AB 889 Prevailing Wage - Per Diem Wages

California’s Assembly Bill 889 (AB 889), signed into law on October 11, 2025 and effective January 1, 2026, introduces specific changes to how contractors must calculate and document fringe benefit credits on public works projects. The bill tightens prevailing wage compliance by revoking one long standing annualization exemption and codifying stricter rules for determining fringe benefit credit—especially when contributions differ between public and private work. 

Given the complexity of this subject, it is advisable for each company to consult with its internal accounting and legal teams to determine the most appropriate approach for regulatory compliance.

What Changes 

There are three main changes to AB 889:

1. AB 889 requires contractors to calculate fringe benefit credits consistently across all hours worked, both public and private. Previously, some employers relied on case by case exemptions issued by the Director of the Department of Industrial Relations (DIR), but AB 889 revokes these exemptions issued before January 1, 2026 and eliminates the Director’s authority to issue new ones. 
2. Defined contribution pension plans are one major annualization exception: if the pension plan set up for public works projects offers immediate participation and essentially immediate vesting, contractors may claim the full hourly credit without annualizing—even when private work contributions are lower or nonexistent. “Essentially immediate vesting” means the benefit vests within the first 500 hours worked. 
3. The bill also shifts more responsibility to contractors by strengthening documentation requirements. Employers must be prepared to show exactly how they calculated annualized rates and must provide records of both public and private hours upon request. 

What Stays the Same

When an employer wants to count its benefit payments as a credit, and those payments are higher on public works projects than on the employer’s private projects, the credit must be calculated by annualizing the benefit. 

However, the employer does not have to annualize the credit if any one of these situations applies:

1. The employer is legally required to pay the higher rate on future private jobs.
   For example, if the employer has a binding agreement that requires the same higher payments on upcoming private construction, annualizing is not required.
2. The higher payments are required by a Project Labor Agreement (PLA).
   If a PLA mandates the higher benefit payments, the employer can use the credit without annualizing.
3. The payments are made to the California Apprenticeship Council.
   Payments required under Labor Code section 1777.5(m)(1) (apprenticeship contributions, including payments to a DAS apprenticeship program or union apprentice committee) are exempt from annualization.

Annualization Explained 

Annualization is a principle adopted by the federal Department of Labor in enforcing the Davis-Bacon Act. It allows contractors to take credit for their existing fringe benefit plans and contribute it towards prevailing wage fringe benefit requirements. This credit is the hourly fringe amount based on the total annual cost of employer paid fringe benefits and dividing it by the total number of hours worked in a year on all projects, public and private. 

Here’s the general formula:  

Total annual cost of benefit per employee ÷ Total annual hours worked by employee 

 = Hourly credit amount

Employers can use the industry-accepted 2080 estimated hours for the total annual hours worked by an employee for a year. If an employee works more hours in one year, the employer can choose to use a higher number of hours. 

In addition, the State of California allows other methods and time periods to calculate the allowable credit (such as monthly or quarterly calculations) so long as the method is reasonable and meets the annualization requirements in Labor Code 1773.1(d).   

 Let’s do a few examples together.

Examples

Example 1

Let’s say a carpenter on a public works project has a Basic Hourly Rate of $40, and a Fringe Benefit Rate of $15, which comes up to $55 for the Total Hourly Rate. 

Your team provides and contributes $3,200 to a retirement package for the year and wants to use this as a credit against the prevailing wage fringe benefit requirement. After looking at previous years, your team determines the established 2,080 annual hours fits the employee’s average annual hours worked. 

You take the annual cost $3,200 and divide by 2,080 hours, resulting in $1.54 per hour. This is the maximum hourly credit that can be contributed towards the Fringe Benefit Rate

After deducting the $1.54 per hour credit, there is still $13.46 per hour due to the employee in addition to the base hourly rate. This can be paid to the employee as a cash fringe benefit or be further credited against another bona-fide fringe benefit.  

Example 2

Let’s take the above example and say you also contribute these additional benefits.  

By taking the $1.54 retirement credit and adding the $5.00 hourly credit from the additional benefits, there is now $6.54 in total fringe benefit credits. Let’s update3 the earlier table!

Now, only $8.46 per hour is due to the employee in addition to the base hourly rate. This can be paid to the employee as a cash fringe benefit or be further credited against another bona-fide fringe benefit.  

Resources

To learn more about how annualization is applied on California public works projects, review the California Labor Commissioner’s Public Works Manual and Section 15f11 of the Department of Labor Field Enforcement Handbook, which provide detailed enforcement guidance.