SAN FRANCISCO — In a sign of the potential confusion and chaos set in motion by a landmark bill that the California Legislature passed on Wednesday to effectively require companies to reclassify their contract workers as employees, Uber said it would not treat its drivers in the state as employees.
The measure requires companies to treat workers as employees — and provide them with the protections and benefits that come with the designation — if they exert control over how workers perform their tasks or if the work is part of an employer’s regular business. Gov. Gavin Newsom has endorsed the bill and is expected to sign it.
Tony West, Uber’s chief legal officer, said Wednesday that the company was confident that its drivers will be able to legally maintain their independent status when the measure goes into effect on Jan. 1.
“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,” Mr. West said. He added that the company was “no stranger to legal battles.”
Uber’s early reaction is just one indication of the scrambling by employers across the state as the bill becomes a reality. Unlike contractors, employees are covered by minimum-wage and overtime laws. Businesses must also contribute to unemployment insurance and workers’ compensation funds on their employees’ behalf.
California has at least one million workers who work as contractors and are likely to be affected by the measure, including nail salon workers, janitors and construction workers.
For months, lawmakers have jockeyed to exempt a variety of job categories, including doctors, insurance agents and real estate agents.
Carrying out the mandate will likely be anything but orderly. Companies in dozens of industries must decide whether or not to comply pre-emptively or risk being sued by workers and state officials. Some workers may find that their schedules and job descriptions radically change, while others may be out of a job altogether if their employers conclude that paying them a minimum wage and benefits doesn’t make economic sense.
And California may be only the beginning, as lawmakers in other states, including New York, move to embrace such policies. Legislators in Oregon and Washington State said they believed that California’s approval gave new momentum to similar bills that they had drafted.
“It makes everyone take notice,” said State Senator Karen Keiser of Washington, who expects her Legislature to take up the measure next year. “It’s not just a bright idea from left field. It gives it a seriousness and weight that is always helpful when you’re tying to pass a new law.”
Under the bill, a company must consider a three-prong test when classifying a worker. That includes weighing how much the company directs the worker’s tasks and how much of the work is part of the company’s main business.
Historically, if workers thought they had been misclassified as a contractor, it was up to them to fight the classification in court. But the bill gives California cities leverage to enforce the law by suing companies that don’t comply.
San Francisco’s city attorney, Dennis Herrera, has indicated that he may take action.
“Ensuring workers are treated fairly is one of the trademarks of this office,” he said in a statement. “We have a track record of taking on such cases, whether it’s making sure workers receive proper health care or are paid what they’ve earned.”
While much of the debate about the legislation has been about the impact on fast-growing businesses like Uber, Lyft and DoorDash, it could apply to many kinds of employers, including those that long predated the so-called gig economy.
For example, religious groups unsuccessfully pressed legislators for an exemption from the bill, known as A.B. 5, arguing that it could force the leaders of small congregations in California out of their positions.
“We had a number of small synagogues in California reach out to us with concerns over this bill,” said Nathan Diament, the public policy director for the Orthodox Union Advocacy Center. Some congregations would struggle to pay for full employment benefits for their religious leaders if they were converted from independent contractors to employees, he said.
“For smaller ones that operate on very small budgets, it could force them to lay off their rabbi or maybe only hire them part time,” Mr. Diament said.
Even drivers for Uber and Lyft have been split on the bill. Some of them protested outside Uber’s San Francisco headquarters and visited lawmakers’ offices in Sacramento to plead their case for employment status. Others objected to the bill, worrying that it would take away their ability to switch their work on and off just by opening an app.
“I’m torn. Drivers are so split on the issue,” said Harry Campbell, a driver and the founder of the publication The Rideshare Guy.
Uber and Lyft have long maintained that converting drivers to employees would most likely require the companies to schedule drivers in shifts rather than allowing them to decide when, where and how long to work. While nothing in the bill requires employees to work scheduled shifts, in practice the companies may want to restrict drivers from working when there are few customers and the revenue that drivers bring in would not offset the hourly costs of employing them.
The companies have taken similar steps in response to changing economic calculations in other states. After New York City enacted a minimum wage for drivers this year, Lyft put such restrictions in place because having too many drivers on the road without passengers could significantly raise the minimum wage the company had to pay under the city’s wage formula.
“Drivers will have some restrictions,” Mr. Campbell said. “The question for me is whether it will be worth it for all the drivers to have protections.”
The costs for app-based businesses, many of which are not profitable, could be significant. Uber has been under pressure this year over its business. The company held a troubled initial public offering in May and has reported large losses and slowing revenue growth. Dara Khosrowshahi, Uber’s chief executive, has laid off hundreds of employees in recent months, including Tuesday, to cut costs.
But some traditional businesses that have lost ground to newer app-based companies have argued that the mandate merely levels the playing field. Construction companies have long complained that they face unfair competition from rivals that classify workers as contractors so they can avoid paying payroll taxes and lowball bids on projects.
App-based companies are “starting to send carpenters, electricians, plumbers off their platform — independent contractors who make very low wages,” said Robbie Hunter, the head of the state building trades council that represents construction worker unions in California. “They’re undercutting brick-and-mortar businesses doing the right thing — paying for workers’ compensation, being very efficient, working hard to make a profit.”