AB 5: For Big Gig Economy Companies, California Is No Longer a Golden State

As the birthplace of the Gig Economy, California reaped many rewards over the past decade. Now, if the most dire predictions are to be believed, the state could become a unicorn graveyard.

At least, that’s the reaction coming out of companies like Uber, Lyft, Instacart, Postmates, and Doordash in wake of Assembly Bill 5 (AB 5) which Gov. Gavin Newsom signed into law on September 18.

The law would compel most companies to reclassify contract, freelance, and contingent workers—the backbone of the so-called Gig Economy—as full-time employees, deserving of the myriad benefits and protections guaranteed under California’s extremely worker-friendly employment law regime.

Under the current system, “employers shirk responsibility to safety net programs like workers’ compensation and unemployment insurance,” Newsom wrote in a Labor Day op-ed in the Sacremento Bee, outlining his support for the law. “Taxpayers are left to foot the bill. Reversing the trend of misclassification is a necessary and important step to improve the lives of working people.”

When the new law goes into effect on Jan. 1, 2020, workers who are engaged in the activity of a company’s main business will be eligible for full-time employment status. Some industries won exemptions, but the major ride-share and delivery companies pointedly did not.

The main avatars of the Gig Economy object to the law on the grounds that their core business is really developing technology platforms, anchored by the ubiquitous mobile apps you probably have on your phone.

The courts have already weighed the issue, they argue.

“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,” Uber chief legal officer Tony West said during a call with reporters after the bill passed.

West is perhaps glossing over the fact that one major case last year set the table for AB 5.

In Dynamex Operations v. Superior Court, a lawsuit involving a same-day courrier service, the California State Supreme Court opened the door for independent contractors to fight to be reclassified as full-time employees, provided that they met three key criteria: A contractor is only a contractor, the justices ruled, if he or she is totally free of company control, is responsible for work duties that are not central to the employer’s core business, and has his or her own independently-incorporated business.

The U.S. Ninth Circuit Court of Appeals affirmed the decision in May, and held that it was retroactive, covering existing employer-contractor relationships.

Companies like Uber and Lyft argue that any move to ensure benefits and other protections for these workers would increase costs to such an extent that they would be forced to institute rules about shifts, limiting how many drivers are on the road at a given time, which, they argue, would take away the flexibility drivers prize and potentially harm the consumer experience.

Supporters of the law have expressed skepticism that these companies would ever truly curtail service, lengthening pick-up or delivery times. Moreover, they note that the companies are very well-capitalized, making the decision to rely on a contingent workforce a choice, and not a business necessity.

As a compromise, Uber floated the idea of setting guaranteed minimum earnings for drivers, but the bill’s backers didn’t bite.

Whatever version of the business case you believe, state politicians clearly view the law as a political winner. The bill sailed through the California Assembly, where Democrats enjoy a super majority, by a vote of 61 to 16. The state senate tally was similarly lopsided, 29 to 11.

Legislators in several other states are now studying AB 5, and progressive presidential candidates Elizabeth Warren (D-Mass.), Bernie Sanders (I-Vt.), and Kamala Harris (D-Calif.) have praised it as a victory for workers’ rights.

Stung by criticism of the very business model that turbocharged their global growth, the embattled unicorns are vowing to pour money—as much as $90 million collectively from Uber, Lyft, and Doordash—into a voter initiative to roll back the effects of AB 5.

So far, that threat has only emboldened the law’s proponents.

In a tweet, the bill’s chief sponsor, Assemblywoman Lorena Gonzalez of San Diego, wrote: “Billionaires who say they can’t pay minimum wages to their workers say they will spend tens of millions to avoid the labor laws. Just pay your damn workers!”

At a time when once-venerated tech companies like Facebook, Google, and Amazon are facing an intense political backlash over their business practices, it will be interesting to see how open the average voter is to the argument that these market-disrupting tech behemoths should be left to their own devices.

In a twist the companies’ founders probably never anticipated, they may be especially vulnerable on their home turf of California, where people have lived with their benefits—and the downsides—of these services for longer than most of us.

For Big Gig Economy Companies, California Is No Longer a Golden State

More must-read stories from Fortune: