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Jeenah Moon/The New York Times News Service

Drivers working for ride-hailing services such as Uber Technologies Inc. and Lyft Inc. will be considered employees under California’s new gig worker law, the state’s leading industry regulator said on Thursday.

Shares in Uber and Lyft fell 5.3 per cent and 4.2 per cent, respectively, in early trading, with the new order striking at the heart of the “gig economy” business model of technology platforms such as Uber and Lyft that rely on cheaper contract workers.

The decision, by the California Public Utilities Commission (CPUC), which regulates ride-hailing companies across the state, comes six months after a state law took effect that makes it tougher for companies to classify workers as contractors rather than employees. The latter designation exempts them from paying for overtime, health care and workers’ compensation.

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The CPUC in an order on Thursday said it had to enforce state law, determining that drivers of transportation network companies (TNCs), the industry term for ride-hailing operators, would be considered employees going forward.

“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,” the commission said in the document.

The companies have said in the past their drivers were properly classified as independent contractors, adding that the majority of them would not want to be considered employees, cherishing the flexibility of on-demand work.

“CPUC’s presumption is flawed. Forcing them [drivers] to be employees will have horrible economic consequences for California at the worst possible time,” Lyft said in a statement on Thursday.

Uber did not immediately respond to a request for comment. The company in December sued to block the new law, known as AB5, arguing that it punished app-based companies and was unconstitutional.

California in early May filed its own lawsuit against Uber and Lyft, arguing the companies misclassified their drivers in violation of the new law.

Uber, Lyft and food delivery platform DoorDash have earmarked US$90-million for a November ballot imitative that would exempt them from the law. Under the companies’ proposal, drivers would receive mileage-based subsidies, health care stipends and occupational accident insurance, while maintaining their flexibility as contractors.

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Labour unions have sharply criticized the proposal for creating a “new underclass of workers” that still lack fundamental protections such as sick pay and unemployment insurance.

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