Employers with workers who perform their duties in more than one state must comply with various state and local laws regarding a broad range of subjects, from worker safety, to drug testing, to anti-harassment training. Wage and hour rules are among the areas of employment law that vary the most from state to state. They address overtime pay, minimum wage, recordkeeping, meal periods, and more. Already difficult to navigate, wage and hour laws become more complex when employees perform work in multiple states during the same week – or even on the same day.

The California Supreme Court recently addressed this issue in Sullivan v. Oracle Corporation. The court’s decision has significant overtime pay implications for California employers with employees in other states who, at times, perform work in California.

The Facts

Donald Sullivan, Deanna Evich, and Richard Burkow worked for Oracle – a California-based software company – as “Instructors.” Sullivan and Evich lived in Colorado, while Burkow lived in Arizona. Plaintiffs trained Oracle’s customers regarding use of the company’s products. They performed work in several states, including California.

Oracle initially classified plaintiffs as exempt from overtime pay requirements under California and federal overtime laws. In response to a class action for nonpayment of overtime filed in the United States District Court for the Central District of California, however, Oracle reclassified its Instructors as non-exempt and began paying them overtime. The class action settled and was dismissed, with the exception of claims by Instructors who were not California residents.

Sullivan, Evich, and Burkow later filed a complaint against Oracle in the United States District Court for the Eastern District of California. They sought payment for daily/weekly overtime under the California Labor Code; restitution under California’s Unfair Competition Law (“UCL”) – codified in Business and Professions Code Section 17200 et seq. – for failure to pay overtime in violation of the California Labor Code; and restitution under the UCL for failure to pay overtime in violation of the federal Fair Labor Standards Act (“FLSA”), which governs overtime pay and applicable exemptions.

The district court granted Oracle’s motion for summary judgment. On appeal, the Ninth Circuit Court of Appeals requested that the California Supreme Court provide clarification regarding: (1) whether the California Labor Code applies to overtime work performed in California for a California-based employer by out-of-state employees; (2) whether the UCL applies to overtime work performed in California for a California-based employer by out-of-state employees; and (3) whether the UCL applies to overtime work performed outside California for a California-based employer by out-of-state plaintiffs if the employer failed to comply with the overtime provisions of the FLSA?

Payment of Overtime to Out-Of-State Employees for Work Performed in California

Regarding the first issue, the California Supreme Court held that “California’s overtime laws apply by their terms to all employment in the state without reference to the employee’s place of residence.” The court reasoned that California Labor Code Section 510(a) “declares simply that ‘[a]ny work in excess of eight hours in one workday and . . . 40 hours in any one workweek . . . shall be compensated at the rate of no less than one and one-half times the regular rate of pay . . . .” The court pointed to other instances in which the California Legislature created exemptions for nonresidents, and noted that it chose not to do so in the Section 510(a).

The court noted that “[s]tates possess broad authority under their police powers to regulate the employment relationship to protect workers within the State” through various wage and hour laws. The court also relied upon the public policy goals furthered by requiring overtime to be paid for all applicable work done in California. Not requiring California employers to pay overtime to out-of-state employees “would encourage employers to substitute lower paid temporary employees from other states for California employees . . . .”

The court, however, limited its protection of out-of-state workers to California’s overtime laws. The court noted that California “has expressed a strong interest in governing overtime compensation for work performed in California.” On the other hand, “California’s interest in the content of an out-of-state business’s pay stubs, or the treatment of its employees’ vacation time, for example, may or may not be sufficient to justify choosing California law over the conflicting law of the employer’s home state.”

Because Oracle is based in California, it is unclear whether the court’s holding would apply to an employer based in another state. Further, given the strong public policy goals underlying the court’s decision and despite the court’s apparent limitation, there is a possibility that Sullivan could eventually provide a foundation for requiring employers based in other states to adhere to other California wage and hour laws when their employees perform transient work within California.

Application of the UCL to Out-of State Employees’ Overtime Claims

The UCL generally prohibits “unlawful, unfair or fraudulent business act[s] or practice[s].” For several reasons, the UCL has been used with great frequency in employment litigation – particularly with regard to wage and hour class action lawsuits. Among the reasons for the UCL’s popularity is a four-year statute of limitations, which obviously is longer than the three-year statute applicable to many statutory wage claims.

In Sullivan, the California Supreme Court held that the nonpayment of overtime to nonresidents for work performed in California violates the UCL. The court relied on precedent in which it previously decided that the failure to pay legally required overtime compensation falls within the UCL’s definition of an “unlawful . . . business practice or act.”

The court, however, approached the UCL’s application to the FLSA claims based on work performed outside of California differently. The court characterized plaintiffs’ FLSA-based UCL cause of action as an attempt to bring a claim that otherwise could not be litigated because the FLSA’s applicable statue of limitations had expired. In reaching this conclusion, the court applied the “presumption against extraterritorial application,” under which it presumed that the UCL was not intended to apply to unfair, unlawful, or fraudulent business practices occurring outside of California.

According to the court, the only relevant conduct that plaintiffs could point to was that “[t]he decision-making process to classify Instructors as exempt from the requirement to be paid overtime wage under FLSA occurred primarily from within the headquarters of Oracle Corporation located in Redwood Shores, California.” The court reasoned that the misclassification of plaintiffs as exempt was not unlawful in and of itself. Rather, liability arises under FLSA when an employer fails to pay overtime appropriately. The court noted that the UCL could “conceivably apply to plaintiffs’ claims if their wages were paid (or underpaid) in California.” The record, however, did not address that issue.

What Does the Sullivan Decision Mean for Employers?

When employees have duties that require them to work in more than one state, employers must decide what laws apply to those employees when they work in California. Until Sullivan, this was an open question with respect to overtime laws. Now, employers who fail to apply California overtime law to workers who perform work in California (even if they usually work elsewhere) may face significant liability.

It remains to be seen how courts will apply the Sullivan decision. Employees could argue that under Sullivan, they are entitled to overtime pay for work performed in California, even if the employer isn’t located here. Further, although the California Supreme Court limited its holding to the payment of overtime, courts could extend other wage and hour protections to out-of-state employees for work done in California as a matter of public policy.