Much debated and highly anticipated, the Build Back Better Act—the BBB Act—has hit a snag. Yet many in Washington remain optimistic that its package of green energy provisions and incentives will become law this year. If that happens, tax departments will need to develop expertise in not only the mechanics of the tax credits, but also in the labor and employment and Buy America requirements that these credits would introduce into the tax system. Although these requirements are new to the world of federal tax credits, they are familiar to lawyers who have expertise in government contracting and grant funding, as well as labor and employment law.
The purpose of this three-part series of articles is to shed light on the proposed prevailing wage and apprenticeship requirements, Buy America requirements, and direct pay election included in the BBB Act’s proposed green energy tax credits. This article addresses the first topic: the prevailing wage and apprenticeship requirements. The next article will address the proposed Buy America requirements, and the third will discuss proposed requirements for making the direct pay election.
The BBB Act’s package of green energy provisions would extend and expand several familiar credits, like wind, solar, and carbon capture, and would make those credits potentially much richer. On top of that, the green energy provisions would give taxpayers a direct-pay option in the form of a refundable tax credit so taxpayers could monetize their credits right away—even if they are tax-exempt or in a net operating loss position.
The BBB Act envisions a two-tiered structure for computing the tax credits, providing either relatively modest “base rate” credits or significantly higher “bonus rate” credits. The path to maximizing one’s benefits by qualifying for bonus rates would lie, among other things, through meeting certain labor and employment rules, including prevailing wage and apprenticeship requirements, plus Buy America domestic content provisions. These new requirements also appeared in the recently enacted Infrastructure Investment and Jobs Act. If a taxpayer claiming bonus credits fails to meet these requirements, they are subject to potentially stiff penalties. Moreover, the Department of the Treasury has a history of litigating with taxpayers that seek to avail themselves of green energy programs, as seen in Alta Wind I v. United States. Treasury challenged the basis and consequently the amount of grant for wind farm facilities under Section 1603 of the American Recovery and Reinvestment Act of 2009.
The Prevailing Wage Requirement
The BBB Act adopted an approach similar to standards applied to federal government funding on public improvements, invoking the prevailing wage mandate under 40 U.S.C. §§ 3141-3148 of the Davis Bacon Act, or DBA.
The DBA requires that covered workers performing covered work be paid at local prevailing rates as determined by the secretary of labor. Prevailing rates of pay generally contain cash wages and supplemental benefits—e.g., fringe or pension benefits. A contractor or subcontractor can satisfy this requirement by paying the entire pay package through cash wage or by a combination of wages and supplemental benefits. The prevailing rates of wages and fringe benefits are specified in the wage determinations made by the secretary of labor. One type of wage determination is a general wage determination derived through surveys conducted by the Department of Labor that are applicable to various building trades in a particular locality. The other is a project-specific determination made through a conformance process in accordance with the requirements of the DBA regulations.
The Apprenticeship Requirement
To obtain bonus credits under the BBB Act, taxpayers would also need to satisfy apprenticeship requirements. A certain percentage of the total labor hours of the construction, alteration, or repair work—including work performed by any contractor or subcontractor—on any covered facility would have to be performed by qualified apprentices. The apprenticeship requirement is further subject to apprentice-to-journeyworker ratios determined by the Department of Labor or the applicable apprenticeship agency. These ratios often follow the area labor standards established by local construction unions. For example, if a collective bargaining agreement of a local laborers’ union establishes an apprentice-to-journeyworker ratio of 4-to-1, that ratio is likely to form the basis of the Department of Labor’s determination.
These labor standards requirements will challenge the economic calculus and construction budgets for taxpayers seeking tax credits for their green energy projects. Careful analysis would be necessary to determine whether the benefits of the tax credit outweigh the additional costs of satisfying the prevailing wage and apprenticeship requirements. Before undertaking such a commitment, the taxpayer should evaluate whether it has or is committed to establishing the requisite management and infrastructure to absorb the additional overhead and responsibilities in appropriately managing a compliant prevailing wage project. Once the taxpayer decides to proceed, the taxpayer should work further with counsel to develop the necessary processes that will ensure meeting the various challenges that are outlined below.
Prevailing rates of pay may be multiples of standard nonunion pay packages in private construction. For example, the prevailing hourly pay package for a journeyworker electrician in the New York City metropolitan area could easily exceed five times the wage package of a nonunion electrician working on private construction. Because green energy projects may involve work that is cutting edge and novel, determining the proper classification of work for purposes of ascertaining the appropriate prevailing wage rate may also prove challenging. The taxpayer faces similar challenges in finding the appropriate apprenticeship programs. Most qualified or registered apprentice programs are sponsored by unions. For a taxpayer to satisfy the apprenticeship requirement, they may need to engage with union-run programs, which could lead to union organizing activities.
The obligation to administer compliance with these labor standards mandates to ensure that workers employed by third parties are properly paid can be a daunting responsibility. These responsibilities include tasks such as determining the appropriate rates of pay, ensuring that the workers of the contractors and subcontractors are paid on a weekly basis, recording precise hours worked, and taking credit for benefits in accordance with the DBA requirements or other applicable law. They also include ensuring the right ratio of apprentices to journeyworkers, monitoring the proper and timely payment of wages to workers, regularly auditing contractor or subcontractor pay practices, and timely curing any violations. These challenges and obligations only add to taxpayers’ risk of exposure to liability for wage underpayments, statutory penalties, and potential private lawsuits in the event of noncompliance as well as credit eligibility challenges by the IRS.
In the next article in this series, we will discuss the Buy America requirements in the BBB Act’s proposed green energy tax credits.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
David B. Blair is a partner at Crowell & Moring and chair of its tax group. He has more than 30 years of experience assisting energy clients with tax planning, controversy and litigation.
Irina Pisareva, a partner in Crowell & Moring’s tax group, has 25 years of experience advising businesses and investors on transaction tax and cross-border tax matters. She provides tax advice to investment funds, corporations, tax-exempt investors, venture capital, and private equity groups and high-net-worth individuals and family offices.
Ira Saxe is a partner in Crowell & Moring’s labor and employment group. He routinely provides management-side labor and employment advice and counsel and litigation defense before federal and state courts in class and collective actions, single-plaintiff litigation, and administrative agency proceedings.
Eric Su is a partner in Crowell & Moring’s labor and employment group and represents management in all aspects of labor and employment law, including government investigations and class and collective action litigation defense involving wage and hour laws. Su is well experienced in federal and state prevailing wage laws, such as the Davis Bacon and Related Acts and state little Davis Bacon statutes.
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