On November 6, 2008, the U.S. Court of Appeals for the Ninth Circuit issued an opinion of concern to all employers who utilize California nonresidents to perform work in California. In Sullivan v. Oracle, the court was asked to determine whether an employer who employs out-of-state residents to perform work in California is required to pay overtime pursuant to the California Labor Code. In an opinion by Judge Fletcher, the court concluded that employees who reside out of the state, but work in California, are entitled to overtime wages as prescribed by California law.

The plaintiffs were three employees of Oracle who resided outside of California. They were employed as instructors who trained customers to use Oracle’s software. Two of the three plaintiffs were residents of Colorado, and the third was a resident of Arizona. Each worked in California from 15 to 33 days a year during the relevant time period. The plaintiffs alleged that Oracle had misclassified them as exempt from overtime and sought compensation for unpaid overtime.

The plaintiffs brought three claims against Oracle under California law: (1) violation of California Labor Code section 510 (failure to pay overtime); (2) violation of California’s Unfair Competition Law (UCL), Business and Professions Code section 17200; and (3) violation of the UCL stemming from violations of the federal Fair Labor Standards Act (FLSA). The first two claims were based upon work performed in California, while the third claim was based upon work performed anywhere in the United States. The district court granted summary judgment to Oracle on all three claims, finding that relevant provisions of California law did not, or could not, apply to the work performed by the plaintiffs. The Ninth Circuit reversed claims (1) and (2), and affirmed claim (3).

 California Labor Code Claim

In deciding plaintiffs’ claim for unpaid overtime, the court first analyzed whether California’s Labor Code applied to work performed in California by residents of Colorado and Arizona. The court then analyzed whether application of California law to these employees violated the U.S. Constitution.

Plaintiffs argued that California law should apply to all work performed entirely in California. Conversely, Oracle argued that Colorado law should apply to the two residents of Colorado, and the FLSA should apply to the resident of Arizona. In determining what state law applied, the court looked to California choice-of-law rules, which uses a three-step test.

First, the court analyzed whether California law and the laws of Colorado and Arizona were “materially” different on overtime requirements. The court concluded that the laws were materially different, because: (1) Arizona had no state-specific overtime laws; and (2) Colorado only required overtime pay when an employee worked more than 12 hours in a day.

Second, the court evaluated the interests of the respective states. The court reasoned that if a California employer could avoid the state’s overtime requirements by hiring nonresidents, California residents would be substantially disadvantaged in the labor market by the cheaper labor that would be made available. The court also held that California has a strong interest in applying its Labor Code to the work performed by plaintiffs in California because Arizona expressed no interest in wages paid to its residents, and Colorado’s overtime laws provided no protection to its workers employed outside of the state’s borders,

The court’s third step was to compare the impairment of interests of the states. Since the court found that Colorado and Arizona had no interest in applying minimum wage laws to plaintiffs’ employment in California, this step was unnecessary.

Having determined that California overtime law applied to work performed by nonresidents of California working in California, the court then analyzed whether the application of California overtime law violated the U.S. Constitution; specifically the Due Process Clause of the Fourteenth Amendment and/or the Dormant Commerce Clause.

The court concluded that since Oracle’s headquarters and principal place of business were in California; the decision regarding how to classify the employees was made in California; and the work in question was performed in California, Oracle had sufficient contact with California such that it would not be denial of due process to apply California law. Applying these facts to the Due Process Clause standard, the court concluded that the “contacts creating California interests are clearly sufficient to permit application of California’s Labor Code.”

As with the Due Process Clause analysis, the court was unconvinced that Oracle’s Dormant Commerce Clause challenge was plausible. Specifically, because California chose to treat its out-of-state residents the same as California residents, the Dormant Commerce Clause was inapplicable. As a result, the court held that California’s Labor Code governed these nonresidents’ employment during the periods they were working in California.

Business and Professions Code Section 17200

Claim For the same reasons that the court deemed plaintiffs’ Labor Code violations applicable to the work performed in California, the court concluded that section 17200 applied as well to these nonresidents. Because the predicate underlying violation of the law for failure to pay overtime as required by the Labor Code could proceed, plaintiffs’ section 17200 claim for unlawful business practices was valid as well.

The court, however, rejected plaintiffs’ contention that a section 17200 claim was viable for Oracle’s alleged failure to pay overtime outside of California. The court held that section 17200 “does not have extraterritorial application.” As such, section 17200 does not apply to claims of nonresidents of California who allege violations of the FLSA outside California.

According to Sullivan v. Oracle, nonresidents who work in California are governed by California’s overtime laws, not the laws of that employee’s home state. Employers therefore should ensure that nonresident employees are compensated in the same manner as residents of California.