Last week, the California Supreme Court ruled that California employers must pay overtime to employees who are not residents of California but who work overtime in the state of California and that the failure to do so subjects employers to claims for restitution under California’s unfair competition law.

The Court considered these issues in Sullivan v. Oracle Corp. (No. S170577) at the request of the Ninth Circuit Court of Appeals. The plaintiffs in Sullivan were three employees of California-based employer Oracle Corp. (Oracle) who were residents of Arizona and Colorado but had spent some time performing temporary work in California. They sued Oracle in a California federal district court for unpaid overtime under California law which requires the payment of overtime to nonexempt employees who work more than eight hours in a workday or 40 hours a workweek. In addition to their overtime claims, plaintiffs sought restitution under California’s unfair competition law and for overtime owed under the Fair Labor Standards Act (FLSA), for work performed outside of California.

In defending against the plaintiffs’ claims, Oracle argued that California’s overtime law does not include nonresidents. Oracle relied on the California Supreme Court’s decision in Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal. 4th 557 (Tidewater) for this proposition and also argued that requiring an employer to comply with the laws of every state in which its employees work might violate the Constitution by placing an undue burden on interstate commerce.

The Court rejected Oracle’s arguments and reasoned that nonresident employees of California employers who work overtime in California are entitled to overtime pay under California law because: (1) “California’s overtime laws apply by their terms to all employment in the state, without reference to the employee’s place of residence;” (2) “the Legislature has not chosen to authorize an exemption from the overtime law on the basis of an employee’s residence, even though it has authorized exemptions on a variety of other bases;” (3) California’s “important public policy goals of protecting health and safety and preventing the evils associated with overwork” would be threatened if nonresident employees were allowed to work without the protection of California’s overtime law; and (4) California’s “legitimate interest in expanding the job market” would be threatened by employers being encouraged “to substitute lower-paid temporary employees from other states for California employees.” The Court clarified that its decision applied to nonresident employees seeking overtime who, like the plaintiffs, worked entire workdays or workweeks in California “in accordance with the statutory definition of overtime" as contrasted with nonresident employees who enter California temporarily during the course of a workday.

In holding that the plaintiffs were entitled to restitution under California’s unfair competition law for Oracle’s failure to pay overtime as required by California law, the Court relied on prior case law which held that, “failure to pay legally required overtime compensation falls with … [Section 17200’s] definition of an ‘unlawful … business act or practice.’” However, the Court held that the plaintiffs’ allegations of failure to pay overtime under the FLSA for work performed in other states could not serve as a predicate for a California unfair competition claim because not only were these claims an attempt to “restate time-barred FLSA claims,” but also because the only conduct related to these claims that occurred in California was Oracle’s adoption of an erroneous policy of classifying the plaintiffs as exempt from overtime, which “is not unlawful in the abstract.”

In light of this decision, California-based employers now face both overtime and unfair competition claims by nonresident employees who have not been paid overtime pursuant to California law for work performed in California. As a result, California-based employers who employ out-of-state employees to perform work in California should take extra precaution to track their hours worked in California, per day and per week, and pay such employees appropriate overtime.