The California Public Utilities Commission on Wednesday ruled that AB5—the state law that classifies gig workers as employees rather than contractors—applies to ride-sharing services.

It wasn’t a big surprise. AB5 (Assembly Bill 5) was specifically targeted at Uber Technologies (ticker: UBER), Lyft (LYFT), and other services that sign on temporary workers. The bill was signed into law by Gov. Gavin Newsom in September and officially went into effect Jan. 1.

Uber and Lyft have resisted implementing the law, which would almost certainly raise their labor costs. The companies have said it would result in a smaller number of drivers with reduced flexibility to set their hours. In May, the California attorney general, along with the city attorneys for Los Angeles, San Diego, and San Francisco, sued Uber and Lyft seeking to force them to comply.

There are other legal cases at play: As the commission noted in its ruling yesterday, Uber has filed a lawsuit in federal court seeking injunctive relief to enjoin enforcement, while a group of Lyft drivers has sued in federal court seeking an order requiring Lyft to comply with AB5 and to reclassify all of its drivers as employees.

Meanwhile, Uber, Lyft, and the food-delivery service DoorDash have teamed up on a proposition to be included on the November 2020 election ballot that would exclude all app-based drivers from the provisions of AB5.

The commission ruled Wednesday that “the presence of these lawsuits and ballot measure does not mean that the Commission can abdicate its regulatory responsibility over TNCs [transportation network companies, i.e., ride-sharing services]. As a matter of California constitutional law, the Commission is tasked with enforcing those laws applicable to the entities subject to its jurisdiction until such time as a higher court, the legislature, or the public through their right to vote, determine otherwise. Thus, for now, TNC drivers are presumed to be employees and the Commission must ensure that TNCs comply with those requirements that are applicable to the employees of an entity subject to the Commission’s jurisdiction.”

Yesterday’s ruling comes one week after the commission sent a memo to the ride-sharing companies pointing out that under state law, they need to provide workers’ compensation coverage for their employees—which includes their drivers under AB5. Failure to comply could result in suspension of the company’s ability to provide services in the state.

In a statement, Lyft responded that the PUC’s “presumption is flawed; drivers are correctly classified as independent contractors and overwhelmingly want to remain independent contractors—71% in the latest independent poll, even after the impacts of Covid. Forcing them to be employees will have horrible economic consequences for California at the worst possible time. That’s why we’re supportive of a ballot measure that gives drivers important new benefits while allowing them to remain independent.”

Uber said in statement that the company “remains committed to expanded benefits and protections to drivers. That commitment is enshrined in the California ballot measure we are pursuing with industry leaders and a growing coalition of thousands of platform earners. If California regulators force rideshare companies to change their business model it would affect our ability to provide reliable and affordable services, along with threatening access to this essential work Californians depend on.”

In recent trading, Uber stock is down 7.9%, at $32.09, while Lyft is off 5.6%, at $36.42. The S&P 500 is down 3.3%.

*by Eric J. Savitz via Barron’s*