(Reuters) – Drivers working for ride-hailing services such as Uber Technologies Inc (UBER.N) and Lyft Inc (LYFT.O) will now be considered employees under California’s new gig worker law, the state’s public utilities agency said on Thursday.

Shares of both the companies fell more than 7% in early trading as the new order strikes at the heart of the “gig economy” business model of technology platforms like Uber, Postmates, Lyft, DoorDash and others.

The new law, which took effect on Jan. 1, makes it tougher for companies to classify workers as contractors rather than employees, a classification that exempts them from paying for overtime, healthcare and workers’ compensation.

The California Public Utilities Commission (CPUC) said drivers working for Transportation Network Companies (TNCs), which include Uber and Lyft, would now be considered employees.

“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,” Commissioner Genevieve Shiroma said in a document here on Tuesday.

The companies have said in the past that 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, which did not immediately respond to a request for comment, in December sued to block the new law, known as AB5, arguing that it punished app-based companies.