On June 30, 2011, a unanimous California Supreme Court ruled that California-based employers must pay out-of-state resident employees pursuant to the more restrictive provisions of the California Labor Code even if these employees visit the state on a limited, temporary basis. The unanimous decision held that the state’s overtime laws were intended by the California legislature to apply broadly to “protect” workers visiting California even temporarily and, therefore, this state’s laws trump the laws from the states in which employees actually reside and primarily work. Sullivan v. Oracle Corp., No. S170577, California Supreme Court (June 30, 2011).

Factual Background

Donald Sullivan, Deanna Evich and Richard Burkow worked for Oracle Corporation as instructors, with the responsibility to train Oracle’s customers in the use of the company’s products. Sullivan and Evich resided in Colorado and Burkow resided in Arizona. Although the three worked mainly in their home states, they periodically traveled to California and other states to provide training.

Oracle treated its instructors as teachers exempt from state and federal overtime laws. In 2003, Oracle’s instructors sued the company in a federal class action alleging misclassification and sought unpaid overtime compensation. Oracle then reclassified its instructors and began paying them overtime. In 2005, the federal action was settled and the class claims were dismissed with prejudice, except for the claims involving the non-California resident instructors.

These plaintiffs asserted three claims. First, they claimed that Oracle was required to pay them overtime in compliance with the more restrictive requirements of the California Labor Code for periods when they were in California temporarily. In California, overtime must be paid for hours worked in excess of eight per day or 40 per week, and for the first eight hours on the seventh workday in one week. By contrast, the federal Fair Labor Standards Act (FLSA) requires overtime pay only for work in excess of 40 hours in a week, and many states, including Colorado, have differing requirements, including the payment of daily overtime only after 12 hours in a workday.

Second, the plaintiffs asserted that the failure to pay these out-of-state employees in compliance with the California Labor Code constituted an unfair business practice in violation of California’s Unfair Competition Law (UCL), Bus. & Prof. Code § 17200. Third, they claimed that it was a violation of the UCL to fail to pay these workers for hours worked entirely in other states. The Ninth Circuit Court of Appeals certified these questions to the California Supreme Court to obtain its guidance on these state law issues.

Legal Analysis

On the first question the California Supreme Court ruled that the Labor Code’s overtime provisions do not distinguish between residents and nonresidents, and thus its provisions apply to any worker who enters California for at least a full day while working for a California-based employer. “The Legislature knows how to create exceptions for nonresidents when that is its intent,” Justice Kathryn Mickle Werdegar wrote for the court. “To exclude nonresidents from the overtime laws’ protection would tend to defeat their purpose by encouraging employers to import unprotected workers from other states.”

On the second question, the court held that the UCL did apply to temporary work performed by nonresident employees, thereby extending the applicable statute of limitations of these claims from three years to four. On the third question, the court held that the UCL did not apply to overtime work outside California by out-of-state employees based solely on the failure to comply with the overtime provisions of the FLSA.

Practical Impact

According to Thomas M. McInerney, a shareholder in Ogletree Deakins’ San Francisco office: “This decision raises several troubling concerns for employers attempting to do business in California. While the court stated that its ruling only applied to overtime claims, it undoubtedly will be read too broadly by plaintiffs and possibly some courts as also requiring that other provisions of the Labor Code or the state’s Wage Orders apply to employees here on a temporary basis, including state law requirements regarding meal and rest breaks, pay stubs, vacation accrual or forfeiture, and many other requirements. There is little doubt that we will now face a decade of litigation over whether the decision applies to all business travelers.”

This decision also imposes added administrative burdens on employers operating in California, as they will now be required to organize their workforce in such a manner as to either avoid having workers in California on a limited basis, or if they do, organize their pay systems to ensure that they are paid in compliance with California’s oftentimes onerous pay requirements even if here for a limited period. Moreover, while the decision ostensibly rejected the application of the UCL to overtime work outside California, it did so based on the facts in this case, and left open the possibility that under different circumstances the UCL might be applied beyond California’s borders depending on where the wages were paid.

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