Beginning January 1, 2026, California contractors performing public works face new statutory requirements governing how fringe benefit credits are calculated. While annualization isn’t a new concept, AB 889 strengthens existing requirements by eliminating certain administrative exemptions, expanding the application of annualization, and placing greater emphasis on documentation.

For contractors, the takeaway is simple: accurately calculating fringe benefit credits and maintaining records to support those calculations is more important than ever.

Why AB 889 Matters?

The significance of AB 889 lies in the risk it creates for contractors who rely on outdated calculation methods or incomplete records. By moving these rules into statute and requiring employers to prove how fringe benefit credits are calculated, the law raises the standard for compliance and makes accurate payroll practices a critical part of protecting against denied credits, back wage exposure, and audit issues. [trackbill.com], [billtexts.s3.amazonaws.com]

Under the new statute:

• All employer-paid fringe benefit contributions not paid directly to the employee must be annualized
• Prior exemptions granted by the Department of Industrial Relations (DIR) are revoked
• The DIR Director no longer has authority to issue future exemptions
• Contractors must be able to prove how fringe benefit credits were calculated, upon request by the Labor Commissioner. [legiscan.com], [billtexts.s3.amazonaws.com]

The goal, according to legislative analyses, is to increase consistency, prevent fringe benefit inflation on public projects, and reduce wage theft risks. [trackbill.com]

What Changed Under AB 889

1. Exemptions Are Eliminated
   Any prior DIR determinations allowing employers to avoid annualization were revoked as of January 1, 2026. [legiscan.com]

2. Broader Coverage of Employer Payments
   Annualization applies to all employer payments not made directly to the worker, regardless of whether benefits are offered on private projects. [trackbill.com], [billtexts.s3.amazonaws.com]

3. Pension Exception (Limited)
   Employers may still take full hourly credit for contributions to defined‑contribution pension plans that provide:

• • Immediate participation, and
  • “Essentially immediate vesting” (defined as vesting within 500 hours worked). [trackbill.com], [billtexts.s3.amazonaws.com]

Why Annualization Matters to Contractors

Before AB 889, some contractors calculated fringe benefit credit using only public works hours, even though benefit contributions supported total employment (public and private). This practice increased the apparent hourly value of benefits on public projects. AB 889 ends this practice.

The Core Rule

Contractors must now divide total employer fringe benefit payments by:

Total hours worked in the year, both public and private

Not just public works hours. This aligns California with federal Davis‑Bacon principles and ensures benefits are spread evenly across all hours worked. [lumberfi.com], [go-alliant.com]

Simple Example: How Annualization Works

Here’s a simplified illustration of how contractors should calculate fringe benefit credit under AB 889:

Scenario:

• Employer pays $12,000 per year toward an employee’s health insurance
• Employee works 1,500 total hours in the year
  • 600 hours on public works
  • 900 hours on private projects

Annualized fringe benefit rate:

$12,000 ÷ 1,500 hours = $8.00 per hour

The contractor may claim $8.00 per hour as a fringe benefit credit on every hour worked on public works projects, not a higher amount based solely on public hours.

Without annualization, applying benefits only to 600 public hours would incorrectly inflate the credit to $20/hour, which AB 889 now expressly prohibits. [lumberfi.com], [go-alliant.com]

Common Questions about AB 889

Does AB 889 apply to every contractor?

Only contractors performing covered California public works projects are subject to California prevailing wage requirements.

Did AB 889 eliminate annualization exemptions?

Yes. The law revokes exemptions previously issued by the Department of Industrial Relations and removes the Director’s authority to grant future exemptions.

Does AB 889 affect retirement plans?

Potentially. The law includes a limited exception for certain defined contribution pension plans that provide immediate participation and essentially immediate vesting (defined as vesting within the first 500 hours worked).

Compliance Starts with the Right Strategy

California’s prevailing wage requirements continue to evolve, and AB 889 reinforces the importance of understanding how fringe benefits are structured, calculated, and documented.

At Beneco, helping contractors navigate prevailing wage compliance isn’t an add-on, it’s what we’ve been built to do. From fringe benefit administration and annualization support to retirement plans, health benefits, and audit-ready reporting, our team works alongside contractors to help simplify complex requirements while supporting their workforce goals.

Whether you’re reviewing your benefit strategy or preparing for your next public works project, having experienced guidance can make all the difference. Contact us today if you have questions about prevailing wage or AB 889.

 

This article is for informational purposes only and should not be construed as legal advice