California governor Gavin Newsom on Wednesday signed a controversial law that could shake up the "gig" economy by reclassifying rideshare drivers and others as employees.
The legislation, which is being closely watched in other states, responds to critics who argue that companies like Uber and Lyft shortchange contract drivers by denying them employee benefits.
Newsom said the new law was a first step toward better treatment of employees and would enable more workers to unionize.
The governor called the measure known as AB5 "landmark legislation for workers and our economy" and said it would reduce "worker misclassification" that denied benefits such as minimum wage, sick leave and health insurance.
"The hollowing out of our middle class has been 40 years in the making and the need to create lasting economic security for our workforce demands action. Assembly Bill 5 is an important step."
The law challenges the business model of the rideshare platforms and others which depend on workers taking on "gigs" as independent contractors.
Efforts by Uber and Lyft to negotiate a compromise to the bill passed by state legislators apparently failed, given the governor signed it into law unchanged.
The measure was hailed as a watershed moment for labor activists seeking more rights for gig and freelance workers.
"Big thank you to all the gig workers, union members & activists who spent countless hours rallying to deliver this historic win," the California Labor Federal said in a tweet.
"We proved when working people stand together, we win!"
- Uber balks -
Uber said it has no plans to immediately reclassify drivers as employees in January, when the law takes effect.
The law "does not provide drivers benefits; give them the right to organize, or classify them as employees," Uber chief legal officer Tony West said on a call last week with reporters.
Uber had pressed for a new classification that considers workers independent while guaranteeing benefits, and has allocated millions of dollars to get a referendum on the ballot to support an option that would let drivers remain independent while providing safety nets.
"It was a leadership moment that was lost by California, to be able to lead that third way that fits th 21st century economy and the way the world works today," West said.
Uber and Lyft, whose business models are likely to be hit by the law, are seeking a referendum in the state that would overturn the measure.