Recurring Pitfalls in Prevailing Wage and Apprenticeship (PWA) Compliance

The Inflation Reduction Act introduced a five-times multiplier on some renewable energy tax credits that is contingent on full compliance with Prevailing Wage and Apprenticeship (PWA) requirements. As projects have become eligible for this multiplier over the past few years, the industry has developed practical applications to meet the complex requirements and has encountered real-world examples of how risks can arise.

We brought together a panel of seasoned practitioners from Orrick and DLA Piper to discuss what they're actually seeing firsthand: the recurring pitfalls, costly surprises, and practical strategies that separate compliant projects from ones that end up in remediation. This post gives a quick refresh of PWA requirements, then provides key commentary from our April 7th webinar. 

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The Basics

We’ll start with a recap of PWA requirements.

Prevailing Wage Requirements: All laborers and mechanics performing construction, alteration, or repair work on a qualifying project must be paid at least the county-specific minimum wage rate, encompassing both base pay and fringe benefits, for their classification where work is performed. These rates are published and publicly available on SAM.gov and locked in when the work is contracted (assuming an EPC contract with a definitive end date).

Apprenticeship Requirements: There are three requirements related to apprenticeship that taxpayers must follow: 

1. The labor hours requirement states that at least 15% of total construction labor hours for the project must be performed by registered apprentices for projects beginning construction in 2024 or later (earlier projects are allowed to be compliant at lower percentages).
2. The ratio requirement states that projects must also maintain the daily apprentice-to-journeyworker ratio established by the relevant registered apprenticeship program throughout the construction period. 
3. The participation requirement states that each contractor and subcontractor that employs four or more workers must either hire an apprentice at some point during the project or meet the good-faith effort exception requirements. 

Where Projects Most Commonly Fall Short

1. Apprenticeship Requirements Shortfalls

The apprenticeship requirements are complex and cause the most issues in tax credit transactions. Contractors often struggle to source enough qualified apprentices to meet the labor hours and participation requirements. Then they still need to ensure the right ratios are maintained daily and document it all rigorously.

"At first glance, some of these non-compliance issues are not as cut and dry as they might look. If you have a required ratio of one apprentice to two journey workers and on a given day you only achieved one to one — it's not as simple as everything being non-compliant. If that apprentice was paid above journey worker wages, we can classify them as a journey worker instead and exclude their labor hours from the apprentice portion of the apprentice labor hours calculation." — Alex Melehy, Head of Product and Engineering, Reunion

Penalty payments exist as a remediation path for each of the apprenticeship requirements, but they can stack up. For example, if enough contractors on a project do not hire apprentices, then they may trigger penalties for the participation requirement and labor hours requirement. Additionally, if the ratio requirement is not met on a given day, then the labor hours of the apprentice who was under-supervised will not be included in the labor hours requirement calculation, which could lead to issues with the labor hours requirement if enough violations occur. It is recommended that the apprentice-to-journeyworker ratio be tracked in an automated platform so that daily violations are caught quickly and flagged to contractors before the violations lead to large penalties. 

 2. Worker Misclassification

Worker misclassification also ranks among the most frequent compliance failures — especially once work has begun and the wrong classification has already been selected. It is important to review the Department of Labor wage determinations classifications before starting work and assess which are the most appropriate for the job at hand. Unfortunately, internal job titles like "installer" or "pile driver" may not map neatly onto Department of Labor wage determination classifications. When contractors make assumptions based on title rather than actual duties performed, they can end up underpaying workers for the entirety of a project.

"You have to look holistically at the role and what duties are being performed. Things like 'installer' will really have to be remapped to the Department of Labor's classifications — general labor, skilled labor, power equipment operator. It really matters what exactly they're doing." — Vani Parti, Attorney, DLA Piper

A few specific scenarios come up repeatedly:

Experience may not change the rate. A laborer with 20 years of experience and one with one year of experience may fall under the same wage determination. There is often no tiered structure within a classification, and companies that apply internal pay scales may inadvertently fall out of compliance.

Multi-classification workers require meticulous tracking. When a worker performs duties across more than one classification in a given period, employers must track hours by classification and pay the applicable rate for each. Estimates, averages, and reconstructed records are not acceptable.

Foremen are not automatically exempt. When a foreman performs labor on site, those hours may need to meet the prevailing wage requirements if the foreman spends 20% of the week doing the work of a laborer or mechanic.  

When misclassification is discovered late in construction, at the transaction stage, or beyond, the financial exposure compounds quickly as interest accrues and penalties stack. Remediation can require reviewing records from the very beginning of a project and involve contractors and subcontractors who have not been on-site for months.

3. The Payroll Data Gap

Compliance is only as strong as the data behind it. Getting complete, timely payroll data from every contractor and subcontractor on a project is a persistent operational challenge, especially if there are issues with the relationship between the contractors and the developer. 

"We had a subcontractor get into a dispute with the developer. The subcontractor then refused to provide some of the data needed to pay the workers. The developer was still obligated to demonstrate PWA compliance for every hour those workers were on site. They had to pull certified payroll reports, reconstruct any misclassifications discovered at that point, work with the general contractor to validate the data, and then somehow find a way to pay these workers...  it was a big undertaking."— Vani Parti, Attorney, DLA Piper

The path forward in situations like this requires pulling certified payroll reports, working with the general contractor to validate data, and, in some cases, invoking state "unclaimed property" laws to make correction payments to workers who could not be located. The best way to prepare for this scenario is to appropriately structure the risks and responsibilities in the contracts between the taxpayer and the contractors. EPC agreements, O&M agreements, and supply agreements should all include provisions that enforce cooperation for PWA.

"It's very important to make sure there's timely sharing of information because it can get very difficult. You have to have provisions in there — not only that the contractor is going to comply with prevailing wage and apprenticeship requirements, but provisions on maintaining records, sharing records, and making sure those records can be shared in a format that the PWA advisor can use in their system." — Mark Christy, Partner, Orrick

Additionally, contracts generally include indemnity provisions that are structured to allow parties to act on a PWA advisor's reasonable findings in real time — rather than waiting for a final IRS determination, at which point a transaction is often already under strain.

4. The Good Faith Effort Exception: A Safety Net With Fine Print

When apprentices are genuinely unavailable, the final Treasury regulations provide a good-faith effort exception. A taxpayer or contractor who has made a documented request to a registered apprenticeship program is exempt from compliance requirements for a given work period if one of the following conditions is true: they received either no response from the apprenticeship program within five business days, or the program confirmed that the program cannot fulfill the request, or fewer apprentices were provided than requested.

In practice, the exception is frequently mishandled.

"The biggest thing I would tell folks is follow exactly what the IRS says needs to be in those requests."— Alex Melehy, Head of Product and Engineering, Reunion

A compliant request must include, among other items, the number of apprentices being requested, the number of labor hours, the relevant trade, and the start and end dates of the work period. There is also a requirement to state that the request is made with an intent to employ apprentices in the occupation in which they are trained, in accordance with the requirements of the registered apprentice program, and consistent with the hours and dates included in the request.  Requests that omit any of these elements do not qualify. 

Timing is equally critical. Requests must be submitted no later than 45 days before apprentices are needed, and the exception itself expires after 365 days. For example, a good-faith effort exception covering a 16-month project period only protects the first 12 months — a new request must be submitted in order to include the requested labor hours of the last four months in the labor hours requirement calculation.

Additional pitfalls include directing requests to programs outside the geographic area of the project, declining a partial fulfillment and attempting to claim the full exception, and failing to confirm that a non-response is genuinely a non-response.

"We've had taxpayers who submitted by email, and the [apprentice] program responded — but it went to their spam folder. They took a good faith effort exception where one wasn't available."— Vani Parti, Attorney, DLA Piper

The operational standard here is straightforward: use a reliable template, track every request and response, set renewal reminders, and maintain all correspondence in a centralized location.

5. Navigating Transactions With an Imperfect PWA Report

On larger projects, a fully clean PWA report is the exception rather than the rule. A clear-eyed remediation plan, established early, is what allows transactions to move forward.

"Usually, I do see PWA reports that are often not clean. The parties are going to have to figure out what to do, and it's good to be able to quantify what the issue is and have a plan."— Mark Christy, Partner, Orrick

For prevailing wage shortfalls, correction payments flow to affected workers, plus interest at the federal short-term rate plus six percentage points. Penalty payments for both prevailing wage and apprenticeship requirement failures should be filed with the taxpayer's tax return. The IRS this year released Form 7220, which requires taxpayers claiming increased credit amounts to calculate and report PWA penalties at the facility level, with a tax return preparer signing off on the filing.

Under the statute, taxpayers have 180 days following a final IRS determination to make correction and penalty payments. This window exists as a post-audit remedy, but should not be relied on as a mechanism for managing known compliance gaps during a transaction. Tax credit buyers and tax equity investors will require documented evidence that all correction and penalty payments have been made before a transaction can proceed.

Looking Ahead

The regulatory landscape for PWA continues to evolve. The final Treasury regulations (published in mid-2024) are comprehensive, but gray areas remain, particularly around newer credit structures like Section 48E and 45Y, where PWA compliance is tracked by inverter block per the definition of a qualified facility for those tax credits.

The practitioners on this webinar consistently reiterated the value of getting ahead of these common pitfalls by focusing on PWA from day one. Managing risk, both for contractors, sub-contractors, and taxpayers, requires visibility into the data and early feedback if mistakes occurred and need to be corrected. Setting up this infrastructure will lead to smoother transactions and better relationships. 

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For more information about PWA and compliance, contact us here.