Both houses of California's legislature have passed sweeping legislation requiring businesses to treat more of their workers as employees rather than independent contractors. As a result, more workers will enjoy protections like the minimum wage and benefits such as unemployment insurance. The bill is now on its way to Governor Gavin Newsom, who is expected to sign it.

The law will apply across the California economy, but it could have particularly stark consequences for Uber and Lyft—both of which are based in the Golden State. The companies currently treat their drivers as independent contractors, and their entire business model is built around that assumption.

In the hours after the legislation cleared the California legislature, Uber and Lyft both blasted the law and vowed to seek changes.

"California is missing a real opportunity to lead the nation by improving the quality, security and dignity of independent work," Uber's Tony West said. In an emailed statement, Lyft argued that the "overwhelming majority of rideshare drivers" want "a thoughtful solution that balances flexibility with an earnings standard and benefits"—a standard Lyft argues that the new legislation doesn't meet.

Uber and Lyft are still hoping that Governor Newsom will push through follow-up legislation specifically for "gig economy" workers. If that doesn't happen, Uber, Lyft, and Doordash have also vowed to spend $30 million backing a ballot initiative to overturn the law.

But if those efforts fail, then "gig economy" companies could be forced to rethink their business models. And the results may not be entirely positive for Uber and Lyft drivers.

More workers will be employees in California

Labor law draws a basic distinction between employees and independent contractors. If you're an employee, you have a boss who sets your schedule, tells you what kind of work to do, and pays you at least minimum wage. Independent contractors, on the other hand, are people who—at least theoretically—run their own, separate businesses. Think about a plumber you hire once to fix a leaky pipe, for example.

In recent years, employers have pushed the legal envelope, trying to classify as many workers as possible as independent contractors. Worker rights advocates have objected, arguing that these workers were being wrongfully denied protections they were entitled to under labor law.

One of those conflicts reached the California Supreme Court last year. A same-day delivery company called Dynamex once treated its drivers as employees, but it re-classified them as independent contractors in 2004. Some of those drivers sued, arguing that they should still be considered employees under California law.

Last year the California Supreme Court sided with the drivers, and in the process it established new, broader criteria for determining who was an employee. Under the test, a worker must be treated as an employee unless three conditions are met:

(a) The worker is free from control and direction over performance of the work; (b) the work provided is outside the usual course of the business for which the work is performed; and (c) the worker is customarily engaged in an independently established trade, occupation, or business

This simpler test means that a lot more workers will be classified as employees. But critics worried it could go too far, upending the businesses of professionals who have long operated as independent contractors.

So the California legislature passed legislation to ratify the Dynamex ruling while also limiting its scope. It carves out a number of exemptions—largely for high-earning professionals like lawyers, architects, engineers and accountants. People in these skilled occupations often operate their own independent firms and have significant bargaining power.

Under the new law, photographers, writers, and cartoonists can more easily be independent contractors if they sell fewer than 35 pieces to a single client in a year. If they sell more than that then they're likely to be classified as employees.

Uber, Lyft, Doordash, and other "gig economy" companies lobbied hard for a similar exemption covering their workers, but they came up short. So Uber and Lyft drivers—as well as delivery drivers for other on-demand services—may soon be legally considered employees of these companies.

Uber disputes that. In a Wednesday conference call, Uber chief legal officer Tony West argued that driving a car is "outside the usual course" of Uber's business. "Several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces," West said.

For example, a Vermont official accepted that reasoning in a 2017 ruling using a legal standard similar to the one that now applies in California. But it's widely expected that courts in California won't see the issue the same way.

The new law could mean changes for Uber and Lyft drivers

A big reason Uber and Lyft have been opposing this bill so ferociously is that their current business model doesn't fit well into conventional labor law categories.

Conventional labor law assumes that a worker goes to a job, clocks in, works, for a few hours, and then clocks out. In this model, the employer decides what work the worker should do; in exchange the worker is guaranteed to make at least minimum wage. Employers set worker schedules; to protect them, California law guarantees workers overtime pay and mandatory breaks.

By contrast, Uber and Lyft drivers have complete control over where and when they work. In this model, it's not clear that mandatory overtime pay helps workers, since workers never face pressure from the platforms to work longer hours. If platforms are forced to pay time-and-a-half for overtime hours, they may just ban drivers from working overtime.

A minimum wage guarantee is likely to trigger significant changes to the ride-sharing model. It's helpful here to look at New York City, where a $17.22 minimum wage for ride-hail drivers went into effect earlier this year.

To make a profit, Lyft needs to make sure drivers bring in at least $17.22 per hour in fares. To accomplish this, Lyft has imposed a new policy that (in the words of Harry Campbell) "prevents drivers from logging on to the company’s app during periods of low demand." Under the new rules, Lyft drivers in New York "have to wait until ride requests pick up, or drive to a busier neighborhood."

Whether these changes ultimately benefit drivers is an open question. Probably it will benefit some drivers and harm others. Full-time drivers may not be affected very much, as Lyft exempts its most active drivers from these restrictions. On the other hand, the changes may be bad for part-time drivers who care more about flexible schedules than maximizing earnings.

We can expect similar changes in California if the new legislation ultimately causes drivers to be classified as employees. Companies will likely restrict how many people drive for them and where and when they can work. Workers who are able to get work may enjoy higher earnings, but they'll lose a bit of autonomy over their schedules. Meanwhile, with fewer drivers on the road, customers may see higher fares and longer wait times.

But the full implications won't be clear until the new rules make their way through the courts. Uber and Lyft aren't going to give up their current business model without a fight.