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From 1998 to 2004, Donald Sullivan worked for Bay Area-based Oracle Corp., teaching customers how to use the company's software. Sullivan lived and worked most of the year in Colorado, but for approximately 30 days each year he worked in California.

Oracle reclassified its California-based instructors in 2003 so they would receive overtime pay under the California Labor Code, and in 2004 the company reclassified all instructors nationwide so they would receive overtime under the Federal Labor Standards Act. But employees like Sullivan, who were based outside California, did not qualify for California's extensive employee protections, which far exceed federal law.

On Nov. 6, a 9th Circuit panel ruled in a suit Sullivan and two other Oracle instructors brought that California employers must treat out-of-state employees temporarily working in California according to California's labor law. The panel also affirmed a lower court decision that Oracle does not need to pay all of its employees nationwide according to California laws.

The decision in Sullivan v. Oracle Corp. has baffled in-house employment attorneys with employees who work part of the time in California.

“There's just total confusion,” says Paul Cane, a Paul Hastings partner who represented Oracle in the case. “Yesterday I got a call from an in-house lawyer at a Fortune 100 company. She said, 'I can't even begin to figure out how to comply with this decision.'”

States At Stake

Normally, a worker's home state laws govern his terms of employment. Because federal labor laws are treated as minimum requirements, individual states have the authority to create stricter rules of their own, which vary across the country. Among labor attorneys, California is infamous for its employee-friendly laws, including the rule that employees must be paid overtime for every day they work more than eight hours, as opposed to the more common weekly overtime rule.

Using the three-prong “choice of law” standard, the court applied California code to visiting employees. The first prong asks if there are “material differences” between state laws. The court said laws governing the plaintiffs' home states, Colorado and Arizona, were different than California's because Arizona has no state overtime laws and Colorado's are less stringent.

The second prong asks what interest each state has in applying its own law. Since Arizona has no law, it has no interest, and Colorado provides no protection to workers outside the state. But California has previously indicated an interest in applying its laws to nonresidents.

The final prong asks which state interest would be most impaired if another state applied its law. The circuit didn't apply this prong, because Arizona and Colorado had no interest in applying their laws.

But the court left many terms undefined. For example, Sullivan legally only applies to “California employers.”

“We don't know what that means,” Cane says. “Does it mean California-incorporated employers? Does it mean any employer that employs any Californian?”

He also cites a 2007 Washington state Supreme Court decision, Bostain v. Food Express, that ruled Washington employees are bound by Washington law when they leave the state, not by where they work.

On the other hand, Charles Russell, a Callahan McCune & Willis associate who represented the plaintiffs in the case, compares the decision to any other situation where a person enters a new state.

“If you drive in Iowa, they're going to hold you to their state speed limit law,” he says. “They're not going to care what California's speed limit law is. The same thing applies to working conditions. If you go work in Iowa, they're going to hold you to Iowa's overtime law. ” But strangely, part of the Sullivan decision reaffirms the standard that California labor law applies to Californians outside the state, leaving experts wondering why the same rule shouldn't apply to out-of-state residents.

Wait and See

Many employers are concerned because the court in Sullivan applied the entire labor code to out-of-state employees in California, although the suit itself dealt with overtime pay.

“We hold that California's Labor Code applies to work performed in California by non-residents of California,” Judge William Fletcher wrote in the opinion (see “Seaman Salaries”).

But Anthony Oncidi, a partner at Proskauer Rose, doesn't think the case will have effects as far-reaching as people have feared, largely because it's too broad to be enforceable.

“There was a flurry of concern when it was first published,” he says. “But the case may not have the dire consequences employers thought it might.”

Nevertheless, Sullivan forces employers to consider their policies for employees who travel to California. Oncidi recommends a “California addendum” to work agreements, in addition to what a company uses “in the rest of the civilized world.”

James Hart, a shareholder at Littler Mendelson, says employers should alert human resources and legal departments to the new issue and make sure the company payroll system can track when employees move between states. But the decision may not stand for long. Both sides have requested an en banc rehearing. At press time the court had asked for more briefs, signaling that the appeal could be granted. Before making any major policy changes, Cane recommends employers “watch and wait” to see what happens.