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LAW ALERT: California Supreme Court Decided Employers Must Pay Non-Resident Employees Overtime

July 1, 2011

The California Supreme Court handed down a decision on June 30, 2011, which is viewed by many as hurting business travel to California. The Court, in Sullivan v. Oracle, unanimously decided that non-resident employees working in California are entitled to overtime payment pursuant to California law. The Court also gave out-of-state employees four years to sue their employer, holding 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.)

This decision ended a long running dispute between Oracle Corporation, a large software company headquartered in California, and three of its former employees who trained Oracle’s customers in the use of the company’s products. While the plaintiffs mainly worked in their home states (Colorado and Arizona), they occasionally worked in California for business trips. The most these employees worked in California was 110 days per year; however, other years, they spent as little as 20 days in California. Oracle applied the wage-hour laws of the plaintiffs’ resident states to their employment. As a result, plaintiffs filed claims for overtime compensation under California law and restitution under the UCL.

On appeal, the Ninth Circuit Court of Appeals asked the California Supreme Court to decide the underlying questions of California law which would have a significant impact on the “large but undetermined number of California-based employers [who] employ out-of-state residents to perform work in California.”

The Court found 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 to not apply California’s overtime laws would “encourage employers to substitute lower paid temporary employees from other states for California employees, thus threatening California’s legitimate interest in expanding the job market.” However, this type of activist policy argument is not the place of the Court and fails to consider the ancillary jobs lost by the substantial decrease in business travel to California. Most disturbing, however, was the Court’s suggestion that the employee performing work may be entitled to apply either the resident state labor laws or California’s labor laws, whichever may be more beneficial for him or her.

Employers doing business in California are expected to see a flood of new wage and hour litigation as a result of this new ruling. Accordingly, California-based employers should review their payroll practices and develop policies and procedures to deal with overtime compensation of out-of-state employees traveling to work within California.