Uber headquarters, located at 1455 Market street in San Francisco, California. Photo: Jason Doiy/ALM

Gov. Gavin Newsom on Wednesday signed landmark worker classification legislation that will make it more difficult for companies to label workers as independent contractors.

In a signing message, Newsom said that while Assembly Bill 5 is "an important step," he will continue negotiating with gig companies over a potential compromise that would give their workers benefits and organizing power without classifying them as employees.

"A next step is creating pathways for more workers to form a union, collectively bargain to earn more and have a stronger voice at work—all while preserving flexibility and innovation," Newsom wrote.

"In this spirit, I will convene leaders from the Legislature, the labor movement and the business community to support innovation and a more inclusive economy by stepping in where the federal government has fallen short and granting workers excluded from the National Labor Relations Act the right to organize and collectively bargain," the governor added.

The legislation largely codifies the California Supreme Court's 2018 ruling in Dynamex Operations West v. Superior Court, which created a more worker friendly, three-pronged test for determining an employee's classification. That decision, along with Newsom's prior commitment to signing AB 5, has already spurred litigation targeting on-demand companies.

Boston-based attorney Shannon Liss-Riordan sued Uber last week, citing the then-pending AB 5 and the Dynamex ruling in challenging the ride-hailing company's practice of classifying its drivers as independent contractors. Uber has yet to respond Liss-Riordan's motion for a preliminary injunction, filed in the U.S. District Court for the Northern District of California.

Uber's chief legal officer, Tony West, said last week that the company believes its workers can still qualify as independent contractors under the Dynamex ruling and AB 5. The company had no immediate plans to reclassify drivers and is considering its legal and political options, he said.

San Diego City Attorney Mara Elliott last week also sued Instacart, alleging the San Francisco-based grocery delivery service misclassifies its workers based on the Dynamex test.

Meanwhile, the delivery company Postmates recently announced it would start providing accident insurance benefits to its drivers, Fisher & Phillips partner Jeffrey Smith said in a blog post the firm hosts about labor and employment issues affecting the gig economy.

"Some businesses have been hesitant to offer a full suite of typical workplace benefits to their gig workforce for fear it could lead to a misclassification finding," Smith wrote. He added: "But by providing this initial step of benefits, Postmates is hoping not to break that wall but instead make itself even more attractive to a pool of qualified and skilled workers."

Uber, Lyft and Doordash have threatened to finance a $90 million ballot initiative in 2020 that would undercut AB 5 if they cannot reach a compromise with state leaders that would keep their workers independent contractors.

AB 5 gives city attorneys in California's biggest municipalities the authority to seek injunctions against employers, an enforcement mechanism added by author Assemblywoman Lorena Gonzalez, D-San Diego, in an attempt to thwart arbitration agreements required by many gig employers.

The worker-classification law exempts numerous professions, including attorneys, doctors and even newspaper delivery workers, from the Dynamex test. In related litigation, the U.S. Court of Appeals for the Ninth Circuit has asked the California Supreme Court to consider whether the new labor laws should be applied retroactively.

"The fact that the Legislature recognized in AB 5—and in related legislation—that so many professions and industries include workers who are not appropriately classified as employees is strong evidence that the Dynamex decision should not apply to everyone and there are many industries that still need to be added," the California Chamber of Commerce said in a statement.

"Simply put, much work remains to be done on the Dynamex issue," the statement continued. "As such, the business community will be aggressively pursuing further exemptions next year.

California's worker classification debate has been closely watched by leaders in other states, including New York, where Gov. Andrew Cuomo said last week that "more people should be classified as employees … I don't want to lag California in anything."

Read more: 

• Uber and Lyft strike: What's at stake for injured gig workers?
• Gig work, data privacy and other workplace trends to watch
• NLRB adopts business-friendly independent contractor test