Prevailing Wage and the Inflation Reduction Act

For purposes of complying with the prevailing wage provisions of the Inflation Reduction Act, the prevailing wage refers to the minimum wage rates that taxpayers must ensure are paid to laborers and mechanics performing construction of a facility, project, property, or equipment (hereafter referred to as a facility) and, in some cases, alteration or repair. A prevailing wage is the combination of the basic hourly wage rate and any fringe benefits rate, paid to workers in a specific classification of laborer or mechanic in the area where construction, alteration, or repair is performed, as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40 of the United States Code, also known as the Davis-Bacon Act.

In order to satisfy the prevailing wage provisions of the Inflation Reduction Act to qualify for enhanced tax benefits, taxpayers must ensure that they, and their contractors and subcontractors, pay applicable prevailing wage rates to laborers and mechanics, as defined at 29 CFR 5.2(m), performing construction, alternation or repair on the facility.

Laborers and mechanics include workers who perform primarily manual or physical work in trades or occupations such as electricians, ironworkers, equipment operators, truck drivers, and general laborers. Workers such as timekeepers, inspectors, architects or engineers, whose duties are primarily administrative, executive, or clerical rather than manual, are generally not considered laborers or mechanics. Persons employed in a bona fide executive, administrative, or professional capacity, as defined in part 541 of the regulations implementing the Fair Labor Standards Act, also are not deemed to be laborers or mechanics. Laborers and mechanics must be paid prevailing wages when they are performing construction, alteration, or repair of the facility on the site of the work, as defined in 29 CFR 5.2(l).

Construction, alteration, or repair means all types of work done on the facility including altering, remodeling, and installation; painting and decorating; the manufacturing or furnishing of materials, articles, supplies or equipment on the site of the work; and transportation between the taxpayer’s facility and an off-site facility dedicated to the construction of the taxpayer’s facility and deemed part of the site of the work under 29 CFR 5.2(l).

Construction, alteration, or repair includes a wide variety of construction projects, and is not limited to new construction or complete renovation of a facility. Construction, alteration, and repair can include everything from painting mailboxes, to installing modular furniture that is fixed in place into an office, to replacing stator cores or turbines in hydroelectric facilities, and also includes the installation of solar panels, and similar work.

The definition of construction, alteration, or repair applies based on the scope of work to be performed on the facility itself. Where construction, alteration, or repair of a facility is taking place, any laborers or mechanics performing the manual and physical labor necessary to complete that construction, alteration, or repair of the facility, will be subject to the prevailing wage requirements, regardless of the specific tasks they perform (although the prevailing wage rates applicable to those workers will vary depending upon the classification of work performed on the project).

The Inflation Reduction Act and IRS Notice 2022-61, section 2.02(3), identify the circumstances under which a taxpayer must ensure that prevailing wages are paid to laborers and mechanics performing construction, alteration, or repair in order to qualify for enhanced energy tax benefits available under the Act. To qualify for the enhanced tax benefits under the Inflation Reduction Act, a taxpayer must ensure that prevailing wage rates are paid to all laborers and mechanics performing construction, alteration or repair on a facility on the site of the work.

Yes. Under the prevailing wage provisions of the Inflation Reduction Act, laborers and mechanics employed by any contractor or subcontractor of any tier must be paid Davis-Bacon prevailing wages when performing construction, alteration, or repair work on the facility in order for the taxpayer to qualify for enhanced tax benefits.

The Inflation Reduction Act is not a traditional Davis-Bacon “Related Act.” Congress has included Davis-Bacon requirements in numerous other laws, known as the Davis-Bacon "Related Acts," under which the Federal government provides assistance for construction projects through grants, loans, loan guarantees, insurance, and other methods. The Inflation Reduction Act is not one of these traditional "Related Acts." Specifically, under the Inflation Reduction Act, a taxpayer is not subject to the regulations implementing the Davis-Bacon Act and the Related Acts (collectively, DBRA), including the regulations related to enforcement. However, IRS guidance implementing the Inflation Reduction Act does incorporate certain Davis-Bacon concepts and requirements, such as definitions of “site of the work” and “construction, alteration or repair,” that are relevant to implementation of the Inflation Reduction Act’s prevailing wage requirements.

To qualify for enhanced tax benefits under the Inflation Reduction Act, taxpayers must comply with the prevailing wage and apprenticeship requirements as set forth in IRS guidance. Only where a facility is also funded or assisted through a traditional “Related Act” does the taxpayer need to also comply with the additional requirements of the DBRA and their implementing regulations.

No. In order to qualify for enhanced tax benefits under the Inflation Reduction Act, taxpayers must comply with the prevailing wage requirements of the Inflation Reduction Act by ensuring that laborers and mechanics performing construction, alteration, or repair on a facility are paid at least the applicable prevailing wage rate established under the Davis-Bacon Act.

The Inflation Reduction Act is a separate law from the Davis-Bacon Act and the Related Acts (collectively, DBRA), and the Inflation Reduction Act thus does not affect the implementation or application of the DBRA. The Inflation Reduction Act’s prevailing wage requirements are implemented through guidance issued by the IRS. In contrast, the DBRA are implemented by the Department of Labor primarily through regulations located in parts 1, 3, and 5 of title 29 of the Code of Federal Regulations.

To qualify for enhanced tax benefits under the Inflation Reduction Act, a taxpayer must ensure that laborers and mechanics performing construction, alteration, or repair on the facility are paid at least the applicable Davis-Bacon prevailing wage rate.

A taxpayer and its contractors and subcontractors may also be subject to other laws, and the applicability of such laws will not be affected by the Inflation Reduction Act. Specifically, any other “Wage and Hour” requirements that apply to an employer performing construction, alteration or repair at a facility (such as higher minimum wage requirements or recordkeeping obligations) will continue to be applicable. This could include other Federal labor laws such as the Fair Labor Standards Act (FLSA), and state and/or local laws, including state prevailing wage laws. Such laws impose separate legal requirements from the Inflation Reduction Act and must be complied with where applicable.

The construction, alteration, or repair of the following types of facilities may be eligible to receive enhanced tax benefits if the applicable prevailing wage requirements are satisfied:

• Facilities that produce electricity from certain renewable resources (e.g., wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources);
• Energy storage technologies;
• Industrial carbon capture or direct air capture;
• Energy efficient commercial buildings (increased deduction amount);
• Dwellings that meet certain Energy Star efficiency standards;
• Certain qualified nuclear power facilities;
• Alternative vehicle refueling properties;
• Qualifying advanced energy projects (e.g., manufacturing or industrial facilities);
• Clean hydrogen facilities; and
• Clean fuel production facilities.

A taxpayer that wishes to meet the prevailing wage requirements of the Inflation Reduction Act must ensure the payment of prevailing wage rates for the applicable classifications of laborers and mechanics for the construction, alteration, or repair of the facility. These wage rates are found in wage determinations published by the Wage and Hour Division of the US Department of Labor on www.sam.gov.

A wage determination is the list of basic hourly wage rates and fringe benefit rates for each classification of laborers and mechanics in a predetermined geographic area, usually a county, for a particular type of construction. There are four types of construction for which wage determinations are published: heavy; building; residential; and highway. More information regarding the each of these four types of construction can be found in All Agency Memorandum 130. Wage determinations are published by the Wage and Hour Division of the US Department of Labor on www.sam.gov.

Yes. If construction, alteration, or repair of the facility takes place in more than one locality (i.e., if an applicable wage determination does not cover the entire geographic area in which construction of the facility will take place), then the applicable wage determination for each locality in which construction will take place will apply. In addition, if a facility that primarily involves one type of construction also requires a substantial amount of work in another category of construction, then the applicable wage determination for each category of construction will apply to the work in each category. Work in another category of construction generally is considered to be substantial if the cost of all work in that category exceeds either 20% of total project costs or $2.5 million. Additional information on the application of multiple wage determinations can be found in All Agency Memoranda 131 and 236. Any questions regarding the application of multiple wage determinations should be referred to the Wage and Hour Division.

If a taxpayer is hiring a contractor to perform the construction, alteration, or repair of a facility, the taxpayer should include the most up to date wage determination at the time it enters into the prime contract.

If the taxpayer is self-performing the construction, alteration, or repair of the facility, the most updated wage determination available at the time the work is commenced will be applicable.

If a taxpayer is constructing a solar farm facility and wishes to comply with the prevailing wage provisions of the Inflation Reduction Act, the taxpayer should identify the heavy construction wage determination for the area in which the facility is being constructed. Generally, labor classifications are based on trades or occupations and each labor classification encompasses many associated tasks, tools, and materials used by the labor classification. For example, “solar installation” is not a labor classification listed in a wage determination. The labor classifications that are typically needed to perform construction of a solar farm include but are not limited to laborers, electricians, equipment operators, ironworkers, carpenters and possibly truck drivers. A taxpayer or contractor should carefully review the applicable wage determination and direct any questions regarding the scope of a classification to WHD.

If a taxpayer is constructing a wind turbine and wishes to comply with the labor standards provisions of the Inflation Reduction Act, the taxpayer should identify the heavy construction wage determination for the area in which the facility is being constructed. Generally, labor classifications are based on trades or occupations and each labor classification encompasses many associated tasks, tools, and materials used by the labor classification. For construction of a wind turbine, the classifications that are typically needed to perform construction at the facility include but are not limited to laborers, electricians, equipment operators, carpenters, ironworkers, and possibly truck drivers. A taxpayer or contractor should carefully review the applicable wage determination and direct any questions regarding the scope of a classification to WHD.

The taxpayer and contractor or subcontractor should first compare the scope of work of the classifications listed on the applicable wage determination with the anticipated work to be performed to determine if any of the work is not performed by any classification on the applicable wage determination. If that comparison indicates that anticipated work is not performed by any classification on the wage determination, the taxpayer should request an additional classification for that work from the Wage and Hour Division by emailing IRAprevailingwage@dol.gov. The request should contain all relevant information, including: the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.

Upon receipt of the request for an additional classification, the Wage and Hour Division will: (1) confirm that the applicable wage determination does not include a needed labor classification; (2) review the requested classification to verify that it is used in the area by the construction industry; and (3) review the proposed wage rate to verify that it bears a “reasonable relationship” to other wage rates in the wage determination, specifically those from the same category of classifications as the proposed classification. After review, the Department of Labor, Wage and Hour Division will notify the taxpayer as to the labor classifications and wage rates to be used.

OMB Control Number: 1235-0034

Expiration date: 06/2023

Paperwork Reduction Act Statement- Persons are not required to respond to this collection of information unless it displays a currently valid OMB control number. The Department of Labor estimates that it will take an average of 15 minutes for respondents to complete this collection of information, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. If you have any comments regarding this burden estimate or any other aspect of this collection information, including suggestions for reducing this burden, send them to the Administrator, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Yes. The prevailing wage provisions of the Inflation Reduction Act state that to receive the enhanced tax benefits, any laborers and mechanics are to be paid applicable prevailing wage rates as determined by the Secretary of Labor in accordance with the Davis-Bacon Act. The Davis-Bacon Act does not make any exception for laborers and mechanics who are independent contractors. Additionally, 29 CFR 5.2(o) reflects that a worker’s status as a laborer or mechanic does not depend on whether the worker is an independent contractor. Accordingly, to meet the prevailing wage provisions of the Inflation Reduction Act, laborers and mechanics must be paid applicable prevailing wage rates even if they are independent contractors.

The prevailing wage is the combination of the basic hourly rate and any fringe benefits listed in an applicable wage determination. Taxpayers may comply with the prevailing wage provisions by ensuring that each laborer and mechanic performing construction, alteration or repair at a facility is paid the applicable prevailing wage for the classification of work they perform entirely as cash wages or by a combination of cash wages and employer-provided bona fide fringe benefits. Examples of bona fide fringe benefits include life insurance, health insurance, pension plans, vacation pay, holiday pay, or paid sick leave.

The Davis-Bacon “prevailing wage” is the combination of the basic hourly rate of pay and any fringe benefits for the applicable classification listed in an applicable wage determination. Prevailing wages, including fringe benefits, must be paid on all hours worked on the site of the work.

The obligation to pay at least the prevailing wage listed in the applicable wage determination can be met by (1) paying each laborer and mechanic the applicable prevailing wage (including the amount of fringe benefits) entirely as cash wages or (2) providing a combination of cash wages and contributions to or incurred costs for bona fide fringe benefits.

Bona fide fringe benefits generally include those benefits which are common in the construction industry. Bona fide fringe benefits include, for instance:

• Life insurance
• Health insurance
• Pension
• Vacation
• Holidays
• Sick leave
• Supplemental Unemployment Benefits

To be considered bona fide, fringe benefits must be provided pursuant to a plan, fund, or program that is legally enforceable and meets certain criteria, such as the requirements of the Employee Retirement Income Security Act (ERISA), laws and regulations enforced by the Internal Revenue Service (IRS), and state insurance laws. See 40 U.S.C. § 3141(2)(B); 29 CFR § 5.29(a), (d).

A taxpayer and/or contractor employing laborers or mechanics performing construction, alteration, or repair work on the facility may take credit towards its prevailing wage obligations by making irrevocable contributions to a trustee or other third party for bona fide fringe benefits which are made pursuant to an insurance agreement, trust, or other funded arrangement on behalf of its laborers and mechanics. The contributions must be made periodically, at least quarterly. The third party must also assume the usual fiduciary responsibilities imposed upon them by applicable law.

A taxpayer and/or contractor may also take credit towards its prevailing wage obligations for the costs it incurs to provide bona fide fringe benefits under an unfunded plan, provided the plan has been communicated to the employees in writing, the cost reasonably anticipates the cost of providing a bona fide fringe benefit, and the plan represents an enforceable commitment to provide such benefits and is carried out under a financially responsible plan or program. To ensure unfunded plans are not used to avoid compliance with prevailing wage requirements, taxpayers and/or contractors must set aside sufficient funds to ensure that the benefits will be available when the workers are eligible for the benefits. Additionally, taxpayers and/or contractors with unfunded fringe benefit plans may obtain prior approval from the Department by submitting a written request to the Department at unfunded@dol.gov, or its successor email address. If the request is approved, the taxpayer may rely on such approval as evidence that its costs of providing fringe benefits count towards satisfaction of its prevailing wage obligations. For more information on unfunded fringe benefit plans or programs, see 29 CFR § 5.28.

Please note that a taxpayer and/or contractor cannot claim a credit for the costs of bona fide fringe benefits that the taxpayer and/or contractor is obligated to provide under other Federal, State, or local law, such as Social Security, unemployment compensation insurance, and worker’s compensation insurance.

When workers work in more than one labor classification of work, the taxpayer, contractor, or subcontractor may, in accordance with 29 CFR 5.5(a)(1)(i), pay them the different wage rates applicable to each classification, so long as they accurately keep track of the actual hours worked in each classification and pay the differing rates in accordance with that accurate record. The taxpayer, contractor, or subcontractor should not estimate the hours worked in each classification or use an average but should keep an accurate record of the time spent in each classification and pay the correct rate for the time spent in each classification.

Section 1.6001-1(a) of the Income Tax Regulations provides that any person subject to income tax shall keep the records sufficient to establish, among other things, the amount of any credit or deduction claimed. The taxpayer would therefore need to keep records showing that all laborers and mechanics working on the site of work had been paid the applicable prevailing wage rate for all of their hours worked to meet the prevailing wage provisions of the Inflation Reduction Act. For example, the taxpayer could keep records that show the applicable wage determinations and any additional classifications and rates received from the Department of Labor; identify all laborers and mechanics who performed construction work on the facility; and reflect the correct classifications of work they performed, their hours worked in each classification, and the prevailing wage rates paid for the work, including any bona fide fringe benefit contributions or costs.

In accordance with 29 CFR 5.5(a)(4)(i), a worker is considered an apprentice who can be paid a rate less than the applicable prevailing wage rate if the worker is employed pursuant to and individually registered in a bona fide apprenticeship program registered by the Department of Labor’s Employment Training Administration, Office of Apprenticeship, or a State Apprenticeship Agency recognized by the Department of Labor’s Office of Apprenticeship, and the employer adheres to the requirements of that registered apprenticeship program.

A map showing which state agencies have been recognized by DOL as State Apprenticeship Agencies, along with state agency contact information, is available at https://www.apprenticeship.gov/about-us/apprenticeship-system.

In accordance with 29 CFR 5.5(a)(4)(i), if a taxpayer, contractor, or subcontractor wishes to pay an apprentice rate below the applicable prevailing wage rate(s) to registered apprentices, they must ensure that sufficient journeyworkers are on the site of work with the apprentices each day to ensure that the apprenticeship program ratio is met. If the apprentice to journeyworker ratio is not met for one or more apprentices that day, those apprentices must be paid the full prevailing wage rate for the classification in which they are performing work.

On projects subject to the prevailing wage provisions of the Inflation Reduction Act, the prevailing wage rate for the classification in the applicable wage determination substitutes for the journeyworker rate listed in the apprenticeship agreement, and taxpayers, contractors, and subcontractors should adjust the rate listed for each stage of apprenticeship in the apprenticeship agreement and pay apprentices accordingly, in accordance with 29 CFR 5.5(a)(4)(i)

Many apprenticeship agreements provide a specific percentage of the journeyworker rate due for each level of apprenticeship, which can then be applied to the prevailing wage rate listed for the classification in the applicable wage determination to figure out the wage rate that can be paid to apprentices at each stage of apprenticeship while they are working on the project.

Sometimes, however, the agreement only lists the rates paid to apprentices and the rate paid to journeyworkers. For apprentices enrolled in such registered apprenticeship programs, the listed apprentice rate can be divided by the journeyworker rate listed in the apprenticeship agreement to convert it to a percentage, which can then be applied to the base hourly wage rate listed in the applicable wage determination to find the applicable rate for apprentices while they are working on the project.

If the apprenticeship agreement explicitly states that a percentage applies to fringe benefits, or specifically states a lower fringe benefit amount that can be similarly applied to fringe benefit rate in the applicable wage determination, then the taxpayer, contractor, or subcontractor may apply that percentage to the fringe benefits listed in the wage determination. However, if the apprenticeship agreement is silent as to fringe benefits, the full fringe benefit amount on the applicable wage determination must be paid to the apprentice to satisfy the prevailing wage requirement.

Although taxpayers and contractors may enter into project labor agreements for construction, alteration, or repair of facilities, Executive Order 14063 generally would not apply to projects qualifying for enhanced Inflation Reduction Act tax benefits, as Executive Order 14063 only applies to certain federal contracts for construction.