to talk to Alex about for sure. Yeah. And again, I want to emphasize that I don't think this applies very often, but it's the kind of thing you need to check to make sure it doesn't. And then you also want to make sure how you're you want to figure out how you're going to demonstrate that it doesn't apply in the case of an audit. So these are the kinds of things you need to think about, even if it's typically not going to apply. And so then we have pure options. So you're wondering, what do we do if we mess up? Are we just going to lose our entire tax credit? Almost never. because it's always going to make sense to cure. If you don't pay workers prevailing wages, you can pay them the difference plus interest along with a penalty to the secretary, depending on how many number of workers were not paid correctly. Now those penalties go up significantly if there's a finding of intentional disregard. I'm not gonna get into the details of how we calculate all of this just for the sake of time. But know that there are remedies for you if there's a foot fault or even if something's just not done correctly by a contractor at all. You can fix it. It might cost you a significant amount, but it's certainly going to be less than the tax credit. And then the same with the apprenticeship requirements. You can pay $50 times the number of labor hours that should have been worked by apprentices and were not. in order to cure this penalty, and it goes to $500 if it's intentional disregard. So again, not cheap, but it's probably going to be worth paying in almost every instance. Also, if you discover that there is a violation or noncompliance in the course of your project, you have 30 days to fix it from the date you learn of the noncompliance, and you don't have to pay the penalty. So you might have to, again, pay the worker, you'd have to pay the workers the difference if you were underpaying them, but you don't have to pay the penalty to the Treasury. And these are really important for folks that are maybe tax credit purchasers under the new transferability rules, or tax equity investors, where you may not have the ability to control compliance, but you can build in that. requirements in your transaction documents to force the sponsor development to perform these curative actions so that the credit that you finance is safe. And so we're working on lots of contractual provisions that build those types of protections in, again, for financing and credit parties. So I won't get into the details of this again for the sake of time, but something to be aware of. is that there's a penalty waiver if you're using a project labor agreement that meets certain requirements. So if you find yourself in a situation where your project is going to use a PLA, I don't know that you necessarily want to use a PLA just to get this penalty waiver. I'm not sure there's enough benefit to that, but if you find, if you are going to use a PLA for a project, it's worth making sure that that PLA satisfies all of these requirements. requirements so that you can get the penalty waiver. So as you were previewed earlier, we've been using proposed regulations that taxpayers can currently rely on. And now you've run through a lot of details on those. And there's still a short time in the comment window up till next week. to provide comments and some issues that have already been catching attention include the requirements under the proposed regs that apprentices be used for alteration and repair. In the code, in the statute itself, it refers to the apprentice use during construction, on construction alteration and repair, and the application of those ratios and labor hour requirements to the alteration and repair period as Alex flagged creates additional issues. There's also the good faith efforts exception which you can seek to satisfy but in the absence of responses or in the absence of a program that really meets the requirements for providing your form of apprentices, your skill set of apprentices. There's no clarity at this time on how you can demonstrate your good faith efforts for lack of available program or response. And then, of course, the 100 day window for that good faith. exception to apply once you've reached out and the requirement to continue reaching out is open for comment. And the lack of responsiveness from an apprenticeship program, the guidance did say that responding no is is information, it is a response. So you're not completely done at that point. Next slide. And then the record keeping requirements, already we've covered in great detail how important hours of labor, classifications of work, specific individual worker information is. If you're going to be making any cure payments, you will need to make them to those specific laborers. And that means that employee information is required. And when you're in a circumstance where a taxpayer may come in and... and purchase a project and be seeking that increased headline credit rate. They are not necessarily the people who were originally handling payroll. So how does one protect the privacy, the information of those employees, but also make sure that a new owner can satisfy any share payments in the event that... prevailing wage wasn't paid for some period and they're looking to make up that underpayment. And then on the side of work requirements, the potential for manufacturing facilities in that final push to be picked up as a result of maybe the equipment fraud. specific project being the full scope of work at that time and the requirement to have the manufacturer keep tabs on what projects they are working on on the floor is another question. And then for 45Z credits, it's not clear whether the begun construction exemption to the prevailing wage requirements applies. And if the construction did begin before the rules were issued, then it's also not clear how the reliance on the proposed regulations will work, given that there was that window prior to issuance. And Alex, on the last one. Yeah, so the PLA penalty waiver that I mentioned right now only applies to project labor agreements, which are really a specific type of thing that, you know, it's something that's a pre, it's a collective bargaining agreement, but it's a pre-hire collective bargaining agreement that really can only be used in the construction industry. It does not apply to people that have CBAs with their own employees. And so it seems to me that the same type of waiver that PLAs get should apply to people who have CBAs with their own employees. And I think people are also looking for some additional relief if you have a PLA or a CBA to kind of make it more worth it to do that other than just losing some of the penalties, maybe some relief from the record keeping requirements in some way. Now, I've seen a lot of the industry comments that are floating around and, you know, some of these are well covered. There's a lot of people submitting comments on them, and especially whether apprentices need to be used in alteration or repair. Everyone's on that. But if you're thinking of submitting some comments in the next few days, there are some that I do think are worth hearing some more voices on, especially the demonstrating good faith efforts when there's no apprenticeship program. A lot of people are asking what is a reasonable expectation for the geographic area, but they're not really getting at what I think is the core question of how to do that. how do you just demonstrate good faith efforts? What do we need to have to show you that we've done this when we don't have an apprenticeship program to ask? And so to me, that's one where I would love to see that in some more letters. Same with the apprenticeship program's failure to respond. So one of the things that they can do is they can say, we've received your request. And the proposed regulations say that that's enough to count as a response, but they didn't provide you with apprentices. So after they say, we've received your response, how long do you have to wait before it counts as a denial? Again, that is a thing that I think people know is an issue, but I have not actually seen in very many of the comments. And I guess the last one I'd say is, again, this PLA waiver and CBAs. I know some people are addressing it, but I think that mostly it's asking for more additional relief that we're seeing. I'd like to see it expanded to CBAs and not just PLAs and more of the requests. Now, the record keeping one, I don't know how far we're going to get with that if we make comments. I do think that they want the taxpayer to have the records. But I do think that. Some of the records they have asked for are very sensitive information, you know, social security numbers, contact information for all of these employees. Maybe there's something that we can get from Treasury to have fewer privacy concerns when we're sending this information around. I think that they looked at what information is required for government contractors and then they send that information to the government. But here it's being sent between private parties. And I think that that creates a different. you know, that's a very different scenario. So I'm hoping that we get some sort of relief on the very least what type of information needs to be in the taxpayers hands, but maybe even we'll get something that says it's okay to have your contractors and subcontractors maintain some of this information. But it does not say that currently. It does not say that currently. I want to be very clear. I think the fact that so many people want to ask that question tells you that it's not that it does not matter way currently. Right, right. And that's, that's an important thing to think about is when you're you're putting in comments, you know, try to focus on the regulations themselves that the statute is law, we can't really go back and change the statute at this point. So we're not going to be able to convince Treasury that no record keeping should be required because the tax code, you know, requires basic record keeping to establish qualification for credits, you're not going to be able to say that you don't have to use apprentices at all, but you might be able to say, hey, the statute specifically only refers to construction in the lead-in to the apprenticeship requirements, and the regulation should be consistent with the statute. So just as you're thinking about comments, it's really focusing on consistency with the code. And I also think comments are best when they propose a solution, not just say a problem. If you can give some treasury something to put into the regulations. I think that your comment is a lot more likely to be well received and implemented than if you're saying this is a problem, solve it for me. OK, so now in our remaining time, I'm going to try to get through some some practical considerations that we've that we've come across while both negotiating agreements that implicate the IRA and looking at, you know, implementing it in your own in your own company. So contractor, subcontractor and supplier compliance. Now, this is a tough one because you have to flow down the requirements to everyone down the chain. And so you want to consider whether you're going to tell your contractors and subcontractors specifically what they need to do. And you take ownership for interpreting the guidance and the regulations or whether you're going to put in there something that says just comply with the guidance and regulations. And then you leave it to them to interpret. There's pros and cons, because if you're saying specifically what they need to do. the risk is on you. But at the same time, the risk in some ways is always on you, because compliance comes back to being your responsibility. And if they interpret it incorrectly, maybe you have an indemnity, maybe you have some way that they have to pay you for non-compliance, but can they satisfy it? What kind of cost do you have to put into getting them to satisfy it? So depending on who your contractor is and how much you think they understand what the requirements are, you might take different approaches there. and just what your level of where you see your risk tolerance being. Now, collecting and retaining records. There are a lot of ways to do this. It is burdensome. There's no way around that. It is burdensome. And it is a lot of companies that have not had to do something like this before. Now, you can handle this internally. Maybe you have people already within your company that can handle this. Maybe you want to. build out a team within your company who's responsible for this. That might be a way of not creating an external cost, hiring someone else that's going to go on indefinitely. So you could build out your own team. But there are also third-party service providers that do this and can help you with this at different levels. There are essentially accounting firms can do this for you, as well as, I guess, specialized services, companies that really only do prevailing wage requirements. Historically, they've worked with government contractors. Now they're branching out into the IRA. And it's worth looking into those if you don't think you can handle this kind of thing internally. But in either event, I think we would agree that it's best to get ahead of this when you're negotiating your contracts. And to the extent you can agree on a form of what those records are going to look like as you're signing up the agreement and ensuring that that form contains all of the information that's needed. currently mandated by the regulations is your best bet. You know, hopefully the regulations in their final form will be. not as burdensome. So at least if you've started with what's in the proposed regs, you're probably safe. And then you can always dial it back later once we get final regulations. Yeah. And I'd say that make sure your commercial team is aware of how important meeting these requirements is because you don't want them to get too far down the road of negotiating an agreement without having this issue been raised. Alex speaks from experience on that. Yes. A lot of experience on very quick deadlines. PWA covered. And it also goes to keeping all the contractors and subcontractors that you're flowing down through aware right from the outset of those requirements. So you want to need to make sure you're determining who is covered, reviewing job descriptions, looking at what kinds of services are covered. So warranty work is something that people that often slips through the cracks. They think it's a supplier who's just going to drop things off. So that supplier's installation of anything is going to be covered. But then people forget about warranty work where they come back later and have to provide essentially repair services. So make sure that you have even in a contract like that, you need something that covers the PWA requirements. And then you need to think about what contractual remedies you're going to have in your agreements. Is it going to be a full indemnity? Are there going to be any caps on that indemnity? Are they just going to reimburse cure payments? There are a lot of different ways to... get at this. You know, maybe if they're not providing you records, you withhold certain payments on the contract until that's done. But you do have to think about how you're going to address this. And it's, you know, it's, there's a lot of different approaches. So it's the kind of thing that can take a while to negotiate. And then the last that I'll raise here is data privacy. And as we've been going through this, this is one that, you know, wasn't expected, I think, initially, it didn't occur to everyone, but has become a bigger and bigger deal, because of what the record keeping requirements are. They require such sensitive information that you don't want to give out about your employees and that maybe you don't want to give a customer because it shows your margins in some way. And so you need to think about how you're going to convey that sensitive information and what you need to do that. Do you need data privacy agreements with who you're giving the information to? Do you need waivers and releases from your employees? What do you want to put into an agreement that says how... How are you going to handle all of this information? Maybe something that limits the ways in which the purposes for which that information can be used is something you'd also consider. So I don't know about you, Alex. And Heather, we've done a few of these. This is the most amount of questions I've seen come through on the chat, which I guess is not a surprise given the complexity of these rules and their novelty. So as mentioned, we will try to get through all of these questions and we have folks contact information and we'll respond as we can. You'll see this is the tip of the iceberg in terms of the V&E folks that work in the IRA or energy transition space. Please feel free to reach out to the three of us or anyone on this slide and they can find the right person if you have questions. But thank you again so much for joining us today. You'll be able to find this presentation on the landing deck and hope everyone has a great day. Thank you, everyone.

Good morning, everyone. I see we have folks joining. Our participant number is climbing.

I think we're ready to go, and I'm going to kick us off in the interest of time. So welcome. Good morning, good afternoon, depending on where you are in the country. I'm Collins.

I am a tax partner here at Vincent & Elkins. I work primarily in the renewables, energy transition, and all things IRA space. This morning, this afternoon, we're talking about the IRA labor requirements.

As many of you probably know, regulations came out recently. We're going to hit on a lot of those details and what they mean practically. Today's speakers, you've got myself.

I've introduced myself. I'm joined this morning by Heather Barron. She is a counsel in our tax practice located in New York. She and I work in the energy transition space. and have been very focused on all other IRA contracts.

He is a counsel in our labor and employment group. He has significant experience with prevailing wage and DBA contracts, and he's used that experience to quickly become one of the foremost experts on these PWA requirements. He's been in the trenches with us the past few months negotiating EPC and supply contracts.

assisting clients prepare record keeping forms, working on behalf of investors to diligence, satisfaction of the labor requirements, and preparing comment letters. I'm probably leaving stuff out that he's working on, but he's the man if you have questions. So with that, let's set the stage a little bit. If you are on this Zoom, you know what the IRA is, but I will tell you anyway. The IRA is one of the most...

sweeping pieces of climate legislation that has been enacted in the U.S., if not the most sweeping piece of legislation. It hits all sorts of different areas, technologies, project types, and it does that through the tax code, basically. It provides the number of subsidies and it extends existing subsidies.

It also has a number of different policy goals. The one that we're going to spend a lot of time talking about today is the goal of... I'm basically establishing and building up a skilled, highly trained and well-paid domestic workforce in the energy transition space.

And the way that it does that is with a new credit structure. This hits many of the tax credits that you find in the IRA. And basically what it says in many of these credits.

is that if you want the full credit rate, so for example, if you're looking for an ITC, if you want a full 30% ITC, you have to meet these prevailing wage and apprenticeship requirements. If you don't, then you only get 20% of the otherwise available credit. So using our example for ITC, that would be 6%.

There are exceptions to these requirements, but they are limited and they're not available for all the credits. But if we're thinking about ITC and PTC, where a lot of folks are playing these days, the exceptions are for small projects, those with a maximum output of one megawatt, and for projects that were able to begin construction prior to January 29, 2023. So we always get questions, what does it mean to begin construction? Thankfully, that is a concept that's been in the tax code for at least a decade, if not more.

And so we have some guidance and Treasury was kind enough to confirm that that guidance will continue to apply in this construct. So to begin construction and be exempt from these requirements, basically it means you've begun physical work of a significant nature or you've met a 5% safe harbor. Essentially, you've paid enough amount of costs prior to January 29th to have been deemed to begin. construction. We're not going to spend any more time on beginning construction today.

It is a highly nuanced area full of all sorts of terms of art that, you know, only the tax code can kind of decipher. Again, if you have questions on beginning construction, please don't hesitate to reach out to anyone on the B&E team. All right.

And so let's say you're not exempt. What are the prevailing wage and apprenticeship requirements? It's twofold.

The first, you have to pay prevailing wages to all laborers and mechanics for construction, alteration, and repair. before the project is placed in service, and during the credit period. So again, for ITC, you're thinking about a five-year period. For 45 PTC, you're thinking about a 10-year period.

For 45 Q, a 12-year period. So it depends on the credit. The second piece of the requirements is the apprenticeship requirements. As Alex is going to explain today, that actually is a little bit harder than the prevailing wage requirements in some respects. The idea there is you need to make sure a minimum number of apprentices are used in the construction of your project.

We're going to hit on this a few times. There's open questions as to what extent you need to use apprentices after construction of a project. I know Alex has thoughts about that. So we'll talk further.

And then the other piece of this that that isn't in the title PWA, but is just as important is the record keeping requirements. This is one that requires a lot of thoughtfulness. And frankly, the market is still developing on how this is best going to be established. But, you know, do not sleep on the record keeping requirements.

The taxpayers are responsible for maintaining these records, establishing that they've satisfied them. And if they do not, then they could be subject to penalty or audit. So, Alex, turning to you to get into. the details sure yeah so we've got proposed regulations that came out on august 29th and i mean they gave us a lot of details about how some of this is going to work but there are also some questions that remain that were raised by the proposed regulations and some that it just didn't cover questions that we already had um there are were comments are open until october 30th so if you're thinking about any comments um you know few more days to get those in. And there are certainly some areas that we'll talk about where we hope to see movement based on comments.

So we hope a lot of comments come in on those subjects. We'll start, though, with some more of the basics, just what are prevailing wages. So for those of you that are kind of new to this, haven't already dived into how this works, prevailing wages are wages that are set, essentially minimum wages. that are set by the Department of Labor, historically for compliance with the Davis Bacon Act, which applies to federally funded construction projects.

But now, of course, it applies to these IRA projects for people who want to get the tax credits. And we'll see that in a lot of these areas, things don't line up perfectly, but I think that we're finding how it's going to fit together, especially with the prevailing wage requirements, as more and more guidance is issued as the regulations have come out. But these are not minimum wages that are like your regular state or federal minimum wage that apply across the board. You have minimum wages that apply based on job category and essentially locality or county in which the project is taking place.

So you're going to have a different prevailing wage for someone who's an electrician in Harris County, Texas, than you would for someone who's a heavy machinery worker in Harris County, Texas. And then again, a different prevailing wage for someone who's an electrician in Harris County versus who's an electrician in Kings County, New York. And so you always have to look at what's called a wage determination, which is where the Department of Labor publishes these prevailing wages. And the prevailing wage that you look at is set at the time that the construction, alteration, or repair begins.

So if you have entered into contracts with long lead times, You might need to update prevailing wages as you get closer to actually working on the project. And that can present some difficulties because you bake in those costs at the time you are entering into those contracts. And there could be some level of cost increase that you aren't anticipating as you get closer to construction. And you have to think about how you want to handle that and how you want to budget for that.

Often, you know, we'll see change order relief. or price adjustments as we see if there are, in the case there are any changes in the prevailing wage. But that's something you need to think about both in your contracts and in your budgeting. Another thing to consider here is fringe benefits. So a prevailing wage includes both a cash amount and a fringe benefit amount.

A fringe benefit is something like health insurance, 401k contributions, or vacation or sick pay. And you can use those to meet the prevailing wage. Now, you can pay the fringe benefit amount in cash if you want to, but you can also receive some payroll tax benefits by paying for by using the fringe benefits.

I mean, on the downside is proving that you're paying the fringe benefit amounts is a little bit more difficult in the record keeping area of this because you have to show what those amounts are and showing how much the 401k contribution is for each of your individual laborers can be an added step to the record keeping requirement that is a little challenging. And another aspect is that so say you have a worker that declines health insurance, you don't get to count the amount that you offered. So you have to look at what they actually receive. And so you have to make sure you're meeting that amount for every worker, regardless of whether they participate in your benefits programs.

And so there's just a lot of pros and cons that you can think about with these that are really in the weeds, but are something you need to address when you're trying to meet the prevailing wage requirements. Alex, if you're using union labor, can you assume that you've met those requirements or is there still more to do? There's still more to do. I mean, you're more likely to have met those requirements based on because a lot of these prevailing wages are set based on wage surveys. And the people who answer those wage surveys are often union members.

And so that is also the prevailing wage is often similar to or pegged to the union rate. But there is a possibility that a union rate is below the prevailing wage and you have to double check that you're paying the right amount. And if you're not, that can be difficult because you might have to open up. bargaining with the union in order to make sure that you get to the right amount. You can't just decide, I want to pay someone more.

Now, unions typically agree when you say you want to pay someone more. But there are a lot of, there might be other factors, especially if you have a contentious relationship with your union. Now, you might ask, what if I look at a wage determination and see that there's not the job I need on this list? And what do I do? So there's a process that In the context of the IRA, it was called a supplemental wage determination.

For people who are familiar with government contracting, this is similar to conformance. Essentially, you would ask the DOL to issue a wage determination for the job. And, you know, in the green energy space, in the clean energy space, a lot of times you're not going to find the job that you're looking for on a wage determination. So you have a solar technician that's typically not going to be on there.

A wind turbine blade technician also typically not going to be on there. And so you would submit a request with the requirements that include the information that's listed here to the Department of Labor and they would issue you a wage determination. Now, sometimes the Department of Labor doesn't want to create a new job category and they'll try to lump your worker into one of the existing job categories.

Now, there are pros and cons in that because maybe it's a lower rate than. you would otherwise be, but maybe it's higher. And it also just creates a lot of questions and uncertainty about where you want to put these people. So something that we've seen in the industry and have been talking to some industry groups about are working to create kind of accepted job categories in the field. So say it's a solar energy group going to the Department of Labor together as a group and saying, we think there should be X, Y, and Z job categories.

So that when you submit one of these requests, you don't have to convince the Department of Labor that a new job category is warranted every single time. You can instead just ask them for a wage determination for that area in a job category that's already been recognized. Now, the timing of these requests, you can't submit them more than 90 days out from when the construction alteration or repair of the facility is going to begin. And it does take the Department of Labor time to get back to you.

And so I would say that the best approach is probably to submit as close to the 90 days as you possibly can, because, again, you probably have contracted out prior to this 90 days. So you need to get the appropriate wage determination so you can start paying that to people. But in the meantime, you can use what you think is the best wage determination, what the appropriate wage determination is.

And then after you're issued a supplemental wage determination, you have 30 days to retroactively pay people the difference, if any. And you don't have to pay any penalties for that time period. And so there is a method to correct. But again, it's something you might have to consider as an expense that you're going to incur.

And I think that really so far we've we have not seen a lot of new job categories created. And. They've been lumped into a lot of general labor, which tends to be a lower paying job category than some specialized work.

But I don't know that I would anticipate that to continue because I do think that the Department of Labor is starting to recognize that, hey, maybe lumping this into existing job categories isn't going to work. And I know you're going to hit on this closer to the end, Alex, but, you know, it goes without saying that this creates significant uncertainty in the cost to construct a project. Right.

If you don't know the labor cost yet, you can't even find out until 90 days before construction. It's obviously putting people in a bit of a pickle. Yeah. Definitely. So then the next major requirement, I guess, next category of requirements is the apprenticeship requirements.

And there are three separate apprenticeship requirements, each of which needs to be satisfied. The there's the labor hours requirement, which refers to the total percentage of labor hours, not number of workers that need to be performed by apprentices on a project. And that's 10 to 15 percent, depending on when the project began.

This is something that you look at for the project as a whole, not on a job category by job category basis or on a contractor by contractor basis. So if you can't satisfy the 15 percent, say, of apprentices or with electricians, you could make some of that up with a different job category. Or if one of your contractors does not cannot obtain apprentices for the kind of work they do, they don't necessarily need to get to 15 percent. You can make again, make up that work in a different job category where it's easier to easier to obtain apprentices.

The second apprenticeship requirement is called the ratio requirement. This is refers to something called the apprentice to journey worker ratio, which is something you would get with an apprenticeship program who you engage. And it's the minimum number of journey workers or essentially regular workers, fully trained workers that. are on a project on any given day compared to the number of apprentices that are there on that day.

And this is designed to make sure that the apprentices on site are getting the appropriate training supervision that is needed. And you can pay apprentices less than you pay a journey worker. So this also ensures that you are not trying to load up on apprentices to reduce your labor costs. Now, this is a day by day.

requirement. So you need to make sure that it's satisfied for every day that you're using apprentices. If on October 26th, you have apprentices on site, you need to check that for each job category, you are satisfying the ratio for each job category on every single day. But if you don't have any apprentices the next day on October 27th, you don't need to worry about this that day. It really is something that unfortunately from a record keeping perspective is...

daily, but does mean that you have some flexibility with the dates on which you are using apprentices. And I think that overall, this is a pretty manageable requirement because the ratios are typically reasonable. And the last one is the participation requirement.

This says that each taxpayer, contractor, and subcontractor all the way down the chain who employs four or more individuals. performing construction, alteration, or repair must use at least one apprentice. And so this is preventing you from loading up all of the apprentices in one job category, but not using any in the others. And so really, this is designed to spread out the training that the labor force is getting for all the job categories that the administration believes we need. And so if you have a contractor who employs four people, And they're electricians.

And those are the only four electricians on the job. They're going to need to go and find an apprentice and they'll need to use at least one. Maybe you have one that uses hundreds of people, but we really are having a hard time finding enough apprentices.

They still need to use at least one and you could make up hours elsewhere. Obviously, it's easier to make up the hours when it's a smaller amount of total workers. If you they employ three or fewer individuals performing. construction, alteration, or repair, you don't need to use any apprentices with that group.

But based on the way that the examples are calculated and the proposed regulations, the work done by those people does seem to count towards the total labor hours. And so you need to make up those labor hours somewhere else, even if that particular contractor did not need to use apprentices. And I think that this...

good faith efforts exemption is maybe the most complicated or it has the most gray area remaining of all the areas of the PWA requirements in the IRA. So this is how you handle it if you can't find apprentices. And this isn't just general good faith we put in an effort.

There are specific things that you need to do. You need to make a request to an apprenticeship program. And now the statute just says an apprenticeship program. But in the proposed regulations, they add some characteristics to the kind of apprenticeship program you need to make that request to. It needs to be in the geographic area of operation that includes the facility or the project.

And it needs to. or it needs to be able to provide apprentices to the location of that facility. It needs to train the kind of apprentices that you need for the work, and it has to have a practice of entering into agreements with employers for the placement of apprentices.

Now that third one's going to be pretty easy to meet because if they're a registered apprenticeship program, that's the kind of thing they do. But those first two, you know, sometimes it's not going to be easy to find someone like that. If you have a specialized worker, then Are you going to be able to ask for a solar technician or what kind of laborer do you need to get? Is it could you hire a general laborer to just work alongside your solar technicians in order to meet this apprenticeship requirement? I think some of that's still pretty unclear.

And one of the major areas for comments that we'll talk about later is how you demonstrate good faith efforts when there isn't such an apprenticeship program that you can ask. And I think that's a pretty. big area that to me seems like should qualify because if there's no apprenticeship program that you can use how you you shouldn't lose the ability to gain the tax credit but we don't know exactly how you're going to demonstrate that you put faith good uh put forth good faith efforts when there isn't such a program you can ask now the apprenticeship requests that you make have again specific requirements that need to be included in them that you'll need to talk to a lawyer or look in the proposed regs to find out.

But they also need to be made every 120 days if you get a denial of your request. And so this is something that was added in the proposed regulations. It's not in the statute.

And so say you've requested apprentices. Again, I'll use electricians. And they say, no, we can't provide you electricians at this time. All of our apprentices are booked up. You can't just say we've now satisfied the requirement for the entire project.

You might need to request again and you'll need to request again every 120 days of the project to see if you can meet the labor requirements or the apprenticeship requirements. If the response is more, no, we don't have these kinds of apprentices, we are too far away, we don't train these people, then you can kind of expect a similar answer. every time, assuming that that's the kind of thing that's going to ultimately satisfy the good faith efforts exception. Because right now, it's not clear that that would, if they respond and say, we don't train the kind of apprentices you need, have you made the request that's required under the proposed regulations? And it doesn't seem like you have.

So that's some area where we're hoping for a little bit more guidance and help. And Alex, in the unlikely event that you get a... no response the first time and then a yes response after 120 days when you resubmit, do we still have uncertainty as to whether you have to hit the minimum threshold for all hours? Or do you think we can just look from that point forward?

So there might be some uncertainty, I think, but I do think that they've given some guidance that at least suggests that you're looking for that point forward. When you get a, it says when you get a denial, that you're relieved for the portion. of a denial. Now, the way they've written it kind of seems like they're talking about kind of worker more so than time period. But I think that I do think that that apply that that at least looks like it should apply to the you're looking at that point forward for the total labor hours.

So now we're going to talk about what kind of work you have to satisfy the PWA requirements We've already mentioned construction, alteration and repair. Now, this is a term of art that comes from the Davis-Bacon Act. And you look at the construction, alteration, repair that's performed by laborers and mechanics, another term of art that comes from the Davis-Bacon Act. Laborers and mechanics tend to be what we might call wrench turners.

You know, it's physical labor. So someone who works in an office related to the project, they're not covered for this. Someone who's on the site but is a supervisor, that person is not. covered unless they perform at least 20 percent of their work is actual manual labor something that would be construction alteration or repair um now it's not always simple what's construction alteration or repair because so in the most recent DBA final rule that was published and went into effect three days ago, they said that flaggers, so people near a construction site who are directing traffic around the construction site, those people are covered laborers under the DBA.

But you might not think of that kind of work as being typically construction. There's also a lot of debate about whether surveyors are always covered. And it really depends on the kind of work that an individual surveyor is doing. And so it's not going to be the whole survey crew, but it might be some of them, especially if they're clearing brush. That's the kind of thing that is physical labor that is typically covered and guidance has said is covered for surveyors.

So you can't always easily tell what is construction even. And it's even more difficult when you're talking about what is repair versus what is maintenance. Now, maintenance is not covered.

and repair work is. And that can sometimes be a blurry line. I guess an easy way to talk about it would be maintenance is routine. It's regular. It's the kind of thing you can predict.

It tends to not look like the initial construction of a project in what the work is. Some examples from regular, I guess, building construction that the DBA had in mind when it was created would be light bulbs, HVAC. filters, mowing grass, like those are some examples of things that everyone agrees are maintenance.

You could say that it's things that keep it in regular operation rather than return it to operation after something is broken or failed. Repair work, on the other hand, are things that look like the initial construction of the project tend to be heavier in labor content, I guess, a way to say it would be. But it's also things that restore functionality. So if something breaks, bringing it back to a working order would be repair and not construction or sorry, not maintenance. And those are like the helpful legal framework.

Right. But there's also the practical realities of constructing a project. How do you ensure that you can pay worker a prevailing wages, but not worker B? And maybe they're doing covered work on one day, but not the next. So I think, you know, Alex, correct me if you feel differently, but sometimes the best bet is to just err on the side of it's covered if it seems like it's a gray area.

I think that's that's correct, where especially if there are people who are going to be doing both kinds of work, you're probably just going to want to pay prevailing wage for all of it. Because then you also introduce the problem of tracking the hours for different kinds of work that they're doing. And that's not easy. And the difference between what you're paying them and the prevailing wage may not be a large amount.

And so you might just bump it up for all the work that they do to not have to worry about the administrative hassle of timekeeping. I think where it gets a little more tricky is when you're talking about different contracts that you have. So if you have someone who's essentially an O&M service provider for your facility. You want to look closely at what kind of work they're doing, because maybe most of what they do is not covered, but there are a few tasks they do that are, such as if they do correct something that's often called in contracts corrective maintenance. It's something that's only done once something fails, but it's performed under an O&M contract.

Based on the title of the contract, you'd say that's maintenance and that it's not covered. But the reality is if it's this corrective maintenance where they're repairing things that have... broken, it's covered in the title of your contract, doesn't matter. So we also have the concept of where, we also have the question, I guess you'd say, of where the prevailing wage requirements apply.

And the proposed regulations say that they're using the DBA concept of site of the work. And this concept was updated again in the most recent rules that went into effect a few days ago. So the two parts of this that have historically... always been included are the actual site of the facility or project, which makes sense, and then adjacent or virtually adjacent dedicated support sites that are right or very close to the site itself.

So like a tool yard, a lay down yard where you're doing things that are a lot like construction right by the facility, but not necessarily within the fence. The new part of this is what's called secondary construction sites. And this was something that was added to the site of work definition.

to address modular construction. So where a lot of the really traditional construction work is done away from the facility and then a nearly completed component or part of the facility is shipped and just has to be put into place. And there's not a lot of additional work that needs to be construction work that needs to be done once it arrives. Now, this can start to look a little scary, but the DBA regulations do say that it's supposed to be a narrow expansion of coverage targeted at modular construction. There is some question because it's so new about how far this applies.

But we know, for example, that it's not applying to does not apply to material suppliers so when you're uh you know you're ordering wire or you're ordering cement or any of those or a kind of smaller components definitely not covered we know that's not covered it's a question of when you start to build bigger and bigger things what starts to fall into a secondary construction site and now i don't think that this is actually going to apply to many things but it might apply to some and so you do have to check a secondary construction for something to be a secondary construction site all of the following need to be true a significant portion of the building or work needs to be constructed at the secondary site and when we're talking about a significant portion we're really talking about again the modular element of things where it's something that's nearly completed and just needs to be put into place without significant work at the at the project site that significant portion needs to be constructed for specific use in the building or work and not a product that's made to the general public. So if this is not something that has any customized features, it is probably not part of the secondary construction site. So a question I like to ask is, you know, could the manufacturer turn around and sell this to someone else without making any changes?

If they could, then it's probably not for specific use in that building or work. But again, even if it's like a customized connection, you start to get into a gray area here where, no, they couldn't turn around and sell this to someone else without making changes. It does seem like the design of this component is something that is specifically for that site.

And then the last thing, which I think is probably the easiest way for a lot of these facilities to get out of it, is that the site has to be either established specifically for the performance of the contract or the project. or it's dedicated exclusively or nearly so for a specific period of time to the project. So there are you're making you know solar panels for multiple projects all at the same time, then this out you're not going to satisfy this element and it's not going to be a secondary construction site.

But if you are making maybe a entire wind turbine for one customer and not necessarily looking at the different components at different facilities, Then this is where you might have to ask questions. Are we covered? And so I do think that if you have to, like when we're really talking about a specific period of time, it's not just it's not a couple of days.

It has to be a matter of weeks in order to qualify for this. It's not going to be like you're rushing at the end to satisfy a contract. So you dedicate an entire facility to one project.

It is a larger. time period that this needs to be specifically dedicated to one customer more or less. And you probably just freaked out a bunch of people, but I tend to think of the secondary construction site rule is almost an anti-abuse rule. Like, you know, don't think you're going to get out of these requirements by moving something elsewhere off of the project site. But if, you know, you're really buying components or equipment.

from a third-party supplier who, you know, maybe they're going to spend a significant portion of time at their facility manufacturing items for the project, so long as it's not dedicated entirely for that project, even if it's going to be a few months, say, that they're building wind turbines for the project. Doesn't sound fatal, but something to talk to Alex about for sure. Yeah.

And again, I want to emphasize that I don't think this applies very often, but it's the kind of thing you need to check to make sure it doesn't. And then you also want to make sure how you're you want to figure out how you're going to demonstrate that it doesn't apply in the case of an audit. So these are the kinds of things you need to think about, even if it's typically not going to apply.

And so then we have pure options. So you're wondering, what do we do if we mess up? Are we just going to lose our entire tax credit? Almost never. because it's always going to make sense to cure.

If you don't pay workers prevailing wages, you can pay them the difference plus interest along with a penalty to the secretary, depending on how many number of workers were not paid correctly. Now those penalties go up significantly if there's a finding of intentional disregard. I'm not gonna get into the details of how we calculate all of this just for the sake of time. But know that there are remedies for you if there's a foot fault or even if something's just not done correctly by a contractor at all. You can fix it.

It might cost you a significant amount, but it's certainly going to be less than the tax credit. And then the same with the apprenticeship requirements. You can pay $50 times the number of labor hours that should have been worked by apprentices and were not. in order to cure this penalty, and it goes to $500 if it's intentional disregard.

So again, not cheap, but it's probably going to be worth paying in almost every instance. Also, if you discover that there is a violation or noncompliance in the course of your project, you have 30 days to fix it from the date you learn of the noncompliance, and you don't have to pay the penalty. So you might have to, again, pay the worker, you'd have to pay the workers the difference if you were underpaying them, but you don't have to pay the penalty to the Treasury.

And these are really important for folks that are maybe tax credit purchasers under the new transferability rules, or tax equity investors, where you may not have the ability to control compliance, but you can build in that. requirements in your transaction documents to force the sponsor development to perform these curative actions so that the credit that you finance is safe. And so we're working on lots of contractual provisions that build those types of protections in, again, for financing and credit parties. So I won't get into the details of this again for the sake of time, but something to be aware of. is that there's a penalty waiver if you're using a project labor agreement that meets certain requirements.

So if you find yourself in a situation where your project is going to use a PLA, I don't know that you necessarily want to use a PLA just to get this penalty waiver. I'm not sure there's enough benefit to that, but if you find, if you are going to use a PLA for a project, it's worth making sure that that PLA satisfies all of these requirements. requirements so that you can get the penalty waiver. So as you were previewed earlier, we've been using proposed regulations that taxpayers can currently rely on. And now you've run through a lot of details on those.

And there's still a short time in the comment window up till next week. to provide comments and some issues that have already been catching attention include the requirements under the proposed regs that apprentices be used for alteration and repair. In the code, in the statute itself, it refers to the apprentice use during construction, on construction alteration and repair, and the application of those ratios and labor hour requirements to the alteration and repair period as Alex flagged creates additional issues. There's also the good faith efforts exception which you can seek to satisfy but in the absence of responses or in the absence of a program that really meets the requirements for providing your form of apprentices, your skill set of apprentices.

There's no clarity at this time on how you can demonstrate your good faith efforts for lack of available program or response. And then, of course, the 100 day window for that good faith. exception to apply once you've reached out and the requirement to continue reaching out is open for comment.

And the lack of responsiveness from an apprenticeship program, the guidance did say that responding no is is information, it is a response. So you're not completely done at that point. Next slide.

And then the record keeping requirements, already we've covered in great detail how important hours of labor, classifications of work, specific individual worker information is. If you're going to be making any cure payments, you will need to make them to those specific laborers. And that means that employee information is required. And when you're in a circumstance where a taxpayer may come in and... and purchase a project and be seeking that increased headline credit rate.

They are not necessarily the people who were originally handling payroll. So how does one protect the privacy, the information of those employees, but also make sure that a new owner can satisfy any share payments in the event that... prevailing wage wasn't paid for some period and they're looking to make up that underpayment.

And then on the side of work requirements, the potential for manufacturing facilities in that final push to be picked up as a result of maybe the equipment fraud. specific project being the full scope of work at that time and the requirement to have the manufacturer keep tabs on what projects they are working on on the floor is another question. And then for 45Z credits, it's not clear whether the begun construction exemption to the prevailing wage requirements applies.

And if the construction did begin before the rules were issued, then it's also not clear how the reliance on the proposed regulations will work, given that there was that window prior to issuance. And Alex, on the last one. Yeah, so the PLA penalty waiver that I mentioned right now only applies to project labor agreements, which are really a specific type of thing that, you know, it's something that's a pre, it's a collective bargaining agreement, but it's a pre-hire collective bargaining agreement that really can only be used in the construction industry.

It does not apply to people that have CBAs with their own employees. And so it seems to me that the same type of waiver that PLAs get should apply to people who have CBAs with their own employees. And I think people are also looking for some additional relief if you have a PLA or a CBA to kind of make it more worth it to do that other than just losing some of the penalties, maybe some relief from the record keeping requirements in some way. Now, I've seen a lot of the industry comments that are floating around and, you know, some of these are well covered. There's a lot of people submitting comments on them, and especially whether apprentices need to be used in alteration or repair.

Everyone's on that. But if you're thinking of submitting some comments in the next few days, there are some that I do think are worth hearing some more voices on, especially the demonstrating good faith efforts when there's no apprenticeship program. A lot of people are asking what is a reasonable expectation for the geographic area, but they're not really getting at what I think is the core question of how to do that. how do you just demonstrate good faith efforts?

What do we need to have to show you that we've done this when we don't have an apprenticeship program to ask? And so to me, that's one where I would love to see that in some more letters. Same with the apprenticeship program's failure to respond.

So one of the things that they can do is they can say, we've received your request. And the proposed regulations say that that's enough to count as a response, but they didn't provide you with apprentices. So after they say, we've received your response, how long do you have to wait before it counts as a denial? Again, that is a thing that I think people know is an issue, but I have not actually seen in very many of the comments.

And I guess the last one I'd say is, again, this PLA waiver and CBAs. I know some people are addressing it, but I think that mostly it's asking for more additional relief that we're seeing. I'd like to see it expanded to CBAs and not just PLAs and more of the requests. Now, the record keeping one, I don't know how far we're going to get with that if we make comments.

I do think that they want the taxpayer to have the records. But I do think that. Some of the records they have asked for are very sensitive information, you know, social security numbers, contact information for all of these employees.

Maybe there's something that we can get from Treasury to have fewer privacy concerns when we're sending this information around. I think that they looked at what information is required for government contractors and then they send that information to the government. But here it's being sent between private parties.

And I think that that creates a different. you know, that's a very different scenario. So I'm hoping that we get some sort of relief on the very least what type of information needs to be in the taxpayers hands, but maybe even we'll get something that says it's okay to have your contractors and subcontractors maintain some of this information.

But it does not say that currently. It does not say that currently. I want to be very clear.

I think the fact that so many people want to ask that question tells you that it's not that it does not matter way currently. Right, right. And that's, that's an important thing to think about is when you're you're putting in comments, you know, try to focus on the regulations themselves that the statute is law, we can't really go back and change the statute at this point.

So we're not going to be able to convince Treasury that no record keeping should be required because the tax code, you know, requires basic record keeping to establish qualification for credits, you're not going to be able to say that you don't have to use apprentices at all, but you might be able to say, hey, the statute specifically only refers to construction in the lead-in to the apprenticeship requirements, and the regulation should be consistent with the statute. So just as you're thinking about comments, it's really focusing on consistency with the code. And I also think comments are best when they propose a solution, not just say a problem. If you can give some treasury something to put into the regulations.

I think that your comment is a lot more likely to be well received and implemented than if you're saying this is a problem, solve it for me. OK, so now in our remaining time, I'm going to try to get through some some practical considerations that we've that we've come across while both negotiating agreements that implicate the IRA and looking at, you know, implementing it in your own in your own company. So contractor, subcontractor and supplier compliance. Now, this is a tough one because you have to flow down the requirements to everyone down the chain.

And so you want to consider whether you're going to tell your contractors and subcontractors specifically what they need to do. And you take ownership for interpreting the guidance and the regulations or whether you're going to put in there something that says just comply with the guidance and regulations. And then you leave it to them to interpret.

There's pros and cons, because if you're saying specifically what they need to do. the risk is on you. But at the same time, the risk in some ways is always on you, because compliance comes back to being your responsibility. And if they interpret it incorrectly, maybe you have an indemnity, maybe you have some way that they have to pay you for non-compliance, but can they satisfy it?

What kind of cost do you have to put into getting them to satisfy it? So depending on who your contractor is and how much you think they understand what the requirements are, you might take different approaches there. and just what your level of where you see your risk tolerance being.

Now, collecting and retaining records. There are a lot of ways to do this. It is burdensome. There's no way around that.

It is burdensome. And it is a lot of companies that have not had to do something like this before. Now, you can handle this internally.

Maybe you have people already within your company that can handle this. Maybe you want to. build out a team within your company who's responsible for this.

That might be a way of not creating an external cost, hiring someone else that's going to go on indefinitely. So you could build out your own team. But there are also third-party service providers that do this and can help you with this at different levels. There are essentially accounting firms can do this for you, as well as, I guess, specialized services, companies that really only do prevailing wage requirements. Historically, they've worked with government contractors.

Now they're branching out into the IRA. And it's worth looking into those if you don't think you can handle this kind of thing internally. But in either event, I think we would agree that it's best to get ahead of this when you're negotiating your contracts. And to the extent you can agree on a form of what those records are going to look like as you're signing up the agreement and ensuring that that form contains all of the information that's needed.

currently mandated by the regulations is your best bet. You know, hopefully the regulations in their final form will be. not as burdensome. So at least if you've started with what's in the proposed regs, you're probably safe. And then you can always dial it back later once we get final regulations.

Yeah. And I'd say that make sure your commercial team is aware of how important meeting these requirements is because you don't want them to get too far down the road of negotiating an agreement without having this issue been raised. Alex speaks from experience on that.

Yes. A lot of experience on very quick deadlines. PWA covered. And it also goes to keeping all the contractors and subcontractors that you're flowing down through aware right from the outset of those requirements.

So you want to need to make sure you're determining who is covered, reviewing job descriptions, looking at what kinds of services are covered. So warranty work is something that people that often slips through the cracks. They think it's a supplier who's just going to drop things off. So that supplier's installation of anything is going to be covered.

But then people forget about warranty work where they come back later and have to provide essentially repair services. So make sure that you have even in a contract like that, you need something that covers the PWA requirements. And then you need to think about what contractual remedies you're going to have in your agreements.

Is it going to be a full indemnity? Are there going to be any caps on that indemnity? Are they just going to reimburse cure payments?

There are a lot of different ways to... get at this. You know, maybe if they're not providing you records, you withhold certain payments on the contract until that's done. But you do have to think about how you're going to address this.

And it's, you know, it's, there's a lot of different approaches. So it's the kind of thing that can take a while to negotiate. And then the last that I'll raise here is data privacy.

And as we've been going through this, this is one that, you know, wasn't expected, I think, initially, it didn't occur to everyone, but has become a bigger and bigger deal, because of what the record keeping requirements are. They require such sensitive information that you don't want to give out about your employees and that maybe you don't want to give a customer because it shows your margins in some way. And so you need to think about how you're going to convey that sensitive information and what you need to do that.

Do you need data privacy agreements with who you're giving the information to? Do you need waivers and releases from your employees? What do you want to put into an agreement that says how...

How are you going to handle all of this information? Maybe something that limits the ways in which the purposes for which that information can be used is something you'd also consider. So I don't know about you, Alex. And Heather, we've done a few of these. This is the most amount of questions I've seen come through on the chat, which I guess is not a surprise given the complexity of these rules and their novelty.

So as mentioned, we will try to get through all of these questions and we have folks contact information and we'll respond as we can. You'll see this is the tip of the iceberg in terms of the V&E folks that work in the IRA or energy transition space. Please feel free to reach out to the three of us or anyone on this slide and they can find the right person if you have questions.

But thank you again so much for joining us today. You'll be able to find this presentation on the landing deck and hope everyone has a great day. Thank you, everyone.

Transcript for:Understanding IRA Labor Requirements

Transcript for:
Understanding IRA Labor Requirements