California Law Aims to Reclassify Contractors as Employees

California Gov. Gavin Newsom has signed a bill requiring that ride-hailing services treat their drivers as employees rather than contractors.

The law applies to a variety of companies that treat workers as contractors, thereby avoiding the need to provide such benefits as Social Security, minimum wage, healthcare coverage, unemployment benefits, overtime payments and paid sick days

Other states, such as Oregon and Washington, are considering similar legislation.

The new California law, scheduled to take effect on Jan. 1, affects independent workers in the healthcare and trucking industry and so-called “gig workers,” such as drivers for ride-hailing companies and delivery services.

Other industries, including accounting, commercial fishing, cosmetology and private investigators, received exemptions under the new law.

Companies in affected industries can still use contract workers if they meet certain criteria. This includes proving that a worker is free from the control and direction of the company and regularly performs work outside the scope of the firm’s business.

California's Division of Labor estimates that the misclassification of workers adds up to a loss of $7 billion per year in estimated annual payroll tax revenue.

Opponents argue that the law will result in significant cost increases that could ultimate drive some companies out of business. Uber and Lyft, both of which are struggling to turn a profit, are spending a combined $60 million to fund a 2020 ballot initiative that would enable them to keep their drivers as independent contractors.