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Inside Uber’s Seattle office. (GeekWire Photo / Monica Nickelsburg)

California is poised to enact a law that would force Uber and Lyft to treat drivers like employees as part of a broader push around the country to ensure app-based workers have broader labor protections. The regulatory trend is a reckoning for the gig economy, a young industry powered by cheap, independent work.

State lawmakers in California approved a bill known as AB-5 on Wednesday in a move that all but guarantees the legislation will become law. AB-5 applies a new standard to determine whether workers are employees or contractors. Under it, workers are considered employees unless the way they conduct their work is free from the hiring company’s control; the work they do is outside the scope of the company’s core business; and the worker is “customarily engaged in an independently established trade.”

Despite a down-to-the-wire fight for exemptions, the law applies to companies like Uber and Lyft. It takes effect Jan. 1.

Update: Uber’s Chief Legal Officer Tony West said the company will not reclassify drivers as employees following the vote. He believes Uber can convince the courts 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.”

Lyft Communications Director Adrian Durbin said California legislators “missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits,” in a statement. Uber declined to comment by publication.

Uber, Lyft, and other gig economy companies have long claimed that the bill will strike a blow to their fundamental business models. Barclays estimates that reclassifying drivers from their current status of independent contractor to employee could cost Uber and Lyft an additional $3,625 per driver, per year. That could increase Uber’s operating loss by $500 million annually and Lyft’s operating loss by $290 million, according to Barclays estimates cited by Yahoo Finance.

Related: In IPO filing, Uber calls out Seattle and warns ‘regulatory risks’ in big cities could impact business

Seattle is another key ride-share market where Uber and Lyft both have engineering centers. The city has been mulling a tax on the companies for months, though what shape it would take remains to be seen. Seattle officials have already started extending labor protections for other categories of workers not covered by traditional employer-employee relationships. Last year, Seattle became the first city in the U.S. to introduce a Domestic Workers Bill of Rights, coupled with a law that gives a minimum wage and rest breaks to thousands of nannies, housekeepers, gardeners, and other home service providers.

Employees are more expensive than independent contractors because employers are required to pay a minimum wage, unemployment, and other payroll costs. Uber warned investors about the impact such regulations could have on its business when the company went public in April.

“Our business would be adversely affected if Drivers were classified as employees instead of independent contractors,” Uber said in its IPO prospectus. The company later added, “Further, any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.”

California is in the vanguard of the gig worker protection battle but it isn’t fighting alone. New York City passed a minimum wage for drivers last year but did not address worker classification. It’s difficult for cities to take on the issue without incurring lawsuits because worker classification is traditionally governed by state and federal jurisdictions.

The timing of this new regulatory push is not ideal for Uber and Lyft. The companies went public before they were profitable and had a rough start on Wall Street. Uber reported a whopping $5.2 billion quarterly loss in its last earnings report, sending share prices plummeting. The picture wasn’t quite so bleak for Lyft, which posted a loss of $644 million during the quarter.

On Tuesday, Uber confirmed 435 layoffs of workers on its product and engineering teams, following 400 layoffs in July.

The regulatory uncertainty coupled with financial turmoil could spook investors, many of whom are already wary of ride-sharing’s long-term economic viability. Some experts believe Uber and Lyft’s best chance at long-term success is prioritizing their new mobility businesses, like bike- and scooter-share.

Pitchbook economist Asad Hussain said California’s new bill “will create a headwind for Uber and Lyft and may reduce the attractiveness of investing in gig economy business models that classify workers as independent contractors,” in a statement.

“As using gig economy drivers becomes more complicated, expensive and regulated, platforms that connect people to vehicles — as opposed to drivers — may provide more favorable unit economics,” he added. “In the long term, we think Uber and Lyft should respond by doubling down on their micromobility and autonomous technology investments and potentially expanding into carsharing.”

Uber and Lyft have warned that they will have to set driver schedules in advance under the new law, impacting the flexibility that many of their workers depend on. The California legislators behind the bill disagree in documents associated with the legislation. They note that “nothing in this act is intended to diminish the flexibility of employees to work part-time or intermittent schedules or to work for multiple employers.”

Uber and Lyft will continue to fight the California legislation. They are putting millions of dollars into a ballot initiative that would give drivers some worker protections and exempt the companies from the new worker classification law.

“We are fully prepared to take this issue to the voters of California to preserve the freedom and access drivers and riders want and need,” said Durbin on behalf of Lyft.

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