Overtime Compensation and “Exempt” Employees, Quirky Question # 89

Quirky Question # 89:

Our company develops software and is based in California with another location in Arizona.  On occasion, our software developers in Arizona come to our California facility to perform some work.  Two of our Arizona based developers have recently complained that while they are in California they should be paid overtime for the work done at our headquarters whenever they work more than 8 hours in a day.  One of the Arizona based employees makes a salary of $60,000 and is classified as exempt.  The other Arizona based employee makes a salary of $77,000 and is also exempt.  Neither one of these employees has worked in California for a whole week; they worked Wednesday through Friday in California four times in a two month period.  They never worked more than 40 hours in a week but both want the company to pay them overtime as if they are a nonexempt employees for the days they worked ten hours.  They both claim that in California they are nonexempt employees and are entitled to overtime.  Must we apply California law to Arizona based employees that work in California so infrequently?

Dorsey’s Analysis:

It has become commonplace for employees who work in one state to occasionally perform work in another state. While this practice is commonplace, unfortunately the law surrounding this practice is very much up in the air, especially for workers who work occasionally in California.

You inquired about how Arizona employees, working periodically in CA, should be treated, both with respect to overtime compensation. As you recognize in your question, this issue also may be affected by how these employees are classified, i.e., whether they are exempt or non-exempt employees. Of course, the situation is complicated further if an employee classified as “exempt” under one state’s statutory scheme would be classified as “non-exempt” under CA law.

This factual context was recently explored by the Ninth Circuit in Sullivan vs. Oracle. In Sullivan, the Ninth Circuit Court of Appeals applied California’s Labor Code to out-of-state employees temporarily working in California for an in-state based company. On February 17, 2009, about three months after first deciding the case and after Oracle filed petitions for rehearing and en banc rehearing, the Ninth Circuit withdrew its opinion. At that point, the three-judge panel asked the California Supreme Court to ultimately decide the following issues raised in Sullivan:

1. Does the 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?

2. Does Business & Professions Code § 17200 apply to the overtime work described in question one?

3. Does § 17200 apply to overtime work performed outside California for a California-based employer by out-of-state employees in the circumstances of this case if the employer failed to comply with the overtime provisions of the Fair Labor Standards Act?

It is unclear whether the Ninth Circuit opinion will be reinstated if the Supreme Court declines to accept these certified questions. Of course, it is equally unclear whether, if it accepts the certified questions, the California Supreme Court will analyze these issues in a manner consistent with the Ninth Circuit’s now-withdrawn interpretation.

While Sullivan has been withdrawn, the circumstances involved in that case, which are similar to the facts you present, may provide us some guidance in how future courts may approach this situation. In Sullivan three putative class representatives were out of state residents (2 from Colorado and 1 from Arizona) who occasionally — anywhere from 5 to 30 days a year — traveled to Oracle’s home state of California to train Oracle customers on its software. Oracle classified these employees as exempt until 2003, when it changed their status to non-exempt and began paying them overtime.

Plaintiffs filed suit, alleging three distinct claims. The first claim sought to recover unpaid overtime pursuant to California’s Labor Code for work performed in California by non-residents who worked complete days in California from 2001 to 2004. Plaintiffs’ second claim under the California’s Unfair Competition Law (“UCL”) asserted that the violations of the Labor Code also violated the UCL. Finally, in their third claim Plaintiffs argued that Oracle’s overtime pay violations for work performed in the United States, but not in California, also breached the UCL.

Oracle moved for summary judgment on all three claims. It argued that California law should not apply to out-of-state employees. Rather, Oracle contended that Colorado overtime law should apply to the two Colorado residents and that the overtime provisions of the Fair Labor Standards Act (“FLSA”) should apply to the Arizona resident, since Arizona lacks its own state-specific overtime law.

The District Court granted Oracle’s motion for summary judgment on all three claims. Specifically, the court granted summary judgment on the first claim on grounds that the relevant provisions of California law did not apply to non-residents who work primarily in states other than California. Since the second claim under the UCL was based on an underlying Labor Code violation, the court also granted summary judgment in favor of Oracle. Finally, the district court granted summary judgment on the third claim on the grounds that the UCL does not apply to work performed outside of California in violation of the FLSA.

On appeal, the Ninth Circuit affirmed the district court’s decision as to the UCL claim for work performed outside of California, but reversed as to the claims under the California Labor Code and related claim under the UCL. Had the Ninth Circuit not withdrawn its opinion, the question you posed would have rather a straightforward response: yes, you must apply California law to both your Arizona employees for all work they perform for your company in California. Since, Sullivan’s future is currently unclear, however, employers in your position are left in a lurch.

Until the California Supreme Court decides this issue, cautious employers may wish to follow the Ninth Circuit’s guidance as set forth in Sullivan, absent other controlling authority. Therefore, it would be prudent to apply California law to your Company’s two Arizona-based employees to provide maximum risk protection.

However, this can become complicated. Your Company apparently has classified both employees as exempt under the computer professional exemption. Since Arizona does not have state-based labor laws, I will assume the exemption analysis was previously done under the applicable Federal law found at Section 13(a)(1) of the FLSA. California, however, has its own slightly different version of the computer professional exemption, including a much higher minimum pay requirement. Specifically, the California computer professional exemption is found at Labor Code 515.5 with sets forth the duties and minimum pay requirements for an employee to meet the exemption.

Because I do not know exactly what duties the two Arizona-based employees engage in on a day-to-day basis, I will assume that they meet the duties test of both Labor Code 515.5 and Section 13(a)(1) of the FLSA. Therefore, the next question is whether the two employees meet the minimum pay requirements under California law. Each year the Department of Labor Standards Enforcement sets the level of minimum pay based on the consumer price index. In 2008 the minimum salary was $75,000 per year. However, effective January 1, 2009, the minimum salary was raised to $79,050 per year.

As a result, the first Arizona employee making $60,000 per year would be ineligible for the California exemption regardless of whether or not the employee performs duties that are classified as exempt and overtime pay would be due under Sullivan. The second employee, making $77,000 per year, would be eligible for the California exemption for work performed in 2008 (provided he was performing exempt duties) because his salary exceeded the $75,000 minimum. For work performed in 2009, however, this employee would not meet the California exemption regardless of the nature of the duties he was performing, because he does not meet the salary threshold.

The underlying caveat to all of this is that Sullivan is no longer good law, so there is a reasonable argument that Arizona employees should not be treated the same as California employees for the few days they happen to work in California. Nevertheless, until the California Supreme Court decides this issue, employers wanting to be exceedingly cautious can apply the Sullivan framework discussed above.

Dorsey & Whitney

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