Do California's overtime laws apply to out-of-state employees who perform some work within California? Today, the California Supreme Court in Sullivan v. Oracle answered this question by holding that California overtime laws do apply to such work, if done for a California employer. The Court also held that overtime work performed by out-of-state employees within California can serve as the basis for a claim under California's unfair competition law ("UCL"). Cal. Bus. & Prof. Code § 17200.

The Sullivan court also held, however, that overtime work, allegedly in violation of the Fair Labor Standards Acts' ("FLSA") overtime provisions, performed by out-of-state employees outside California cannot serve as the basis for a California UCL claims.

Factual Summary of Sullivan v. Oracle

Oracle, a California-based employer, employed the three named plaintiffs as instructors who train its customers on how to use its software. Two of the plaintiffs were Colorado residents; the other was an Arizona resident. Each of the plaintiffs worked in the state in which they resided, and Oracle applied the wage-hour laws of those states to the plaintiffs. From the three years of work history in evidence, the most number of days that any of the plaintiffs worked in California was 110 days; the fewest was just 20 days.

The Ninth Circuit's Prior Decision

The nonresident employees of Oracle filed three claims: (1) overtime compensation under the Labor Code; (2) the same claim as one for restitution under the UCL; and (3) restitution under the UCL for compensation due under the FLSA. The Ninth Circuit ruled that "California has chosen to apply its Labor Code equally to work performed in California, whether that work is performed by California residents or out-of-state residents." The Ninth Circuit further ruled that overtime work of non-residents can form the predicate harm for a California's UCL claim. Finally, the Ninth Circuit concluded that the UCL "does not apply to the claims of nonresidents of California who allege violations of the FLSA outside California."

The Issues Presented to the California Supreme Court

The Ninth Circuit subsequently withdrew its opinion and certified three questions for the California Supreme Court to address:

  1. Do California Labor Code overtime provisions apply to work performed in California and for a California-based employer by plaintiffs primarily employed outside California, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week?
  2. Does California Business and Professions Code section 17200 et seq., California's UCL, apply to the overtime work described in question one?
  3. Does the UCL apply to overtime work performed outside of California for a California-based employer by plaintiffs primarily employed outside California if the employer failed to comply with the overtime provisions of the federal Fair Labor Standards Act (29 U.S.C. § 207 et seq.).

The Supreme Court's Decision

The California Supreme Court addressed the first question regarding the applicability of California overtime laws to work performed by out-of-state employees for California-based employers by first looking to the language of California Labor Code section 510, which provides that "[a]ny work . . . shall be compensated at the rate of no less than one and one-half times the regular rate of pay." Cal. Lab. Code § 510(a). The Sullivan court then cited language in California Labor Code section 1171.5 which provides that California's wage laws apply to "all individuals . . . who are or have been employed[] in this state." Cal. Lab. Code § 1171.5(a). Because there is no exemption for nonresident employees, as the California Legislature implemented in other California Labor Code sections (such as California's Workers Compensation Act, Cal. Lab. Code § 3600 et seq.), the opinion concluded that the meaning of the California Labor Code provisions was clear.

Oracle had argued that the California Supreme Court's decision in Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557 (1996), held that California overtime laws follow California employees wherever they work and that other states' overtime laws should therefore follow out-of-state employees into California to avoid issues of interstate comity. The Sullivan court rejected this argument, stating that the Tidewater decision merely suggested that California laws might not apply to "nonresident employees of out-of-state businesses who 'enter California temporarily during the course of the workday.'" The Sullivan court distinguished the present situation by explaining that nothing in Tidewater suggests that out-of-state employees of a California-based employer who enter California for entire days would be without the protection of California overtime laws.

With regards to Oracle's arguments that the application of California wage-and-hour laws to visiting, nonresident employees would impose practical burdens on employers, the court dismissed these concerns. The Sullivan court first explained that its holding was limited to California overtime laws, indicating that "one cannot necessarily assume the same result would obtain for any other aspect of wage law." The Sullivan court impliedly limited its holding to California-based employers, as it explained that burdens on out-of-state businesses are conjectural and, in any event, present an issue not before the court.

The Sullivan court then engaged in a conflict of laws analysis. Although California overtime laws differ from the Colorado and Arizona overtime laws Oracle asserted were applicable to the plaintiffs, the Sullivan court explained that neither Colorado nor Arizona has asserted an interest in regulating overtime work performed in other states. Because the California Legislature has expressed an intention of promoting the public policy of preventing the evils associated with overwork, the Sullivan court concluded that failing to apply California overtime laws would impair California's interests more than applying California overtime laws would impair Colorado or Arizona's interests.

Based on the Sullivan court's conclusion that the California Labor Code does apply to overtime work performed in California for a California-based employer by out-of-state employees, the Sullivan court also held that the UCL also applies to such overtime work, thereby allowing overtime work performed in California for a California-based employer by out-of-state plaintiffs to form predicate harms for UCL claims.

Finally, with respect to the issue of whether violations of the FLSA outside California can form predicate harms for California UCL claims, the Sullivan court explained that nothing in the California UCL's language or legislative history suggested that the UCL would have extraterritorial application. In the circumstances of the present case, the Sullivan court concluded that the fact that Oracle made its exempt-classification decisions in California alone was insufficient to justify application of the UCL to overtime work performed in other states, as adopting an erroneous classification policy is not unlawful in the abstract. Though the parties invited the Sullivan court to consider whether the place of payment would provides a basis for applying the UCL, the Court declined to address this issue.

What the Sullivan v. Oracle Decision Means for Employers

The California Supreme Court's decision is limited to the application of California overtime laws to Colorado and Arizona employees who perform work within California for California-based employers, but plaintiffs' attorneys will argue that the opinion has broader implications.

For California-based employers, it is now clear that Colorado and Arizona employees must be paid in accordance with California overtime laws for full days of work performed within California. Though it is uncertain whether the same conclusion applies to partial days of work performed within California, the plaintiff's bar can be expected to take the position that the Sullivan court's reasoning provides no meaningful distinction between partial and full days of work within California. As a result, California-based employers may face California overtime liability for even a few hours of work performed within California by Colorado and Arizona employees. Because the California Supreme Court also concluded that the UCL law applies to work performed within California by Colorado and Arizona employees, such liability would cover a four-year period.

However, plaintiffs should not rely too heavily on Sullivan. The Sullivan court's holding does not necessarily apply to employees who are not based in Colorado or Arizona. The Sullivan court's conflict of laws analysis looked specifically to Colorado and Arizona law, and a similar analysis must be applied to other states' overtime laws.

Moreover, the Sullivan court addressed narrowly the questions certified for review by the Ninth Circuit, but the plaintiff's bar is likely to now claim that other wage-and-hour provisions apply to non-California employees who perform incidental work within California's borders. For example, the plaintiff's bar will most certainly attempt to rely on Sullivan to argue that an employer must treat an employee, who is properly classified as exempt under his resident states' laws but would not be exempt under California's wage-and-hour laws, as non-exempt when working within California's boundaries. Though the Sullivan court did not so hold, and expressed that such an assumption "is of doubtful validity," the plaintiff's bar is apt to claim that the reasoning of the Sullivan court suggests that California-based employers must apply California's other wage-and-hour protections to work performed by out-of-state employees within California. This argument would be based on the fact that the Sullivan court relied upon California Labor Code section 1171.5's expression that California Labor Code provisions apply to "all individuals," and section 1171.5 applies to "[a]ll protections, right, and remedies available under state law." Cal. Lab. Code § 1171.5(a).

The Sullivan v. Oracle decision also has considerable implications for non-California-based employers. Although the Sullivan court explicitly limited its decision to "the circumstances of this case," it is anticipated that the plaintiff's bar will argue that a logical extension of its reasoning suggests that similar conclusions may result for non-California-based employers. The Sullivan court declined to opine on the different burdens that a non-California-based employer may face in applying California overtime laws to nonresident employees working in California, but the plaintiff's bar will undoubtedly seek to obtain judicial rulings that the California Supreme Court's conflict of laws analysis suggests no reason for why a different conclusion would result for non-California-based employers.

Although the Sullivan court could not possibly have intended to further burden California's already battered economy, employers across the country are likely to think twice before sending their employees to California for business or to attend business conventions.