Gov. Tim Walz said the legislation would have raised costs for ordering an Uber or Lyft too high, potentially pricing out Minnesota customers.
Lyft and Uber have opposed the legislation, threatening to reduce operations or leave the state if it is enacted.
Gig work has been silently taking over new industries, but not in the way many expected.
The decision lessens the chances that gig drivers will be considered employees in the state, but it is expected to be appealed to the state Supreme Court.
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