The California Senate has passed a bill that threatens the gig economy model, making it tougher for the likes of ride-hailing companies Uber and Lyft to classify their drivers as independent contractors.

Assembly Bill 5 will head to the assembly floor on Wednesday, where it is expected to pass and be signed by California governor Gavin Newsom. If it becomes law, it will take effect on January 1, 2020.

The new law would pose a challenge for ride-hailing and food delivery companies, which classify drivers as independent contractors rather than employees. That has allowed them to avoid paying a certain level of wages, as well as health benefits and paid vacation.

“This is a huge win for workers across the nation!” said the California Labor Federation in a tweet. “It’s time to rebuild the middle class and ensure ALL workers have the basic protections they deserve.”

Bob Schoonover, president of SEIU California, a coalition of over 700,000 workers, said the Senate’s passage “has set the stage for a major breakthrough for workers that are excluded from basic pay and protections no matter how hard they work”.

The law will not automatically turn contractors into employees but will make it more difficult for gig economy companies to prove that workers are not staff.

Still, the uncertainty around the bill ahead of Tuesday’s vote was enough for investors to send Uber and Lyft shares to record lows last week as it became clear the bill could prompt other states to follow suit.

Uber declined to comment but said it would respond if the bill passed the assembly floor on Wednesday. Lyft could not be immediately reached for comment.

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The ride-hailing groups say they are not opposed to giving their drivers benefits but the “flexibility” of how, when and where they work is central to their asset-light business models.

Together with DoorDash, a food delivery service, Uber and Lyft have pledged $90m on a ballot initiative to seek an exemption from the law. They are looking for “a third way” to maintain flexibility but agreeing to support things such as a “minimum earnings floor”, sick leave and paid time off.

In a blog on August 29, Uber wrote: “Uber is ready to do our part. That is why we have been at the table in California — with other ride-share companies, lawmakers, the governor’s office and labor unions — to propose a truly innovative framework that we believe would preserve Uber’s key benefit for drivers (flexibility) and key benefit for riders (reliability), while improving the quality and security of independent work.”

Via Financial Times