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A controversial piece of legislation passed the California Legislature late Tuesday evening, codifying and clarify a landmark state Supreme Court decision that limits whether companies can classify their workers as independent contractors.

Expected to have wide-reaching implications that resonate across the country — including posing an existential crisis for businesses built with independent, on-demand labor — the bill is now on its way to Gov. Gavin Newsom’s desk.

“This is one of the few times in recent history when so many people will be impacted by a single decision,” said Ryan Vet, an entrepreneur, and gig-economy expert who founded Boon, an on-demand health care platform. He said he sees positives and negatives in the new law, that is “good for the workers, but will also implode the gig economy as we know it today” with increased costs. 

“We have been able to get a quick and easy, safe ride from one place to the next,” he added. “We have been able to get food delivered to our door, or a package delivered on Sunday. This is not only going to affect the worker but the consumers that are benefiting from these services — it is more than a two-sided equation.”

The governor has already voiced his support and is expected to sign it. Other states could soon follow suit.

Even though the bill could soon become law, legislators speaking on the Senate floor ahead of the vote said negotiations would continue to ensure a smoother implementation. 

“We did not get to evaluate every category of worker,” Toni Atkins, the Senate president pro tempore said during discussion. Many of us have pledged to continue that conversation. I don’t know what kind of comprehensive process we would anticipate doing, because it was found to be way more complex than any of us imagined.” She added that those conversations are ongoing with stakeholders. 

At the 11th hour, 12 new amendments that sought to add more exemptions or streamline the application of the law were brought to the Senate floor by Republican senators, but all failed to make it into the final legislation. 

The bill, which passed 29-11, already included carveouts for a range of industries — but not for gig-reliant businesses, which are expected to be most impacted by the new law.

“Today we are determining the future of the California economy,” said Sen. Maria Elena Durazo, D-Los Angeles, introducing the legislation. Speaking directly about the tech industry, which pioneered the gig model and prides itself on modernizing services and work, she added, “Let’s be clear, there’s nothing innovative about underpaying someone for their labor and basing an entire business model on misclassifying workers.” 

Organizers are now hoping that the legislation will open the possibility that drivers can form a union, which they were not able to do as independent contractors. 

“AB 5 is only the beginning,” said Edan Alva, a driver with Gig Workers Rising. “I talk daily to other drivers who want a change but they are scared. They don’t want to lose their only source of income. But just because someone really needs to work does not mean that their rights as a worker should be stepped all over. That is why a union is critical. It simply won’t work without it.”

So what’s changing? 

Millions of workers are classified as independent contractors and don’t qualify for protections under the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act. They also aren’t guaranteed other rights afforded to employees, including minimum wage, overtime pay, or unemployment insurance. Now, for many—especially those working in the tech sector — that will all change.

While that could be a big win for workers, enactment of AB 5 could threaten the future of the gig economy that was built on contracted, on-demand labor. Many tech companies, including Uber and Lyft, which have been among the most vocal opponents, will have to rework their core business models. They stand to lose billions in the process and have threatened to pass those costs onto consumers.

More: What is California’s AB 5? The bill could make gig economy workers like Uber drivers employees

AB 5 applies a strict “ABC test” to determine workers’ employment status and puts the burden of proof on employers: 

  • (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work
  • (B) that the worker performs work that is outside the usual course of the hiring entity’s business
  • C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity

With the aim to crack down on misclassification and close loopholes that enable companies to skirt labor protections and lighten their tax loads — which has resulted in an estimated $7 billion in losses of payroll tax revenue — the bill was championed by organizers hoping to secure and broaden benefits for tech workers, and pave the way for unionization.

Critics also warn that workers accustomed to having freedom and flexibility, including those who give rides, deliver food, or perform other app-based services, will now be forced to conform to typical employee expectations, like scheduled hours and stronger oversight. 

Drivers against the legislation have raised concerns about whether the workforce will be cut, as the companies face higher costs to come into compliance. 

When will the changes happen?

It’s unlikely that changes will move quickly. While the legislation provides for retroactive enforcement, used primarily for litigation, the law won’t be implemented until next year. Plus, there are still some legal obstacles in the way and a lot of paperwork will need to be filed. 

“I think this is too complicated to change things overnight,” said Domenique Camacho Moran, a labor law expert, and partner at the New York-based firm, Farrell Fritz. “It is going to require dramatic changes. All of those [independent contractors] will have to be vetted as employees and onboarded—that’s a process.”

More: Why some on-demand drivers are fighting for — or against — California’s gig economy bill

She added that the law will likely face immediate legal challenges, which could delay its implementation while the issues are worked out. “The laws as they exist did not envision these gig economy workers,” she said. “You could get a ruling relatively quickly that stays the enactment of the law while the legal battle takes place,” she said.

Gig economy players haven’t given up

Opponents to the law are already preparing for the next round of battles.

Even before the measure passed, Uber, Lyft, and food delivery company, DoorDash, invested a collective $90 million to bring the issue to voters as a proposition on the next ballot. Their plan preserves independent contractor status of their workers while offering basic protections and benefits, including a minimum earnings floor, access to health care plans not tied to their employment, and representation in the companies to better address issues. 

As Uber put up the financing to fight AB 5 and to fund the proposition, it also cut hundreds of employees in its second large-scale layoff this year. Earlier this year, 400 employees were cut from the marketing department. On the same day of the AB 5 vote, more than 400 engineers and product team employees were let go, and the company said it was reassessing its priorities.

“While certainly painful in the moment, especially for those directly affected, we believe that this will result in a much stronger technical organization, which going forward will continue to hire some of the very best talent around the world,” an Uber spokesperson told TechCrunch.

Meanwhile, the proposed proposition is already getting pushback. California Labor Federation, an organization that represents 1,200 unions, is also ready to take on the tech companies at the ballot box. After the initiative was announced, the organization posted on its website that it will “meet the gig companies’ absurd political spending with a vigorous worker-led campaign to defeat this measure to ensure working people have the basic job protections and the right to organize a union they deserve under the law.”

Lyft representatives have emphasized that even without the legislation they are intent on changing the status quo and improving their drivers’ experiences. But they are committed to fighting the bill to ensure those changes don’t include hiring their drivers as employees. 

In a statement released Tuesday night after the bill’s passage Lyft officials said: “Today, our state’s political leadership missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits. The fact that there were more than 50 industries carved out of AB5 is very telling. We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need.” 

More: Why some on-demand drivers are fighting for — or against — California’s gig economy bill

In recent years, workers have voiced concerns about the lack of power they have and how easily the giant companies can change earnings or dismiss their complaints. Many aren’t buying the new promises of better treatment and are supporting the uncertainty, in favor of better representation.

“The ability to make some on-demand extra cash is life-changing and I can see that,” said a driver and pro-AB 5 activist, Jeff Parry, earlier this week. He added that he isn’t worried about the threats to the companies, and how that could affect drivers.  

“What’s more likely to happen is [they] find a may to make it work with the flexibility,” he said. “There’s always going to be someone who will not fit into that model. But if it works for the majority? I don’t see that as a bad thing.”

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