The pandemic has been very bad for Uber and Lyft. Arguably worse for the companies, though, is California’s attempt to blow up the gig economy. If California succeeds, other states are guaranteed to follow, leading to a national fragmentation of the ride-hailing industry that will benefit some drivers and disadvantage others.

The effort that began with the passage of AB5, which makes it hard for companies like Uber and Lyft to classify drivers as independent contractors rather than employees, took another big step this week when the state’s attorney general and a consortium of local prosecutors filed a lawsuit against Uber and Lyft. The law officially went into effect on January 1st, but ride-sharing companies like Uber and Lyft have continued to lobby against it.

“Californians who drive for Uber and Lyft lack basic worker protections,” California Attorney General Xavier Becerra said during a news conference Tuesday. “Sometimes it takes a pandemic to shake us into realizing what that really means and who suffers the consequences.”

If the lawsuit is successful, around 1 million drivers could be eligible for the type of benefits traditionally associated with full-time employment: health insurance, workers compensation, unemployment insurance, and a minimum wage guarantee. It would be a huge setback for Uber and Lyft, which have both warned that reclassifying drivers as employees would undermine their business models. But more importantly, it could accelerate the fragmentation of the ride-hailing industry, in which drivers are treated as employees in some states, and contractors in others.

Undoubtedly, Uber and Lyft will become more expensive in states that succeed in turning drivers into employees. Industry officials predict that both companies are likely to see a 30 percent increase in costs related to driver expenses, a staggering amount for businesses that have yet to prove they can stop burning cash and turn a profit.

Experts interviewed by The Verge predict the companies can pass those costs along to consumers through higher fares with only a modest impact on demand. In other words: higher-income people probably won’t notice a difference, while mid- to low-income people who view the occasional Uber or Lyft trip as an acceptable luxury will probably stop using the service. And Uber and Lyft have repeatedly warned that they will have to start scheduling drivers in advance if they are employees, reducing drivers’ ability to work when and where they want.

But more troublesome for Uber and Lyft is the host of other states watching the California situation unfold and waiting to launch their own broadsides against the ride-hailing companies’ controversial labor practices.

“This lawsuit will be the first of more to come around the country,” said Len Sherman, an adjunct professor of business at Columbia University who studies the ride-hailing industry.

California’s AB5, which enshrines the so-called “ABC test” for determining whether someone is a contractor or employee, is under review in other states. New York Gov. Andrew Cuomo has said the law got his “competitive juices flowing” and expressed an interest in seeing a proposal in his own state that steers more workers away from independent contractor status. New Jersey has introduced its own version of the law.

Many other states, though, have taken the opposite position, affirming Uber and Lyft’s right to treat drivers as freelancers. About half of the states in the country have passed provisions deeming drivers contractors, according to The New York Times.

Of course, there’s no guarantee that California will be successful in strong-arming Uber and Lyft into reclassifying its drivers. The companies have dodged numerous class action lawsuits by driver groups in the past. And even when they’ve been forced to settle, the amounts have been comparatively modest.

“I think what we’re seeing is that California is challenging the status quo — in California — continuing a patchwork approach, rather than reversing a trend,” said Alex Rosenblat, senior researcher at the Data & Society Research Institute and author of Uberland: How Algorithms Are Rewriting the Rules of Work.

Indeed, Wall Street sees the pandemic, not California’s lawsuit, as the more existential threat. “Remember when California’s AB5 legislation was the biggest risk to ride sharing stalwarts such as Uber and Lyft?” Daniel Ives, an analyst at Wedbush, wrote in a note to investors. “Now the big question for investors looking forward is what the growth prospects for the Gig Economy will be on the other side of this dark valley.” But that could change if California is successful in its effort to dynamite the gig economy.

The reactions from both Uber and Lyft to the lawsuit seem to follow this logic. Uber said that it would “contest this action in court, while at the same time pushing to raise the standard of independent work for drivers in California, including with guaranteed minimum earnings and new benefits.” Lyft said it would work with California to “bring all the benefits” of the “innovation economy to as many workers as possible, especially during this time when the creation of good jobs with access to affordable healthcare and other benefits is more important than ever.”

The ride-hailing industry has a reputation problem before the pandemic — remember #DeleteUber? — but California is taking a big risk by challenging the gig economy during record-high unemployment, said Rosenblat. After all, Uber has lost around 80 percent of its ride-hail business, and drivers, though considered essential workers, are struggling to fulfill rides.

“Enforcing the law now is not the main factor that will affect the employment conditions of drivers,” she added, “it’s the economy under the pandemic.”

A regulatory patchwork isn’t ideal, but companies like Uber and Lyft are uniquely positioned to adapt without too much hassle. Where it gets kind of messy, though, are large metropolitan areas that splash across multiple states, like New York City. Drivers who pick up passengers at Newark Airport in New Jersey and drive them to Manhattan, for example, aren’t covered by New York City’s first-of-its-kind minimum wage law. But the law does affect riders: Uber has told its customers they will have to pay a surcharge when they have cars take them outside of New York City to compensate drivers for the ride back.

“It’s not ideal and local minimum wage laws have the same patchwork feel to them,” said Michael Reich, professor of economics and co-chair of the Center on Wage and Employment Dynamics at the University of California, Berkeley. “But the markets don’t know exactly what these political boundaries are and so there are spillovers from one market to another.”

The timing of the California lawsuit is weird, given the pandemic, and it’s hard to know what to make of it. Uber just eliminated 3,700 full-time employees, or about 14 percent of its global workforce. Last week, Lyft did the same, laying off 1,000 people, or about 13 percent of its employees. The companies are scrambling to look like good guys who protect their frontline “essential” workers by providing them with hazard pay if they get sick or are forced to quarantine, or delivering masks and other protective equipment that can keep them safe while on the job.

But the pandemic will ultimately pass. And when it does, these perks could remain, or they could vanish. If things will go back to the way they were, drivers will have to pay for their own health insurance, clean-up costs, and fuel bills.

That’s unless California wins, that is, and drivers suddenly find themselves gig workers no more but newly minted employees.

*By Andrew J. Hawkins via The Verge*