On June 30, 2011, the California Supreme Court issued a decision in Sullivan et al. v. Oracle Corporation1 that may result in a flurry of class-action claims against large California-based employers and requires California-based employers to immediately examine their practices with respect to paying out-of-state non-exempt employees for work performed in California on a short-term or temporary basis.

Although not encompassed by the decision, it is likely that employees of businesses based outside of California who perform work in California on a short-term or temporary basis will seek to expand on this decision by asserting claims against their employers under California’s overtime laws, especially if the employers have facilities in California.

Background

California employers are subject to more stringent overtime laws, including the daily overtime requirement, than are employers based in most other states. In Sullivan, three former employees of Oracle Corporation who worked as "instructors" and traveled from their residences outside of California to perform periodic work inside California brought a claim against Oracle in the United States District Court for the Central District of California2 asserting that they were: (1) not exempt from California and federal overtime laws; (2) entitled to overtime pay in accordance with California law while performing work in California and (3) entitled to bring a claim under California’s unfair competition law (Business and Professions Code Section 17200 et seq.) (the UCL) based upon Oracle’s alleged violation of California overtime laws for the time they worked in California and federal Fair Labor Standards Act for the time they worked outside of California.

The District Court granted Oracle’s motion for summary judgment and rejected the plaintiffs’ claims. The plaintiffs appealed to the Ninth Circuit Court of Appeal, which affirmed in part and reversed in part.3 The Ninth Circuit held that the California Labor Code and UCL did apply to plaintiffs’ overtime claim for days and weeks worked entirely in California, but held that plaintiffs could not state a claim under the UCL based upon alleged violations of the Fair Labor Standards Act for unpaid overtime incurred while working in other states. Subsequently, however, the Ninth Circuit withdrew its opinion and certified the question of the application of California law to the California Supreme Court, because there was no directly controlling precedent and a decision would have potentially significant impact on California-based employers that employ out of state residents to perform work in California.

The California Supreme Court held that California’s Labor Code overtime provisions do apply to out-of-state employees of California-based employers when they perform work in California. In reaching that conclusion, the Court stated that it was neither improper nor capricious for California to regulate all non-exempt overtime work performed within the state’s borders. The Court also stated that the overtime laws served the important public policy goals of protecting the health and safety of workers and the general public, protecting employees in relatively weak bargaining positions and expanding the job market by giving economic incentives to spread employment throughout the work force.

The Court also addressed whether the UCL applies to violations of the California Labor Code under these circumstances. The Court had previously determined that a failure to pay legally required overtime compensation can be an unlawful business act or practice within the meaning of the UCL.4 Consequently, the Court held that the UCL does apply to overtime claims brought by an out-of-state resident for work performed in California. This aspect of the decision is important because it creates a second way for plaintiffs to recover and effectively extends the statute of limitations on overtime claims from three to four years.

Sullivan contained one unsurprising, but important victory for employers. The Court held that plaintiffs could not pursue a claim under the UCL based on alleged violations of the Federal Fair Labor Standards Act for overtime worked outside of California. The Court noted there is a presumption against extraterritorial application of state law and that neither the language nor history of the UCL suggested the legislature intended it to apply extraterritorially. In reaching that conclusion, however, the Court noted that only a single alleged incident of conduct relevant to that claim occurred in California — the a decision to classify the instructors as exempt. The Court noted that the liability under the FLSA was the failure to pay overtime when it was due, which apparently occurred outside of the State of California.

Consequently, while in the abstract, a failure to pay overtime compensation is an unlawful business act or practice for purposes of the UCL, there was little to tie the claim to conduct inside California, and the conduct alleged was not sufficient to apply the UCL. However, it is important to note that the California Supreme Court did not determine that the UCL applied in this case, in part, because of the limited question certified to the Court by the Ninth Circuit. The question did not specify whether the wages were paid in California. The Court declined to speculate whether the UCL would have applied had payment been made in California.

The Court did not address a number of other important questions. First, the Court did not address whether other provisions of the California Labor Code, such as meal and rest-period requirements, also apply to out-of-state employees performing work in California. Second, the Court did not address whether an out-of-state business sending out-of-state non-exempt employees into California would be subject to California’s overtime laws. The Court also did not address applicability of the commerce clause in the United States Constitution, Article 1 Section 8, Cl.3. to the issue, leaving open the possibility that the federal courts will find that California’s application of its overtime laws under these circumstances to be unconstitutional. Finally, the Court did not address the application of California’s overtime laws to an employee who spends part of a work day in California. It addressed only those who spend an entire work day or work week in California.

Take-Aways From the Sullivan Decision

The Sullivan decision is a very important decision for any California-based employer who has non-exempt employees travel to the state to perform work. A California-based employer bringing non-exempt employees into the State of California to perform work for an entire day or work week must pay in accordance with California’s overtime laws for the time worked in California. Employers who have done so in the past — especially if it was done routinely and/or with large numbers of non-exempt employees, need to consider whether to voluntarily remedy past failures to pay, or to risk class action litigation.

For employers located outside of the State of California sending non-exempt employees into the State of California, the question remains open as to whether employees who spend entire work days or work weeks in California are subject to California’s overtime requirements. Given the Court’s rationale in this case, there is a meaningful risk that Sullivan will be expanded to reach out-of-state employers. However, until that question is answered, out-of-state employers face the risk of being the subject of class action litigation if they send substantial numbers of employees into California.