California state senators today approved a bill that will reclassify Uber Technologies Inc. and Lyft Inc. drivers from independent contractors to employees, potentially raising operating costs significantly for the ride-hailing giants.

Assembly Bill 5 passed 29-11 in a development that likely paves the way for it to become law in the foreseeable future. The legislation will now go before the state Assembly, which already greenlighted an earlier version of the legislation. It will then require the signature of Governor Gavin Newsom, who has likewise expressed support for reclassifying workers in California. 

AB5 will apply not only to drivers making their living on ride-hailing platforms but also to other workers in the so-called gig economy. As a result, players such as grocery delivery provider Instacart Inc. and restaurant delivery provider GrubHub Inc. will also have to restructure their operations. 

The bill will require gig economy companies to guarantee minimum wage for workers as well as the benefits afforded to employees. The likes of Uber will have to provide, among other things, overtime pay, sick leave and family leave, Social Security contributions and reimbursements for expenses such as vehicle maintenance.

The law could further complicate the already difficult path to profitability facing the ride-hailing industry’s biggest players. Uber and Lyft are both still racking up massive quarterly losses to maintain their revenue growth, despite their recent efforts to curb spending. Uber laid off 435 employees earlier this week and previously axed 400 marketing positions in July as part of its ongoing cost-cutting push.

AB5 will go into effect at the start of 2020 if it receives final approvals. Uber and Lyft have already started preparing for that eventuality: The companies last month teamed up with food delivery DoorDash Inc., which will also be affected by the bill, to launch a ballot initiative that would maintain the status of their drivers as contract workers. 

“We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers want and need,” Lyft said in a statement.

It may not be just a California issue before long, however. “Other states are likely to enact similar legislation,” Michael Droke, a labor and employment partner at the international law firm Dorsey & Whitney, said in an email.

Photo of California State Capitol: Steven Pavlov/CC BY-SA 3.0