(January 9, 2009) A California court has found that that California has a strong interest in applying its Labor Code to the work performed by workers in California and as a result has ruled that California overtime laws apply to non-residents.

In the case of Sullivan v. Oracle Corp. 547 F.3d 1177, three non-residents of California sued, claiming that they were not paid overtime because they were misclassified as exempt employees. They performed only some of their work in California, but sued under California law.

The court sent the case back to the trial court to determine, under California law, whether the employer owed unpaid overtime.

Although none of the employees lived in California, they performed work as instructors in California and throughout the United States. The employer classified its instructors as teachers and therefore exempt from overtime under California and federal law until 2003 when it reclassified them as non-exempt and began paying the instructors overtime. The company did not retroactively compensate these employees for overtime before the reclassification.

Case Recap

Donald Sullivan worked as an Oracle instructor from June 1998 to January 2004 and lived in Colorado. He worked on average about 24 days per year in California. Deanna Evich worked as an Oracle instructor from August 1999 to July 2004 and also lived in Colorado. For all years, except one, she worked about 27 days per year in California. Richard Burkow worked as an Oracle instructor from March 1998 to April 2002 and lived in Arizona. He worked an average of 10 days per year in California.

In no instance did any instructor work less than one workweek in California if they worked in California at all. The employees claim that their employer, among other things, failed to pay overtime for work performed in California. The company countered the overtime claim by saying Colorado law should apply to the Colorado residents and that federal overtime rules should apply to the Arizona resident because Arizona does not have its own overtime law.

A California court will apply another state’s law if the company is able to demonstrate the other state’s law will further the interests of the other state. The court will look to see whether the other state’s law is materially different from California’s. California law requires payment of overtime at one-and-one-half times the regular rate of pay to non-exempt employees who work more than eight hours in a day or more than 40 hours in a workweek and for the first eight hours on the seventh consecutive workday. Any work in excess of 12 hours in a workday or in excess of eight hours on the seventh consecutive workday must be paid at two times the regular rate of pay. The court found that the California Labor Code is “clearly intended to apply to work done in California by non-residents” regardless of where the worker lives.

Further, Colorado law requires only one-and-one-half times the regular rate of pay for more than 12 hours in a day or 40 in a workweek. Nor does Colorado impose any double-time requirement or overtime for the seventh consecutive workday. Arizona has no overtime requirement, but follows federal law, which requires only time-and-one-half pay for hours worked over 40 in a workweek. These are material differences.

The court then reviews what interest, if any, each state has in having its own law applied to the case. According to the court, California has a clear interest in the economic welfare of its own residents who perform work in California as well as an interest in the effect compensation for non-residents will have on residents. If a California employer can avoid state law requirements simply by hiring non-residents, California residents will be substantially disadvantaged in the labor market by the cheaper labor.

Then the court decides which state’s interests would be more impaired if its law were not applied. The court found that Colorado law provides no protection to workers performing work outside Colorado as its overtime law addresses only work performed in Colorado. Arizona law defers to federal law so it has no express interest in wages paid to its residents outside of federal law, which applies equally across the country. The court determined that any interests Colorado and Arizona may have will not in any way conflict with California’s interest in applying its Labor Code to other states’ residents performing work in California. “To the degree that Colorado or Arizona would be interested in the economic welfare of its residents working in California, these states both have an interest in the application of California law” because it is “by any measure the most advantageous” to employees.

CalChamber Recommendation

The California Chamber of Commerce has recommended that employers:

• Apply California law to employees who perform work in California.
• Ensure that employers properly classify employees as exempt or non-exempt before they start work.
• Contact legal counsel immediately if they have misclassified employees as exempt.