How Far May a State Labor Law Reach?

Sullivan v. Oracle Corp. 
Oracle, a software company headquartered in Palo Alto, California, employs “instructors” to travel to various client locations to train clients in the use of Oracle’s products. In 2003, Oracle revised the instructors’ classifications as hourly nonexempt employees but did not provide back pay for prior unpaid overtime.

Consequently, the instructors brought a class action under California Labor Code and the federal Fair Labor Standards Act (FLSA) for the unpaid wages. Gable & Sullivan v. Oracle(Sullivan I), No. SACV 03-348 AHS (MLGx) (C.D. Cal. Mar. 29, 2005). The court certified two classes—one for the plaintiffs seeking damages under the California Labor Code and one for the plaintiffs seeking damages under the FLSA. The matter ultimately settled. However, claims under California law for periods of time that out-of-state instructors worked in the state of California were expressly excluded from the settlement.

Plaintiffs Sullivan, Evich, and Burkow thereafter filed the suit that is the subject of this article (Sullivan II). It was undisputed that the plaintiffs performed the majority of their work in their home states but would occasionally travel to California to instruct various Oracle customers. Plaintiffs Sullivan and Evich resided in Colorado, which has its own overtime statute that generally requires 1.5 times the regular rate for hours exceeding 12 in one day or 40 in one week. Burkow resided in Arizona, which follows the FLSA in requiring 1.5 times the employee’s regular rate for hours exceeding 40 in one week. 29 U.S.C. § 207.

The plaintiffs sought to certify a class on three claims: violation of overtime provisions under section 510 of the California Labor Code, violation of California’s Unfair Competition Law (UCL) pursuant to Business & Professions Code section 17200 for failure to pay overtime for work performed within California, and violation of California’s UCL predicated on violations of the FLSA for work performed outside California.

The U.S. District Court for the Central District of California granted summary judgment to Oracle, finding that applying the California Labor Code to work performed by nonresidents would violate the due process clause of the Fourteenth Amendment. On appeal, the Ninth Circuit initially reversed, then ultimately withdrew its opinion and certified the questions regarding the applicability of California’s overtime provisions to the California Supreme Court.

This article focuses on one of the questions certified: “[D]oes California Labor Code apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week?”

The California Supreme Court’s Analysis
Statutory Construction
In determining the question, the court first looked at the language of the statute, which it found to be clear and unambiguous. Section 510(a) of the California Labor Code provides, “Any work in excess of eight hours in one workday and . . . 40 hours in one workweek . . . shall be compensated at the rate of no less than one and one-half times the regular rate of pay. . . .” The California Labor Code also provides for penalties to “any employee receiving less than . . . the legal overtime compensation applicable to the employee . . .” Cal. Labor Code § 1194 (emphasis added). The court noted that the preamble to the penalty section of California’s wage law also states that California’s employment laws apply to all individualsemployed in California.

The fact that the Labor Code did not explicitly differentiate between a resident and nonresident employee did not escape the court’s notice. Rather, the court determined that the California legislature knows how to create exemptions when it intends to, as in California’s workers’ compensation statutes. The lack of an explicit exemption for nonresidents indicated to the court that an employee’s residence is not relevant for purposes of California’s overtime laws while he or she is working in California. To provide such an exemption would encourage employers to import unprotected workers from out of state, the court reasoned.

Oracle argued, however, that the legislature could not have intended for the statute to apply to nonresident employees because that would impose significant burdens on employers to comply with related overtime laws such as meal periods, compensable travel time, accrual of vacation time, and overtime exemptions, in violation of the Constitution’s dormant Commerce Clause. Significantly, the court stated that it had not been asked to consider the applicability of any other wage laws or to undertake any analysis of the Commerce Clause to the facts presented and, consequently, declined to do so.

This was a case of first impression in California. Other courts addressing this issue have reached similar results. In 2004, the Seventh Circuit Court of Appeals was called upon to determine whether the Illinois Wage Payment and Collection Act applied to a nonresident who worked in Illinois for an Illinois employer. Adams v. Catrambone, 359 F.3d 858 (7th Cir. 2004). Like the California Supreme Court, the Seventh Circuit held that the Illinois wage laws applied to all work performed within the state’s boundaries regardless of where the plaintiff resides. However, in Adams, the plaintiff worked full-time in Illinois; in Sullivan, the California Supreme Court extended that rule to apply to as little as one day or one week of work.

The largest gap in the current status of California’s overtime provisions is whether the court will eventually hold an out-of-state employer liable for overtime wages of a nonresident employee who occasionally visits California. Under the court’s statutory analysis, which emphasized that the statutory overtime regulations cover “any work” by “any employee” and “all those employees employed in California,” it could very well do so. Cal. Labor Code §§ 510(a), 1194(a), and 1171.5(a).

Conflict of Laws Analysis
The court resolved the conflict of laws issue—which involved the laws of  California, Arizona, and Colorado—using the three-step governmental interest analysis. The first step required the court to determine whether the states’ laws at issue were different. Because California’s overtime laws are different from those of every state in the nation, the first step was easily resolved.

The second step was to determine whether a true conflict existed between California law and the laws of Colorado and Arizona and the states’ interests in applying their own law to the terms of the plaintiffs’ employment. Here, the court relied on the failure of Colorado and Arizona to provide any statute governing overtime outside their own boundaries. Arizona had no overtime provision at all, and Colorado’s overtime law governed only “work performed within the boundaries of the state of Colorado.” 7 Colo. Code Regs. § 1103-1(1) (2011). The lack of any expressed interest in the overtime pay of their residents outside their own borders indicated to the court that applying California overtime laws would negligibly affect the interests of Colorado and Arizona.

Oracle argued that the interests of Arizona and Colorado in protecting their businesses from more costly regulations in other states outweighed California’s interests. The court rejected this argument, finding that, pursuant to the full faith and credit and due process clauses, the U.S. Constitution does not require one state to substitute another state’s laws for its own law, applicable to persons and events within its borders (citing Phillips Petroleum v. Shutts, 472 U.S. 797, 822 (1985)). The court further found that the Constitution does not permit one state to project its own laws into those of another. Healy v. The Beer Institute, 491 U.S. 342, 336–37 (1989).

Nevertheless, in the final step of the governmental interest analysis, the court determined that California’s interest in protecting workers within its borders would be significantly impaired if it was required to permit nonresidents to work without the protection of the overtime laws it affords to its residents. In addition, employers would be encouraged to substitute lower paid temporary nonresident employees, thus “threatening California’s legitimate interest in expanding the job market.”

Jurisdiction and Extraterritorial Application of State Laws
The limitations of the court’s analysis leave several issues wide open. Because the court answered only the question of whether the overtime wage orders apply to all employment within California, employers are left in a quandary as to how they should apply the related overtime provisions, such as exemptions, vacation pay, and pay stub requirements. In addition, the question remains whether a California court could exercise jurisdiction over an out-of-state employer or resident employees who work outside California, and, if so, whether California’s overtime laws apply under those circumstances. The issue then becomes one of jurisdiction.

Liability of In-State Employer
The United States Supreme Court has long held that legislation is presumptively territorial and confined to the limits over which the law-making power has jurisdiction. Am. Banana Co. v. United Fruit Co., 213 U.S. 347 (1909). The presumption is always against any intention to give the act an extraterritorial operation and effect. McCullogh v. Scott, 182 N.C. 865, 877–78 (1921).

For the most part, employers have not been held liable for violations of a state’s wage laws for work performed by a nonresident employee outside the state. Courts have been very reluctant to apply state laws extraterritorially to work performed outside state boundaries by a nonresident employee.

For example, in a recent wage-and-hour case, the U.S. District Court for the Central District of California held that an Indonesian employee on a cruise ship, which sometimes stopped at the Port of Los Angeles, could not maintain a claim against his Dutch employer based in Seattle, Washington. Priyanto v. M/S Amsterdam, 2009 WL 175739 (C.D. Cal. 2009).

Other courts have also considered the extraterritorial application of state laws to nonresidents performing work outside the state’s boundaries. See, e.g., Vengurlekar v. Silverline Techs., Ltd., 220 F.R.D. 222 (S.D.N.Y. 2003); Glass v. Kemper Corp., 920 F. Supp. 928 (N.D. Ill. 1996). With rare exception, the courts have declined to exercise any jurisdiction beyond state borders and apply state laws extraterritorially.

In Sawyer v. Market Am., Inc., 661 S.E.2d 750 (N.C. Ct. App. 2008), the North Carolina Court of Appeals held that the North Carolina Wage and Hour Act does not apply to the wage claims of a nonresident independent contractor who worked and lived in Oregon. Similarly, the U.S. District Court for the Southern District of Ohio denied the wage claims of two employees who had never lived or worked in Ohio. Mitchell v. Abercrombie & Fitch, 2005 WL 1159412 (S.D. Ohio 2005).

Application of a State’s Law 
When a complaint is filed against an out-of-state employer, a court would first have to perform a constitutional due process analysis to determine whether a nonresident defendant has certain minimum contacts with the forum state such that maintenance of suit comports with constitutional due process and does not offend traditional notions of fair play and substantial justice. Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945); see also Liaquat Khan v. Van Remmen, Inc., 756 N.E.2d 902, 907 (Ill. App. Ct. 2d Dist. 2001). Under California’s minimum contacts analysis, general jurisdiction will be conferred only if the contacts are substantial, continuous, and systematic.

General jurisdiction cannot be conferred where an employer does not maintain an office or place of business; has no bank accounts, assets, telephone listings; and is not, nor ever has been, licensed to do business within the forum state. Stanley Consultants v. Superior Court, 77 Cal. App. 3d 444, 449 (Cal. Ct. App. 3d Dist. 1978).

If general jurisdiction cannot be conferred, then the court may exercise specific jurisdiction if (1) the nonresident company purposefully directed its activities at the forum residents and availed itself of the privilege of conducting business within California, thereby invoking the protection of its laws; (2) the dispute arises out of those specific purposeful contacts and conduct; and (3) the exercise of jurisdiction is fair and reasonable. Asahi Metal Indus., Co. Ltd. v. Superior Court of California, Solano Cnty., 480 U.S. 102, 112 (1987).

Purposeful availment has been established where the nonresident defendant had set up a toll-free number in California, maintained a national advertising campaign that reached California, and made two sales after the advertisement appeared; and where the defendant had specifically sought a California corporation to engage as an investor in a leveraged buyout. See, e.g., Checker Motors Corp. v. Superior Court, 13 Cal. App. 4th 1007 (Cal. Ct. App. 2d Dist. 1993). In addition, simply advertising in the forum is a means of purposefully directing activities at forum residents. Asahi Metal, 480 U.S. at 112.

However, no purposeful availment is found where a foreign corporation, as an incident to an interstate transaction, lends one of its employees to the purchaser of a machine to assist in installing the machinery, Proctor & Schwartz v. Superior Court in and for San Mateo County, 99 Cal. App. 2d 376, 221 P.2d 972 (Cal. Ct. App. 1st Dist. 1950), or where an out-of-state insurer processed insurance premium payments and claims of insureds domiciled in California who had moved there after purchasing the insurance policy, but the out-of-state insurer never directed sales or advertising toward California. Elkman v. Nat’l States Ins. Co., 173 Cal. App. 4th 1305, 1316–17 (Cal. Ct. App. 2d Dist. 2009).

Conclusion
It is unlikely that California courts will apply California’s overtime laws to nonresidents for work performed out of state. However, if a court can assert general or specific jurisdiction over an out-of-state employer, it could find that the California Labor Code applies to nonresident employees if they perform work in California. The jurisdictional and due process concerns posed by the court’s ruling in Sullivan II create a minefield for employers when it comes to nonresident employees performing work in California. Given the significant penalties that can be incurred for violations of labor laws related to overtime pay such as vacation accrual, meal and rest periods, and compensable travel time, defense attorneys should caution their clients who send employees to California for short-term projects or events, especially if they have California employees who could achieve the same result. For plaintiffs’ attorneys, this is an exciting time to bring the unanswered issue to California courts for further clarification. A final resolution on the applicability of the related overtime laws will come only through further litigation and appeals to the California Supreme Court.

Keywords: litigation, employment and labor relations law, Sullivan v. Oracle Corp., resident employee, nonresident employee

_{William A. Munoz and Kerri L. Ruzicka practice with Murphy, Pearson, Bradley & Feeney in Sacramento, California.}

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