Sullivan v. Oracle Corp.

Facts

The employees and the work. Donald Sullivan, Deanna Evich and Richard Burkow worked as “Instructors” for Oracle Corporation, “a large software company headquartered in California,” training Oracle’s customers in the use of its products. Sullivan and Evich resided in Colorado; Burkow resided in Arizona. (Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191, 1194–1195.) Required by Oracle to travel, they “worked mainly in their home states but also in California and several other states.” Over the 2001–2004 period, “Sullivan worked 74 days in California, Evich worked 110 days, and Burkow worked 20 days.” (Id. at p. 1195.)

The classification and its aftermath. Oracle did not pay Instructors overtime, having determined they were exempt as teachers under California and federal law. In 2003 the Instructors brought a federal class action alleging misclassification; Oracle then reclassified them and began paying overtime under the Labor Code in 2003 and under the FLSA in 2004. The federal action settled in 2005, with the claims of nonresident Instructors carved out — those are the claims at issue here. (Sullivan, supra, 51 Cal.4th at p. 1195.)

The three claims. First, overtime under Labor Code sections 510, subdivision (a) and 1194 for days longer than eight hours and weeks longer than 40 hours “worked entirely in California.” Second, the same claim restated as UCL restitution, on the theory that the failure to pay was an “unlawful [or] unfair . . . business act or practice.” Third — the contested one — UCL restitution measured by overtime due under the FLSA for weeks longer than 40 hours “worked entirely in states other than California,” using an alleged FLSA violation elsewhere as the predicate unlawful act. (Sullivan, supra, 51 Cal.4th at p. 1195.)

The statutory materials. Section 510, subdivision (a) speaks of “[a]ny work in excess of eight hours in one workday,” and section 1194, subdivision (a) gives a civil action to “any employee receiving less than . . . the legal overtime compensation applicable to the employee.” A preambular section confirms that the employment laws reach “all individuals” employed in the state. (Sullivan, supra, 51 Cal.4th at p. 1197, quoting Lab. Code, § 1171.5, subd. (a).) Notably, section 1171.5 was enacted to protect undocumented workers after Hoffman Plastic Compounds, Inc. v. NLRB (2002) 535 U.S. 137, but the court held it “cannot reasonably be read as speaking only to undocumented workers,” having been “drafted and codified as a general preamble to the wage law.” (Id. at p. 1197, fn. 3.)

Procedural history

Plaintiffs sued in the United States District Court for the Central District of California, which granted Oracle summary judgment on stipulated facts. The Ninth Circuit initially affirmed in part and reversed in part — reversing on the first two claims and affirming on the third — but then withdrew its opinion and certified the underlying questions of California law, having found no directly controlling precedent. (Sullivan, supra, 51 Cal.4th at pp. 1195–1196.) The Ninth Circuit observed that the answers carried “considerable practical importance” because “[a] large but undetermined number of California-based employers employ out-of-state residents to perform work in California,” and possibly also “an appreciable economic impact on the overall labor market in California, given the competitive cost advantage out-of-state employees may have over California-resident employees if overtime pay under California law is not required for work they perform in California.” (Id. at p. 1196.)

The court was explicit about what was not before it. Although the complaint contained class allegations, no class had been certified and “no question concerning class certification is before us.” Nor was “the question whether Oracle properly classified plaintiffs as exempt from the overtime laws during the relevant time period.” (Sullivan, supra, 51 Cal.4th at p. 1196.) The stipulated-facts posture also constrained the third question. (Id. at p. 1208.)

Issue

Three certified questions. First, does the 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?” Second, does Business and Professions Code section 17200 apply to that same work? Third, does section 17200 apply “to overtime work performed outside California for a California-based employer by out-of-state plaintiffs in the circumstances of this case if the employer failed to comply with the overtime provisions of the FLSA?” (Sullivan, supra, 51 Cal.4th at p. 1196.)

Holding

Reasoning

1. The statutes speak territorially, not by residence. The court began with text: “California’s overtime laws apply by their terms to all employment in the state, without reference to the employee’s place of residence.” Section 510 reaches “[a]ny work”; section 1194 gives an action to “any employee”; section 1171.5 extends protections to “all individuals” employed here. (Sullivan, supra, 51 Cal.4th at p. 1197.) Breadth was not ambiguity: “That the overtime laws speak broadly, without distinguishing between residents and nonresidents, does not create ambiguity or uncertainty. The Legislature knows how to create exceptions for nonresidents when that is its intent.” (Ibid.) It had done exactly that in the workers’ compensation scheme (Lab. Code, § 3600.5, subd. (b)) (id. at p. 1197) while authorizing overtime exemptions “on a variety of other bases” but never on residence (id. at p. 1198).

2. The purposive argument. Regulating all nonexempt overtime within the state “is neither improper nor capricious,” given that “[s]tates possess broad authority under their police powers to regulate the employment relationship to protect workers within the State.” (Sullivan, supra, 51 Cal.4th at p. 1198, quoting De Canas v. Bica (1976) 424 U.S. 351, 356.) The overtime laws protect health and safety, shield employees “in a relatively weak bargaining position from the evils associated with overwork,” and expand the job market — purposes the Legislature deemed important enough to make the right unwaivable and nonpayment a crime. (Ibid., citing Gentry v. Superior Court (2007) 42 Cal.4th 443, 456.) From that the court drew the decisive inference: “To exclude nonresidents from the overtime laws’ protection would tend to defeat their purpose by encouraging employers to import unprotected workers from other states.” (Ibid.)

3. Tidewater misread. Oracle’s principal authority was Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, which it read as holding that California overtime law follows California residents wherever they go — and therefore, by symmetry, that other states’ laws must follow their residents into California. “The argument fails because the premise is incorrect: Tidewater says no such thing.” (Sullivan, supra, 51 Cal.4th at p. 1198.) Tidewater held only that wage orders reached employment “within California’s state law boundaries, including all of the Santa Barbara Channel.” (Id. at p. 1199.) Its much-quoted passage was a caution against overbroad extraterritorial claims, not a holding: the court had merely said the Legislature “may have” intended limited extraterritorial reach and “may not have intended” wage orders to govern out-of-state businesses whose nonresident employees “enter California temporarily during the course of the workday.” (Ibid.) That hypothetical does not describe this case: “Nothing in Tidewater suggests a nonresident employee, especially a nonresident employee of a California employer such as Oracle, can enter the state for entire days or weeks without the protection of California law.” (Id. at p. 1200.)

4. The commerce-clause and burden arguments deflected, not resolved. Oracle argued that applying California wage law to visiting employees would force multistate employers to comply with pay-stub, meal-period, travel-time, vacation and final-pay rules across jurisdictions, raising commerce clause problems. The court gave three answers. First, and most important for later citation, the case “presents no issue concerning the applicability of any provision of California wage law other than the provisions governing overtime compensation,” and California’s interest in, say, “the content of an out-of-state business’s pay stubs, or the treatment of its employees’ vacation time . . . may or may not be sufficient” to displace another state’s law. Second, the asserted burdens “are entirely conjectural,” absent from the stipulated facts, and no out-of-state employer was even a party. Third, the Ninth Circuit had not asked about the commerce clause, and Oracle raised “no constitutional question of sufficient gravity” to warrant a strained construction. (Sullivan, supra, 51 Cal.4th at p. 1201.) The court added that under Pike v. Bruce Church, Inc. (1970) 397 U.S. 137, 142, California’s overtime law “regulates evenhandedly to effectuate the legitimate local public interests we have previously identified.” (Ibid.)

5. Governmental interest analysis — and a conflict that barely exists. The court applied the familiar three-step framework from Kearney v. Salomon Smith Barney, Inc. (2006) 39 Cal.4th 95, 107–108. (Sullivan, supra, 51 Cal.4th at pp. 1202–1203.) At step one the laws plainly differ: California requires time-and-a-half after eight hours a day and double time in defined circumstances; Colorado uses a 12-hour daily trigger; Arizona has no overtime law, so the FLSA’s 40-hour standard applies by default, and “[u]nlike California law, neither Colorado law nor the FLSA requires double pay for any work.” (Id. at p. 1203.)

At step two the analysis nearly ends: “Whether a true conflict exists under the circumstances of this case is doubtful, at best.” The court’s statement of the California interest is emphatic, and precisely bounded: “California has, and has unambiguously asserted, a strong interest in applying its overtime law to all nonexempt workers, and all work performed, within its borders.” (Sullivan, supra, 51 Cal.4th at p. 1203, italics added.) The word “nonexempt” is doing real work — whether these Instructors were properly classified as exempt was expressly not before the court. (Id. at p. 1196.) By contrast, “[n]either Arizona nor Colorado . . . has asserted an interest in regulating overtime work performed in other states” — Arizona having no such law and Colorado’s reaching only work “performed within the boundaries of the state of Colorado.” (Id. at p. 1204.) Oracle’s attempt to extrapolate from those states’ extraterritorial workers’ compensation statutes failed on its own terms: those statutes “speak narrowly to the subject of workers’ compensation” and therefore “show only that Colorado and Arizona know how to assert an interest in applying their laws extraterritorially, and thus highlight the same states’ failure to assert any extraterritorial interests with respect to overtime compensation.” (Ibid.)

6. No interest in a competitive discount. Oracle’s fallback — that Colorado and Arizona have an interest in a hospitable regulatory climate for their businesses — met the federalism answer from Kearney: every state enjoys that power equally, so “a company that conducts business in numerous states ordinarily is required to make itself aware of and comply with the law of a state in which it chooses to do business.” (Sullivan, supra, 51 Cal.4th at p. 1205.) Hence “neither Colorado nor Arizona has a legitimate interest in shielding Oracle from the requirements of California wage law as to work performed here.” (Ibid.) The court also noted those states had expressed no interest “in requiring their residents to work side-by-side with California residents in California for lower pay.” (Id. at p. 1204.)

7. Comparative impairment. Assuming a conflict for argument’s sake, subordinating California’s interests “unquestionably would bring about the greater impairment,” because excluding nonresidents “would completely sacrifice, as to those employees,” the state’s health-and-safety and anti-overwork policies and would “encourage employers to substitute lower paid temporary employees from other states for California employees.” By contrast, declining to apply Colorado and Arizona law “would impact those states’ interests negligibly, or not at all.” (Sullivan, supra, 51 Cal.4th at pp. 1205–1206.)

8. The UCL question was easy; the extraterritorial question was not. Question two required little: failure to pay legally required overtime is already an unlawful business act under Cortez v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 177, and “the parties offer no argument on the point.” (Sullivan, supra, 51 Cal.4th at p. 1206.) Question three turned on the presumption against extraterritorial application: nothing in the UCL’s language or history shows a legislative intent to operate abroad, so “the presumption against extraterritoriality applies to the UCL in full force.” (Id. at p. 1207.)

9. Why the in-state decision was not enough. The stipulated facts identified “only a single instance of relevant conduct occurring in California” — that “[t]he decision-making process to classify Instructors as exempt . . . occurred primarily from within the headquarters offices of Oracle Corporation located in Redwood Shores, California.” The court drew a precise distinction: “But for an employer to adopt an erroneous classification policy is not unlawful in the abstract. [Citation.] What is unlawful, and what creates liability under the FLSA, is the failure to pay overtime when due.” (Sullivan, supra, 51 Cal.4th at p. 1208.) Because the wrongful act — nonpayment — occurred elsewhere, the California classification decision “does not, standing alone, justify applying the UCL to the nonresident plaintiffs’ FLSA claims for overtime worked in other states.” (Ibid.) The court noted the UCL “might conceivably apply” had the wages been paid or underpaid in California, but “the stipulated facts do not speak to the location of payment,” and it declined the parties’ invitation to speculate — its answer “must be confined to the circumstances of this case as established by the stipulated facts.” (Ibid.) The motive behind the third claim was disclosed candidly: plaintiffs sued under the UCL “to obtain recovery for a year the FLSA no longer reaches by invoking the UCL’s four-year statute of limitations.” (Id. at p. 1207, fn. 8.) There was no dissent.

Significance

Sullivan is the controlling authority on California overtime law’s application to nonresidents, and its practical effect is substantial: on facts like these — where the home state has asserted no competing interest in the work — a California-based employer that brings out-of-state workers here for full days owes California overtime for that work, whatever the employee’s residence. The conflict-of-laws analysis is unusually lopsided because the comparison states had not attempted to regulate work done elsewhere — a feature of the case, not a general rule.

The decision’s most-cited passages are its narrowest. The court twice confined itself: to overtime rather than wage law generally (Sullivan, supra, 51 Cal.4th at p. 1201), and to entire days and weeks rather than partial-day incursions (id. at pp. 1199–1200). Both limits have generated a decade of downstream litigation over whether other wage-law provisions — pay stubs, meal and rest periods, final pay — reach nonresident work in California, and over how much presence is enough. Sullivan answers neither question, and citing it as though it does is the most common error made with the case.

The third holding is the more analytically interesting half. By separating the classification decision from the failure to pay, the court identified the operative unlawful act as the one that gives the UCL its situs. That reasoning limits the frequently attempted strategy of routing time-barred federal claims through the UCL’s four-year period on the theory that a corporate decision was made at a California headquarters. The court did not foreclose the theory entirely — it left open the significance of the place of payment — but it rejected headquarters-based conduct as sufficient standing alone.

Key quotes

“California’s overtime laws apply by their terms to all employment in the state, without reference to the employee’s place of residence.” (Sullivan v. Oracle Corp. (2011) 51 Cal.4th 1191, 1197.)

“To exclude nonresidents from the overtime laws’ protection would tend to defeat their purpose by encouraging employers to import unprotected workers from other states.” (Id. at p. 1198.)

“[T]he case before us presents no issue concerning the applicability of any provision of California wage law other than the provisions governing overtime compensation.” (Id. at p. 1201.)

“But for an employer to adopt an erroneous classification policy is not unlawful in the abstract. [Citation.] What is unlawful, and what creates liability under the FLSA, is the failure to pay overtime when due.” (Id. at p. 1208.)

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Practice pointer

Open questions

Wage-law provisions other than overtime. Expressly reserved: “one cannot necessarily assume the same result would obtain for any other aspect of wage law,” and California’s interest in matters such as pay stubs or vacation “may or may not be sufficient to justify choosing California law over the conflicting law of the employer’s home state.” (Sullivan, supra, 51 Cal.4th at p. 1201.)

Partial-day presence. The holding addresses entire days and weeks worked in California (id. at pp. 1199–1200). Tidewater’s scenario of employees who “enter California temporarily during the course of the workday” (id. at p. 1199) remains unresolved.

Out-of-state employers. Oracle was California-based, and the court repeatedly said so. Whether the same result follows for a nonresident employee of an out-of-state employer working in California is not decided.

Place of payment. The court said the UCL “might conceivably apply” to the FLSA claims if wages were paid or underpaid in California, but the stipulated facts were silent and it declined to speculate. (Id. at p. 1208.)

The commerce clause. Not addressed, because the Ninth Circuit did not ask and Oracle raised “no constitutional question of sufficient gravity.” (Id. at p. 1201.) The due process limits on extraterritorial application were likewise left aside. (Id. at p. 1207, fn. 9.)

Exemption and certification. Whether Oracle properly classified the Instructors as exempt, and whether a class should be certified, were both outside the certified questions. (Id. at p. 1196.)

What has happened since. Two of these reservations have been substantially answered. Ward v. United Airlines, Inc. (2020) 9 Cal.5th 732 addressed the wage-statement requirements of Labor Code section 226 for work not performed predominantly in any one state, and Oman v. Delta Air Lines, Inc. (2020) 9 Cal.5th 762 addressed section 226 and the minimum-wage and timely-payment provisions — both, like Sullivan, on certified questions under rule 8.548 and both building on it. On remand after the answers here, the Ninth Circuit disposed of the appeal at Sullivan v. Oracle Corp. (9th Cir. 2011) 662 F.3d 1265. Nothing in the analysis above is disturbed by those decisions — Sullivan reserved these questions and they were answered elsewhere — but the current state of the law on non-overtime wage provisions is Ward and Oman, not Sullivan.