On June 30, 2011, the California Supreme Court issued its decision in Sullivan v. Oracle Corporation, No. S170577 (June 30, 2011), deciding three questions of state law that had been certified from the Ninth Circuit.

The Supreme Court held that California’s overtime laws apply to work performed in the state for California-based employers by nonresident employees and that alleged violations of the overtime provisions of California law (Labor Code § 510) may serve as predicates for claims under California’s Unfair Competition Law (Bus. & Prof. Code § 12700, et seq.) (UCL). The court did set geographic limits, however, holding that the UCL cannot extend to claims based on violations of the federal Fair Labor Standards Act (29 U.S.C. § 207(a)) (FLSA) that took place in other states, at least under the circumstances of Sullivan. Although the decision did not address the merits of the plaintiffs’ claims, or the certifiability of the proposed class, the choice-of-law holdings are of significant interest to all companies whose non-California employees may work in California, and to all California companies defending against efforts by class-action lawyers to apply the UCL nationwide.

The Decision

Oracle, which is headquartered in California, had employees working in the position of “Instructor” in 20 states, including California. In 2003, Oracle’s Instructors brought a class action in the federal court for the Central District of California alleging that their position had been misclassified as exempt and seeking overtime compensation under California law and the FLSA. Although most of the plaintiffs’ claims were resolved in 2005 through a settlement of the class action, that settlement did not cover certain class claims of employees who were not California residents.

Three of those employees subsequently filed a separate action in the same district court to assert their outstanding claims. The plaintiffs in that new action were residents of Arizona and Colorado who worked mainly in their home states but were required by Oracle to travel to work in California and other states.

First, under the California Labor Code, plaintiffs sought to recover daily and weekly overtime compensation for days longer than 8 hours and weeks longer than 40 hours for any full day or any full week worked entirely in California. Second, plaintiffs restated that same claim as one for restitution under the UCL, alleging that Oracle’s purported failure to pay them overtime pursuant to California’s overtime law was an “unlawful [or] unfair … business act or practice” in violation of the UCL. Third, plaintiffs sought to recover as restitution under the UCL the amount of overtime compensation allegedly due them under the FLSA for weeks longer than 40 hours worked entirely outside California.

The district court granted Oracle summary judgment. The Ninth Circuit initially reversed in part, holding that the Labor Code and UCL applied to overtime claims for work days and work weeks performed entirely in California, and affirmed in part, holding that plaintiffs could not use Oracle’s alleged violation of the FLSA outside California as the predicate unlawful act for a UCL claim under California law. The Ninth Circuit subsequently withdrew that opinion, however, and certified the controlling Labor Code and UCL questions to the California Supreme Court.

California Labor Code’s Overtime Provisions Apply to Work Performed in California by Nonresident Employees of California-Based Employers

In addressing whether the Labor Code applies to nonresident employees working in the state, the California Supreme Court first held that the California legislature intended that the Labor Code’s protections should apply to any employee who performs work in California. Observing that Labor Code § 1171.5 extends Labor Code protection to illegal immigrants working in California, the court deduced intent to provide similar protections to residents of other states.

The Supreme Court then undertook a choice-oflaw analysis to determine the extent to which the Labor Code applied to nonresidents who work in California. The court noted that other states may have competing interests that must be weighed in deciding whether to apply California law to their residents. The court held that the interests of the employees’ home states of Arizona and Colorado were minimal because those states had not expressed any preference that their overtime laws should apply to their citizens when working out of state. Indeed, Arizona does not have a state overtime law, while Colorado’s overtime law explicitly applies only to “work performed within the boundaries of Colorado.” On the other hand, the court concluded that failing to apply California’s overtime law to nonresident employees would “completely sacrifice, as to those employees, the state’s important public policy goals of protecting health and safety and preventing the evils associated with overwork,” and “would also encourage employers to substitute lower paid employees from other states, thus threatening California’s legitimate interest in expanding the job market.”

The Supreme Court made it clear that its holding applies only to the narrow overtime compensation question posed by the Ninth Circuit, and that “one cannot necessarily assume that the same result would obtain for any other aspect of wage law.” The court noted that, for example, California’s interest in the contents of an employee’s paystub or the treatment of an employee’s vacation “may or may not be sufficient to justify choosing California law over the conflicting law of the employer’s home state.” Moreover, the court stated that its decision did not address the application of California’s overtime laws to employees of out-of-state employers when they work in California.  

This decision is troublesome for California-based employers in that it may result in a number of new claims from their nonresident employees who perform work in California. Depending on the decision’s scope, it also may discourage business travel to California by nonexempt employees. Moreover, the plaintiffs’ bar likely will seek to extend the scope of this decision— both to employers based outside California whose nonresident employees perform work in California, and to other substantive provisions of the Labor Code.  

In response to this decision, California-based employers should promptly review their payroll policies and practices with respect to their nonresident employees to ensure that they comply with the decision.

UCL Applies to Violations of the Overtime Provisions of the California Labor Code that Occurred in California

The Supreme Court reaffirmed its decision in Cortez v. Purolator Air Filtration Products, Inc., 23 Cal. 4th 163 (2000), holding that the failure to pay legally required overtime compensation falls within the UCL’s definition of an “unlawful … business act or practice,” and that the UCL authorizes, as restitution, an order for payment of unlawfully withheld wages.  

UCL Does Not Apply to Claims Under the FLSA for Overtime Performed Outside California for a California-Based Employer by Nonresidents of California

The Sullivan plaintiffs contended that Oracle’s decision to categorize Instructors as exempt had been made at Oracle’s California headquarters, and that the UCL should provide a remedy for alleged violations of the FLSA in connection with work performed outside California by nonresidents of California. In the circumstances of this case, applying the UCL (and its four-year statute of limitations) effectively would have revived time-barred FLSA claims because the UCL’s four-year statute of limitations is longer than the FLSA’s.

The Supreme Court refused to go so far. The court noted that what is unlawful is the failure to pay overtime that is due. “[F]or an employer to adopt an erroneous classification policy is not unlawful in the abstract,” so “that Oracle’s decision to classify its instructors as exempt was made in California does not, standing alone, justify applying the UCL to the nonresident plaintiffs’ FLSA claims for overtime worked in other states.” Because employees working outside California had not been paid (allegedly underpaid) in California, there was no “unlawful practice” occurring in California that could form the basis for a UCL claim predicated on a failure to pay overtime compensation in violation of the FLSA.  

This aspect of the Supreme Court’s decision, and particularly its statement that an employer’s adoption of an erroneous classification policy “is not unlawful in the abstract,” may be helpful in defending against class certification motions contending that a purportedly uniform classification decision satisfies the requirement of commonality. Employers should now find it easier to argue that such a classification is not per se unlawful, and by itself does not provide sufficient commonality to support class certification in the face of other individualized issues.  

The Supreme Court did note that its conclusion was based on the lack of evidence about where employees were paid for out-of-state work. Of potentially broader application is the court’s strong language recognizing a presumption against extraterritorial application of the UCL. The court stated its presumption that the legislature did not intend a statute to operate extraterritorially “unless such intention is clearly expressed or reasonably to be inferred ‘from the language of the act or from its purpose, subject matter or history.’” The court concluded that “[n]either the language of the UCL nor its legislative history provides any basis for concluding that the Legislature intended the UCL to operate extraterritorially,” and that “[a]ccordingly, the presumption against extraterritoriality applies to the UCL in full force.” That language may be useful for California-based companies defending against class actions—including beyond the employment context— when plaintiffs seek to apply the UCL nationwide.