California, the heart of the current tech-driven gig economy, moved a significant step closer this week to overhauling how gig workers are classified with the passing of a controversial new labor law.

Assembly Bill 5, which the state Senate approved on Tuesday, would require employers to treat independent contractors — like Lyft and Uber drivers — as regular employees. The legislation has been lauded by labor groups and firmly opposed by major companies in the sector since it was introduced last year.

"AB-5 is a powerful counter to the corporate greed and rampant exploitation that's driving inequality across our state in emerging and traditional industries, alike," said Art Pulaski, the chief officer of the California Labor Federation. "This historic victory clears the way for the bill to become law, setting workers and their families on a path to a better future and ending abuses that are all-too-common."

The law, which still requires the signature of Governor Gavin Newsom, would mandate that businesses treat contractors like full-time employees, which, proponents say, is crucial for guaranteeing workers rights like workplace protections, insurance benefits, and paid sick leave, among others.

"Under the guise of independent contractor status, rideshare companies have egregiously mistreated their workforce for years," John Costa, the international president of the Amalgamated Transit Union, said in a statement. "With the passage of AB-5, rideshare drivers have finally been given the basic rights afforded to all other workers."

Major gig employers, however, say the law will jeopardize their business models and hurt workers by limiting the much-loved flexibility inherent in their jobs. Ride-hailing companies in particular have lobbied for months to stave off the legislation; even paying some drivers to rally against the bill.

In June, the CEOs of Uber ($UBER) and Lyft ($LYFT) penned an op-ed in the San Francisco Chronicle, arguing that a change to the employment classification of their drivers would "pose a risk" to their businesses. They ceded, however, that the "status quo can and should be improved."

In response to the state Senate's 29-11 vote, Lyft spokesman Adrian Durbin said that California missed an important opportunity to create a "thoughtful solution that balances flexibility with an earnings standard and benefits."

Tony West, Uber's chief legal officer, echoed the sentiment in a call with reporters on Wednesday, saying that the company is "not arguing for the status quo" but instead favors a proposal that "avoids the potential harm of forcing drivers to be employees, whether or not they want to."

A supporter of AB-5 drives past the Capitol during a rally in Sacramento in August. Photo Credit: Rich Pedroncelli/AP/Shutterstock

Yet supporters of the bill say reclassifying employment statuses is long overdue to protect workers in the modern economy, which is increasingly reliant on peer-to-peer services.

"There are a lot of laws that we have in place that companies right now are skirting by, saying their workers are independent contractors," California Assemblywoman Lorena Gonzalez, who wrote and introduced AB-5, told Cheddar last month.

Costa, who heads the largest transit and allied workers union, said AB-5 is specifically essential to curbing the "exploitative behavior" of Uber and Lyft, which fail to "grant their drivers basic workers' rights" such as affordable health insurance, overtime pay, and retirement plans.

AB-5 also enjoys significant political support, especially after receiving two major endorsements from Democratic 2020 hopefuls, Sen. Bernie Sanders of Vermont and Sen. Elizabeth Warren of Massachusetts, earlier this year.

"Every worker deserves to be treated with respect and is entitled to fair compensation for their work. Independent contractors are no different," Herb J. Wesson, Jr., the Los Angeles City Council President, said on Twitter Tuesday.

Yet the gig economy giants maintain that mandating full employment status for contract workers would hurt their business, and in turn their workers. The California Chamber of Commerce also came out in opposition to the law, saying it would "undercut the innovation of a business model" that has spurred economic growth in the state.

Uber, which went public in May, noted in regulatory filings that one risk to its business model was "legislation or judicial decisions" that would require drivers to be treated as employees. Such a change, the company said, would have a significant "adverse effect on our business and financial condition."

Several companies, including Uber and Lyft, have dedicated millions of dollars to fighting the bill; even calling for a referendum to give California voters the final say. DoorDash, the San Francisco-based food delivery service, also said that the company is "committed to passing a new law – in the legislature or at the ballot – that would create benefits and protections" for its workers, known as Dashers.

"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," added Durbin, Lyft's spokesperson.

In a statement to Cheddar last month, a spokesperson for Newsom said that when AB-5 "reaches the Governor's desk it will be evaluated on its merits," but Newsom has expressed support for the bill.

Yet regardless of the law's implementation, labor groups and other proponents say passing the California legislature is an enormous victory. "We hope AB-5 sparks state houses and Congress to follow California's lead by protecting millions of workers from being cheated out of fundamental rights we all deserve," Pulaski added.

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