Navigate the prevailing wage and apprenticeship requirements with ease
Interest in meeting prevailing wage and apprenticeship requirements has skyrocketed in the past year as companies pursue new tax credits for clean energy.
The Davis-Bacon Act (DBA) and apprenticeship program rules, long a part of infrastructure projects, have now become a compliance concern among commercial companies not accustomed to managing the requirements as they seek generous new tax credits under the Inflation Reduction Act (IRA). Companies claiming tax credits under the IRA must comply with rules based on the DBA to benefit from the full credit amounts despite having no federal funding, no federal projects and no federal end customers.
The DBA rules mandate a minimum prevailing wage and fringe benefit for laborers and mechanics working on construction, alteration, or repair jobs of a qualified facility, project, property, or equipment. The apprenticeship programs also mandate a minimum prevailing wage and require the use of a certain percentage of apprenticeship workers to journeymen workers.
The IRA created a large economic incentive for commercial companies to pay their mechanics and laborers at least the prevailing wage for the time worked, as well as provide a minimum amount of fringe benefits or cash in lieu. Under the IRA, companies that fail to meet the prevailing wage and apprenticeship requirements, similar to the DBA rules will generally only qualify for a credit rate at one-fifth of the full amount.
For a company accustomed to receiving federal funds, the DBA regulations come as no surprise. These government contractors have invested in the necessary processes, key controls and supporting systems to maintain compliance with the DBA. Those newly affected by the prevailing wage DBA and apprenticeship regulations should find that establishing and maintaining compliance with the rules is certainly achievable, as experienced government contractors have been complying with the regulation for nearly a century.
For those new to requirements, below is a beginner’s guide to compliance with the DBA and the apprenticeship programs.
Step 1: Assess which efforts the prevailing wage DBA and apprenticeship regulations will apply to.
Taxpayers will have to comply with the wage and apprenticeship rules (including both contracts and subcontracts) during the construction, alteration, or repair of a qualified facility, project, property or equipment and in some cases for a period after the property is placed in service. There are some exceptions for certain projects that began construction before Jan. 29 or involve under 1 megawatt of energy capacity. Routine or basic maintenance is generally not covered. The DBA is a mandatory flow-down clause, meaning the company seeking the IRA tax credit is responsible for both (applicable or covered) prime contracts and subcontracts compliance with the rules.
Step 2: Of the covered efforts, assess which employees the DBA and apprenticeship programs will apply to and map those internal job positions to Department of Labor (DOL) Wage Determination (WD) job positions.
An employee’s internal job position must first meet the definition of a laborer or mechanic, and this includes apprentices and helpers. Taxpayers will need to obtain the applicable wage determination using the effort’s geographic location(s) and the construction type(s). This will entail retrieving the relevant WD(s) from the Wage and Hour Division’s (WHD) System for Award Management website. You will need to have a WD for each county and/or work location. If a WD does not exist for the county in which you are performing work, then you will need to request a supplemental WD from the WHD via email at firstname.lastname@example.org. Companies will then need to use a consistent methodology to map applicable internal job positions to the job positions listed on the WD and document and store the methodology and job mapping.
Companies will also need to apply to an apprenticeship program(s) using https://www.apprenticeship.gov/about-us/apprenticeship-system. Each program defines specific requirements, such as minimum wage rate per hour and ratio of apprenticeship workers to journeymen workers. Companies should consider a consistent methodology to map applicable internal job positions to the job positions listed on the WD and document and store the methodology and job mapping.
Step 3: Of the covered employees, set up the human resources information system (HRIS) pay rate to be at least the WD minimum prevailing wage rate.
To establish compliance with the prevailing wage rates, set up covered employees within HRIS using a rate that is at least the minimum WD prevailing wage rate. Consider employees who may charge the project using different job positions depending on their specific project tasks (e.g., an electrician vs. an insulator). Ensure that the current timekeeping process and/or system functionality can handle these situations.
Step 4: Implement a method for covered employees to track their time worked.
When implementing an automated timekeeping system, use one that speaks directly with the accounting and payroll/HRIS systems. Publish clear guidance on time tracking practices, and account for employees who work overtime, hold multiple positions, or work at multiple locations, etc.
Step 5: Create a method to demonstrate and document compliance with the prevailing wage and apprenticeship requirements.
The IRS regulations did not create a process or require submission of certified payroll records, as mandated under the DBA. However, the information needed to substantiate the tax credits is largely equivalent. The IRA mandates that companies document and store covered employees’ payroll records, including the hours worked under each job position, as well as the actual wages and fringe benefits paid to each covered employee. Companies are also required to retain records of any correction payments made to covered employees who did not receive the minimum prevailing wage and/or fringe benefit.
Companies should perform weekly reconciliations to ensure that covered employees have been paid at least the minimum prevailing wage and fringe benefit (or cash in lieu of fringe benefits), similar to the way they would for certified payroll. Timely correction payments or payouts must be made to any employee who did not receive the stipulated minimum.
Additionally, companies are required to maintain apprenticeship records, which should include:
- Copies of any written requests for apprentices, any agreement with a registered apprenticeship program
- Documents reflecting any registered apprenticeship program sponsored by the company
- Documents verifying participation in a registered apprenticeship program by each apprentice
- Records reflecting the required ratio of apprentices to journeymen workers prescribed by each registered apprenticeship program from which qualified apprentices are employed
- Records reflecting the daily ratio of apprentices to journeymen workers
- Payroll records for any work performed by apprentices
Step 6: Take a deeper dive into demonstrating compliance
Ease administrative burden by using reports from the accounting, timekeeping and payroll/HRIS systems to automate a weekly calculation that proves compliance. Create a process to quickly issue back pay to employees in instances of non-compliance with the prevailing wage and fringe benefit requirements. Finally, don’t forget to implement a process to pay out terminated employees for their time worked in a timely manner. Be sure to define who is responsible for monitoring and reviewing new projects or employees for applicability to the regulation.
The IRA tax incentive provides an important opportunity to pursue energy credit projects. Companies should be prepared for a thorough application and due diligence process, as well as ongoing monitoring and reporting of their compliance with the prevailing wage/DBA and apprenticeship programs to receive the maximum credit. Once the labor compliance framework is established and the business can prove ongoing compliance with the prevailing wage, there may be opportunities for future and/or additional projects funded by the federal government.
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