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Inflation Reduction Act and Support of Labor Standards



When the Inflation Reduction Act was passed in August of 2022, it was heralded as a boon for unions and union workers. Of the over $300 billion dedicated to investing in renewable energy, $270 billion in tax incentives were tied to labor standards.  The initial passage was very promising for existing union members, and unions across the nation were excited about the prospect of growing union enrollment for individuals wanting employment in the clean energy transition. The newest proposed rules released by the US Treasury and the Internal Revenue System in November of 2023 clarify the rules companies must meet in order to receive all of the potential tax credits.

 

Before we get into the latest guidance, it is best to understand the premise for the labor standards the IRA is based on: the Davis Bacon Act. The Davis Bacon Act of 1931 established the requirement for paying local prevailing wages on public projects, applying to both contractors and subcontractors working on federally funded or assisted contracts1. 

 

Changes have been made to the Davis Bacon Act over the years, with the most recent occurring in August of 2023.  These changes effectively modernized the Davis Bacon Act, allowing the Department of Labor to enforce labor standards more efficiently. The biggest change was the revision of the “prevailing wage” definition and therefore, calculation.

 

When the Davis Bacon Act was initially passed, the focus on prevailing wages was to ‘protect local wage standards by preventing contractors from basing their bids on wages lower than those prevailing in the area’2. During the early years of the Act, the prevailing wages of workers were defined by the area they worked and the specific trade or classification they fit. If the workers did not fit into a classification, the prevailing wage was the rate paid to the greatest number of workers, as long as they amounted to at least 30% of the workers within a classification. If there was no established rate, a weighted average was taken to determine the prevailing wage3. That changed in 1982, when the 30% rule was eliminated. That change meant the prevailing wage would be determined by identifying the rate paid to a majority of workers or taking the weighted average.  The change made in August of 2023 reinstated the 30% rule of the Davis Bacon Act, meaning if at least 30% of workers within a classification are earning a certain rate, that rate will be the new prevailing rate3.

 

The recent change to the Davis Bacon Act benefits unions greatly.  The clean energy build up will create a number of new worker job titles and classifications, and the change to the Davis Bacon Act will allow the new classifications to be paid higher prevailing wages than it would under the system from 1983 – 2023.

 

How does this all fit with the Inflation Reduction Act? Basically, if companies involved in the clean energy transition want to receive all of the tax credits available, they will need to ensure two things: prevailing wages are paid to all workers and project developers ensure registered apprentices are utilized for the construction of projects, coined as the Prevailing Wage and Apprenticeship Requirements (PWA Requirements). If all conditions of the PWA Requirements are met, companies can expect to receive 30% credit for investment into renewable projects.  That number goes down to 6% if the PWA Requirements are not met. The IRA also provides a credit of up to 2.75 cents per kilowatt-hour in 2022 dollars where taxpayers meet prevailing wage standards and employ a sufficient amount of qualified apprentices.


The PWA Requirements also specify the usage of apprentices on projects, stating 12.5% of total labor hours must be done by apprentices for projects initiated in 2023 and increasing to 15% in 2024. Apprenticeship programs have always been an important part of unions, as it allows new members to join and learn on the job, without the requirement of prior knowledge or any type of college degree. This focus on apprenticeships creates a pipeline to careers in the clean energy economy4. The recently established Apprenticeship Ambassador Initiative intends to connect apprenticeships around the nation and create over 400 programs in 2024. In order to streamline the PWA Requirements and the tax credits available for clean energy, companies are encouraged to enter into Qualifying Project Labor Agreement with unions, to better set firm requirements before a project is initiated.

 

Penalties will be assessed for companies ignoring the PWA Requirements, but any company reporting errors within 30 days will receive a waiver of penalties. If a company fails to satisfy the Prevailing Wage Requirements, the company must make a corrective payment to the employed person, interest on the amount paid, and $5,000 penalty multiplied by the total number of laborers and mechanics who were paid wages at the prevailing rate. The only major exemption to the PWA Requirements is if a company tries to hire through an apprenticeship but cannot find enough people available.  Those companies will be given a ‘good faith’ exception, as long as proper documentation is submitted. 

 

Projects involved in almost every part of the energy transition, and thus receiving money from the IRA, can benefit by meeting the PWA Requirements.  The requirements can be applied to the credits in the table below, credits that can be increased by at most a multiple of five. For example, for clean hydrogen, the base credit of $0.60 per kilogram will be multiplied by 5 for a total credit of $3.00 per kilogram. This allows unions to increase their foothold in renewable energy, including newer areas such as carbon sequestration and clean hydrogen.

 

Alternative Fuel Refueling Property Credit (30C)

Production Tax Credit (45, 45Y)

Credit for Carbon Oxide Sequestration (45Q)

Credit for Production of Clean Hydrogen (45V)

Clean Fuel Production Credit (45Z)

Investment Tax Credit (48, 48E)

Advanced Energy Project Credit (48C)

Energy Efficient Commercial Buildings Deduction (179D)

New Energy Efficient Home Credit (45L)

Zero-Emission Nuclear Power Production Credit (45U)

The IRA is already showing an increase in apprenticeships, as areas where new projects are being proposed and initiated have documented more first year trade workers than have been seen in recent years. The IRA also includes at 10% bonus in tax credits if projects are established in communities previously dominated by fossil fuel.  Recent studies estimate that over the next ten years, the period in which the IRA covers, almost one million jobs per year will be created, with about nine million jobs expected to be created in those ten years. The IRA promises the potential for not only a carbon neutral environment, but an economy with positive job growth with strong labor standards.

 

  

 

 

 

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