California Supreme Court Holds That Out-of-State Employees Working in California Must Be Paid California Overtime

July 2011

Employment Law

Last week the California Supreme Court concluded in Sullivan v. Oracle1 that non-resident employees are subject to California overtime laws when performing work in the state. This ruling may seriously impact multi-state employers and companies who send out-of-state employees to work in California on a temporary basis. While the Court’s decision was limited to overtime issues, employers should expect that future employee-litigants will attempt to extend the case’s holding to the full extent of California’s wage and hour protections. For now, however, employers should ensure that all non-exempt employees performing work in California — whether residents or not — are paid daily and weekly overtime pursuant to California law.

The Facts.  Oracle, a company headquartered in California, sent several of its Arizona and Colorado-based employees to California to train Oracle customers. These employees typically spent several days or a few weeks in California each year acting as an “instructor,” but primarily worked in their home states. During the time period relevant to the litigation, Oracle misclassified these employees as exempt and failed to pay overtime. Although the company later reclassified them as hourly employees, Oracle nonetheless compensated them according to their home state overtime laws. Colorado and Arizona have more relaxed overtime statutes that are modeled after the federal Fair Labor Standards Act. In particular and contrary to California, these states do not pay overtime for time worked in excess of eight hours per day. The plaintiffs thus sought unpaid overtime under California law by a class action lawsuit.

The Opinion.  As a preliminary matter, the Court concluded that the Legislature intended California overtime laws to reach any person working within the state, without regard to residence status. Although the Court recognized that other states may have an interest in applying their own overtime laws to their citizens, the Court found no evidence that Arizona or Colorado specifically intended for their overtime laws to apply to citizens working in other states. In addition, the court worried that applying overtime laws based on residence would encourage employers to substitute temporary employees from other states to avoid California’s less employer-friendly overtime laws. The Court thus determined that California overtime laws will apply in the absence of a strong conflicting interest raised by the employee’s home state.

The Court was careful to note that its rule does not affect other state wage and hour laws, including meal and rest breaks or pay stub requirements. Specifically, the Court explained that its analysis was limited to states’ competing interests in regulating overtime compensation, and that various states may have more or less interest in regulating other aspects of wage and hour law. Likewise, the Court stated that its holding might not be applicable to an employer not based in California depending upon the circumstances.  In short, the Court’s opinion only directly applies to overtime work performed in California for a California-based employer by an out-of-state employee.

The Effect.  Although Sullivan v. Oracle has a limited holding, employers should compensate all work performed in California pursuant to California overtime laws, regardless of an employee’s state of residence or permanent employment. For many employers, this may mean that out-of-state payroll personnel must consider the location of employees and be knowledgeable regarding California overtime requirements.

Ultimately, Sullivan v. Oracle raises more questions than it resolves. In particular, it is unclear how lower courts will apply the “competing interests” rule to other provisions within the Labor Code or Industrial Welfare Commission Wage Orders. Because California law tends to afford stronger employee protections than other states, employers should anticipate that plaintiffs will attempt to expand the Court’s holding to encompass all aspects of California wage and hour law, including rest periods and other California-specific employee protections. Thus, the coming months may bring a spike in class actions by out-of-state employees. Until courts have a chance to further develop the Supreme Court’s rule, however, employers need only focus on providing out-of-state employees with proper overtime compensation. Please contact your employment attorney if you have any questions regarding application of California laws to out-of-state employees.

1 Sullivan v. Oracle (11 C.D.O.S. 8243 (2011))

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.