California's contractor law was aimed at Uber and Lyft, but it could cause much bigger problems for food delivery startups

DoorDash

• On Friday, California lawmakers passed a law that could force companies like Uber and Lyft to reclassify independent contractors as full-time employees.
• Assembly Bill 5 could be detrimental to companies that are struggling to become profitable while relying on gig economy labor for low prices that attract new customers.
• While the focus has remained on the two ride-hailing companies, other gig economy experts think food delivery startups like DoorDash will be the most affected if the law goes into effect.
• According to reports, Uber, Lyft, and DoorDash have already committed to a $90 million ballot initiative that could reverse the decision if voters approve it in 2020.
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Uber and Lyft have been at the center of debate surrounding California's new landmark bill that could force companies to reclassify independent contractors as full-time employees. But industry experts say the biggest loser might actually be food delivery.

The bill passed California's State Senate and Assembly on Friday, and is headed to Governor Gavin Newsom's desk for his signature. Although the bill was created in part to go after Lyft and Uber, both of which have seen driver protests for higher wages and better benefits, the law could have unintended consequences for more than just ride-hailing services, many gig economy experts say.

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"I do think there will be some companies where this will result in their demise," Micah Rowland, Chief Operating Officer of gig economy recruiting tool Fountain, told Business Insider. "Companies that are totally reliant on gig labor are going to find it more difficult to make the argument that Uber is trying to make that gig workers are not essential, so they will have to make the transition."

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Rowland said that industries with already low margins, like food delivery, are particularly vulnerable to the changes. Customers are unlikely to support any increase in delivery fees, so the companies would have to pass on the increased cost to restaurants they partner with, which also operate on razor-thin margins. It's not difficult to see how the entire industry folds in on itself, Rowland said.

"The response pathways will break down by company size," Rowland explained. "I would normally say to break it down by profitability but none of them are profitable. It will come down to who can and will expend resources to reverse this decision."

Many companies are planning to do just that. According to previous reports, Uber, Lyft, and food delivery startup DoorDash are planning to commit to a $90 million ballot initiative that could reverse the decision if voters approve it in 2020. DoorDash did not respond to Business Insider's request for comment.

But Rowland isn't convinced that such an initiative could come back to bite its backers in the form of a customer backlash in solidarity with gig workers.

"I'd be surprised if there was a backlash, but I wouldn't be surprised to see people vote with their wallets," Rowland said.

Another unforeseen casualty could be more traditional industries that have relied on contract workers, such as construction or landscaping. Shawn Cadeau, chief revenue officer at home services job board Jobber, explained that it's best for small, independently run businesses when contractors are able to accept the jobs that work best for them. If the bill is signed into law, he said it might force small businesses to only accept jobs that can financially support full-time employees.

"These types of entrepreneurial initiatives truly help to bolster the economy and drive middle-class growth," Cadeau said.

But Cadeau and Rowland agree that these companies are officially on notice, and other states are waiting to see how the law plays out.

"When companies make the change from contractors to employees, other states will be watching closely to see what the law's impact is to make sure it works as intended," Rowland said.