California Supreme Court Extends California Overtime Laws to Non-California-Based Employees When Working in the State

In a ruling that could spur a new wave of wage and hour class action litigation, the Supreme Court of California unanimously held in Sullivan v. Oracle Corp. that non-California employees were entitled overtime pay under California law (which requires daily overtime pay after eight hours worked in a day) for full days and full weeks worked in California under the facts presented.  However, the Court also held that work performed by non-California employees outside of California allegedly in violation of the Fair Labor Standards Act ("FLSA") could not be the basis for an unfair competition claim under Business & Professions Code Section 17200 ("UCL"), because there was not a sufficient nexus to California.

The named plaintiffs, all residents of Colorado and Arizona, worked as "Instructors" for Oracle Corporation, which is headquartered in California.  Plaintiffs worked mainly in their home states but traveled periodically to California to perform training.  In 2003, a nationwide class of Oracle Instructors sued in federal court alleging they were improperly classified as exempt and seeking overtime pay.  Oracle subsequently reclassified its Instructors as non-exempt, and in 2005, the federal class action was settled with the exception of the claims by nonresident Instructors.  In 2006, a California district court granted Oracle’s motion for summary judgment.  On appeal, the Ninth Circuit initially ruled that: (1) California’s overtime laws and UCL apply to plaintiffs’ claims for overtime for full days/weeks worked entirely in California; and (2) the UCL ”does not apply to allegedly unlawful behavior occurring outside California causing injury to nonresidents of California.”  Sullivan v. Oracle Corp., 547 F.3d 1177, 1187 (9th Cir. 2008). 

On a petition for rehearing, the Ninth Circuit certified the following three questions to the California Supreme Court, and on June 30, 2011 the Court ruled as follows:

Question 1:  Whether California’s overtime provision applies to business travelers who temporarily visit the state, for as little as a single day.

California Supreme Court’s Ruling:  Yes.  California’s overtime rules apply on the facts presented to "overtime work performed in California for a California-based employer by out-of-state plaintiffs…"  (Slip op. at 18.)  The plaintiffs only sought overtime pay for full days/weeks worked in California.

Question 2.  Whether California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq., also applies to the overtime pay of the same business travelers.

California Supreme Court’s Ruling:  Yes.  The violations of California’s overtime laws constituted unlawful acts triggering liability under the UCL.  (Id. at 19.) 

Question 3.  Whether the UCL provides a remedy for alleged Fair Labor Standards Act violations involving employees based outside of California for work done outside of California.

California Supreme Court’s Ruling:  No.  The UCL "does not apply to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case based solely on the employer’s failure to comply with the overtime provisions of the FLSA."  (Id. at 23.)  Oracle’s decision to classify its Instructors as exempt, which was the only nexus to California, was not in itself an unlawful act.  The Court left open the question of whether there would be a sufficient nexus to California if the wages for the out-of-state employees were paid in California.  (Id. at 22.)

The Court expressly limited its decision to the factual record presented, leaving open many questions about how the ruling will be applied, such as:

• While the Court only addressed the applicability of California’s overtime laws, plaintiffs can be expected to argue that other California wage-hour laws apply as well (e.g., California’s minimum wage, meal break, pay stub, vacation, etc.).  The Court expressly left open the possibility that some California wage and hour laws may not apply.  (Id. at 11)
• Oracle is a California corporation.  It is not clear the extent to which the ruling with respect to California’s overtime laws will be applied to companies based outside of California, particularly those with no permanent California employees.  The Court noted that the burdens on out-of-state businesses in having California’s overtime laws apply to non-California employees were "conjectural" on the record presented because "Oracle itself is based in California."  (Id. at 11)
• In reaching its decision, the Court considered choice of law principles as applied to Arizona and Colorado law (where the plaintiffs resided), although the plaintiffs’ bar can be expected to argue that California’s overtime laws apply regardless of where the employee resides.
• The Court only addressed the applicability of California’s overtime laws when the employee works a full day or full week in California, leaving unanswered the question of whether the ruling also applies to partial days or weeks worked in California.
• The Oracle plaintiffs had traveled to California on business.  It is not clear whether the result would the same if non-California employees performed work in California while traveling to California for vacation.

Potential Implications for Consumer Class Actions and Other Litigation

Companies throughout the country were watching Sullivan closely because its ruling on the third question (whether the UCL applied extraterritorially outside of California) could have had significant implications in all class actions.  In particular, a reversal of the Ninth Circuit’s original decision in Sullivan could have reinvigorated efforts by the plaintiffs’ bar to file nationwide class actions predicated solely on UCL violations where the connection to California is the defendant’s headquarters.  There have been several successful attempts to apply California law to a nationwide class on this basis.  See Mazza v. Am. Honda Motor Co., 254 F.R.D. 610, 621-24 (C.D. Cal. 2008), appeal docketed, No. 09-80000 (9th Cir. argued June 9, 2010).  But in Sullivan, the California Supreme Court held that "the presumption against extraterritoriality applies to the UCL in full force" because there was no statutory language or legislative history to suggest any intent to apply the UCL outside of California.  (Slip op. at 20.)  Importantly, the Court also noted–but did not reach–the potential due process issues associated with extraterritorial application of the UCL.  (Id. at 20 n.9.)

Practical Tips for Employers

In light of these uncertainties, companies whose non-California employees perform work in California are advised to consult counsel to determine whether to track time worked in California and evaluate the extent to which they should be complying with California wage and hour laws for time worked in California.  The potential exposure is four years under the California’s UCL.