Many thanks to Thomas R. Kaufman of Sheppard Mullin's Los Angeles office for attending and providing the following report of the oral argument yesterday morning in Sullivan v. Oracle Corp., no. S170577:
I attended the oral argument today at the California Supreme Court for Sullivan v. Oracle. The case raised essentially two main issues: (1) If an employee who normally works out of state for a company headquartered in California comes to California for a short stint of work, does he have to be paid overtime under California's overtime laws? and (2) if an employer who is headquartered in California makes a decision in California to classify employees across the country as exempt, can a class action under the California Unfair Competition Law borrow the FLSA as a predicate act and sue for misclassification of the nationwide class? I am more interested in issue (2), but almost the entirety of the argument focused on issue (1).
From the questioning, it looks as though most of the justices are leaning to holding that out-of-state employees of a California-based company who come to California must be paid overtime under California law (e.g., daily overtime and California exemptions apply). The few comments there were on the second question give me some hope that the Court may find for the employer on the nationwide UCL issue, but that is far less clear because the questioning on that issue was so minimal.
Charles Russell of Callahan, Thompson, Sherman & Caudill argued for Sullivan and Paul Cane of Paul Hastings argued for Oracle. The case was well argued on both sides, but Cane faced a lot more questioning and the questioning he faced was much more aggressive. I took copious notes, so here is my best effort at a play by play recounting of the oral argument:
Charles Russell started by claiming that the answer to question (1) is answered by the plain meaning of Labor Code section 510, which states that "any work" in excess of eight hours in one workday must be paid at overtime rates. There is no exception made for work of employees who reside out of state. Justice Kennard interjected that there is language in the preamble to the statute (not sure what statute she is referring to) that suggests that it applies to all individuals employed in the state. Russell agreed.
Justice Kennard then asked what law applies to work outside the state of California. Russell stated that, for the plaintiff's Labor Code claims, he was not contending that work performed outside California is subject to the Labor Code. The issue is simply employees who worked for Oracle within California (note, this is somewhat misleading, as he is claiming that employees everywhere can sue under California law, but just via the UCL rather than the Labor Code).
Justice Chin then interjected that there is a 9th Circuit case involving a Texas company holding that California law applies to employees who are paid in the State of California. Russell did not really respond to the question, but stated that the issue here was simply employees who worked in California. Russell said in the Tidewater decision, the court examined whether California law applied to work by employees who lived in California and worked in California, but the dispute there was whether the employees were actually working in the state. Russell contended that the case implied that California law applies to all work performed in California. Justice Chin corrected Russell, stating that Tidewater did not involve employees who lived out of state, so it didn't really address the issue. Russell backed off his original statement a bit and said that Tidewater at least left the issue open.
Chief Justice Cantil-Sakauye interjected about the plain meaning again. She noted that there are exceptions delineated in Labor Code section 510 as to when overtime pay is required, and there wasn't one for out-of-state employees. Russell agreed.
Russell then noted that the "parade of horribles" imagined by the defense really has no application to the issue of daily overtime. For example, an employee who is working on a plane that merely flies through California airspace would not work more than eight hours in a day within California, so the daily overtime rule would not apply. The case is limited to situations where employees come to California for a long enough stint that they actually work daily overtime that is not also weekly overtime compensable under the FLSA. Russell said that there is nothing unusual about applying state laws to people who visit a state. When you drive into California, you are governed by the California speed limit even if the state where you drove from has a higher speed limit.
Justice Chin asked Russell if the plaintiffs were seeking retroactive overtime pay. Russell explained that, in the course of the litigation, Oracle reclassified all the subject employees as non-exempt and now pays them overtime (it was unclear whether they pay California overtime for visitors, but I assume not). The issue is that Oracle did not concede they were misclassified in the first instance, so this case seeks overtime for the period in which the employees were classified as exempt. California law is relevant to determine amount of damages if employees were misclassified as well as the statute of limitations (to the extent UCL is used to extend statute of limitations to four years on claims for restitution of wages).
At this point, Russell began a long recitation and did not receive questions for a while. He made some policy arguments about how the statute is to be liberally construed (recently reiterated in the Martinez v. Combs case) and how that justifies supporting Sullivan's position. He cast Oracle's argument as trying to create a "non-residents exception" for overtime that is not supported by public policy or the text of the statute.
The last comment on issue (1) came from Justice Kennard who asked whether the result would be different for other Labor Code sections or for employees of a company that was not based in California. She suggested that the Court need not address other statutes or non-California companies because that is outside the facts of the case. Russell eagerly agreed that the Court need not address those issues, but could limit the holding to the facts before the Court. Russell indicated that it would be administratively easy for employers based in California simply to follow the California overtime rules when their employees are working in California.
The only discussion of issue (2) was Russell making an analogy to someone living in a house and throwing rocks at other houses. He said that if you consider California as a house, California law can punish the conduct of the homeowner who is throwing rocks into other states and hurting people in those other states because the conduct took place in California. It doesn't matter where the victims are when the rocks hit them; for jurisdiction purposes, the UCL can apply so long as the rock is thrown from California. In a rather strained analogy, Russell stated that the rock throwing here was Oracle misclassifying employees under the FLSA from their company headquarters in California. This violation of the FLSA impacted employees throughout the country, but the decision to classify the employees as exempt emanated from California, and that was sufficient to trigger the UCL for all victims of the California-based act.
Justice Boren, sitting by designation, was the only judge to ask any questions to Russell about issue (2). He asked whether you could sue under the UCL for a claim by a Colorado employee that arose under Colorado law. Russell sidestepped the question and said that the issue here was the FLSA, which also applies in California. By suing under the UCL, you give up some relief (penalties, attorney's fees) and are limited to restitution under the UCL. I don't know if this concerned Justice Boren in that he was worried now that employees anywhere who happen to work for a company based in California can use state laws and transform them into UCL claims. He provided no further explanation of these questions.
Paul Cane began by providing the example of a New York Times reporter in attendance to watch this argument. He began to state that by merely coming here for this story, under Sullivan's argument, the employee would be subject to all of California's wage and hour laws.
Before he could finish making this point, Justice Kennard interjected that this case need not reach all California wage and hour laws or all types of employers. It is just addressing California-based employers and the narrow issue of overtime pay. She asked whether this could be answered by the plain language of the preamble of the statute without addressing broader issues.
Cane said because the broader issue of which state law applies to an employee visiting another state is unavoidable. There is a Washington state case that said that Washington law applies to truckers whose home base is in Washington but who drive for the day into Oregon. Similarly here, the state where most of the employee's work is performed should apply. This same standard has been adopted by the state Labor Commissioner for California employees working temporarily out of state. You couldn't have it be that California law applies to employees whose base is California when they go to another state AND employees based on other states are also governed by California law when they come to California. There is no reason to believe California sought to ignore general principles of comity and to have its law trump every other state's laws.
Justice Baxter asked whether Cane was arguing that a Mexican national who comes to this country to perform agricultural labor has no right to protections of California law but instead is protected only by Mexican law. (As a parenthetical, when the justices start comparing your employees to Mexican farmworkers, it doesn't bode well for the employer.) Cane explained to Justice Baxter that the analogy was inapt because the employee's work relationship with the employer was not primarily in Mexico even if the employee resided there when he wasn't working in California. The only employment relationship between that employee and the employer in the hypothetical would be in California (presuming the employee was not working for a Mexican company visiting California for an assignment-- which Cane did not address).
Justice Kennard then stated that Mr. Russell had allegedly conceded that the rule would be different for an employee of a non-California company temporarily visiting California, but this case dealt with employees of a California-based company. Cane replied that Mr. Russell had not agreed that a different rule applied to a non-California company, but rather that Russell's position was that the headquarters of the company is irrelevant. Cane stated that he agreed that the state of incorporation of the employing company should not bear on the issue. Justice Kennard stated that she thought it was relevant and that Mr. Russell had agreed.
Cane then argued further that it would be irresponsible to decide this issue focused solely on California-based companies and overtime law while leaving the employer community in the dark as to how this rule would be applied to other wage and hour laws and non-California companies. Cane noted that as soon as this case came down, the broader issues would be litigated next, and the employment community would be in a state of panic and extreme confusion about how to handle employees visiting California. The potential penalties for non-compliance could be massive and it would take years for this issue to be sorted out in the appellate courts. Cane then noted that the issue was not limited to daily overtime but also conflicting exemptions. In New York the laws governing whether newspaper reporters are exempt are different than in California. Could a company be expected to perform an exemption analysis for every employee that visited California. How would you deal with the exemption for an employee who was exempt four days in a week (under NY law) and non-exempt three days?
Chief Justice Cantil-Sakauye jumped in again and stated that the Ninth Circuit certified only a very narrow question, so what basis would the Court have to address other questions?
Cane stated that the Court must be mindful that rules it announces can be applied. Why should the determination of whether an employee is treated as exempt or non-exempt or paid daily overtime turn on where the company is headquartered?
Justice Corrigan responded that companies headquartered or doing most of their business in California are more likely to be familiar with California laws than a company headquartered in Rhode Island.
Cane stated that, whether that is true or not, exposing employers to a more punitive standard would scare businesses out of headquartering in California.
Chief Justice Cantil-Sakauye asked why it was such a burden to pay daily overtime.
Cane responded that laws are different all over because different states strike different balances between the interests of employees and those of the business community. California should respect those balances and defer to the other states where the work of that employee is primarily in the other state.
Justice Werdegar -- who seemed most sympathetic to Oracle's position -- asked whether a conflict of laws analysis would apply and, if so, which state would have the greater interest.
Cane stated that the state where more work was performed would have the greater interest. That is why you look to the state where the employee is primarily employed to determine which law to apply. Cane asserted that if the Court looked at the amicus briefing, it would see that no company pays according to the rule Sullivan advocates. That is, no company pays employees under California law when they visit California for a temporary visit.
Chief Justice Cantil-Sakauye asked what Cane meant by the issue being controlled by where the employment being primarily based in a state.
Cane responded that this analysis is from the Restatement of Contracts which allegedly says you look to where the majority of the work is performed in the relationship.
Justice Baxter interjected with his Mexican laborer example again and asked why that wasn't a proper analogy. Cane explained (again) that the focus is on the employment relationship between the employer and employee -- not on the state of residence of the employee. In the Mexican laborer example, the entirety of the employment relationship is in California, so California law applies. This is different from the analysis of which speed limit applies (Russell's analogy) because that question is geographically based. Wage/hour law is governed by where the employment relationship is primarily based.
Justice Corrigan asked whether Oracle's proposed rule actually hurts California employees because employers would have an incentive when they need a teacher for an assignment to use non-Californians rather than Californians. Cane indicated that this example was unrealistic because employers would need to send a wave of "shock troops" from out-of-state, over and over again each week, but Justice Corrigan corrected him that it would apply whenever an employer had a need for teachers for a limited stint. Cane stated that those were not the facts of the case, but Justice Corrigan chided him that Oracle wants the Court to consider real world consequences when it advantages them but not when it doesn't (that is a paraphrase, not a quote).
Cane regained his footing here a bit and stated that the case deals with situations of a business traveler who is primarily employed in another state. If an employee is hired just to come to California to work from another state but doesn't have a primary employment relationship with the same employer in another state, California law would apply. He didn't say (but probably should have said) that it was not realistic that employers are going to repeatedly fly employees from their Minnesota office to California for two-week stints to avoid overtime because the cost of transporting and housing them in California would swamp the savings from avoiding daily overtime.
Cane reiterated that if the rule is that you suffer more punishing regulation by being headquartered in California, then you are encouraging employers to relocate their headquarters to Arizona. That is not in California's interest.
Cane then briefly turned to issue (2). He challenged the notion of the rock throwing analogy by stating that where an employee who resides, works and is paid outside California (and may have never even been to California), you cannot say that the violation of the law happened in California. Even if a decision to classify the employee as exempt was made by someone in California, the "violation" is having the employee work more hours than 40 under the FLSA (which happens outside California) and then paying the employee no overtime pay (which happens outside California).
The rebuttal went a bit better for Oracle as Charles Russell had to backpedal from a couple points he made. Justice Werdegar did most of the questioning and was rather tough on Russell.
Justice Werdegar said she was troubled if it was true that no company follows the rule that Sullivan was advocating of paying employees under California law when they visit California.
Russell denied that there was any factual basis in the record for Cane's assertion of that alleged "fact." He claimed that Cane essentially made it up. I suspect there were statements in industry amicus briefs without evidence actually being part of the appellate record.
Justice Werdegar then asked whether the Restatement really announced a rule that the law that governs is where the employment relationship is principally based.
Russell conceded that was the common-law standard, but stated that the common law does not apply here. Under Martinez v. Combs, the IWC regulations trump the common law (unclear which IWC regulation he was referring to).
Justice Werdegar then asked whether what Justice Kennard has said was true. Was he conceding that different rules would apply if the company was not headquartered or principally based in California?
Russell stated that he made no such concession, but rather just stated that the Court did not need to reach that issue to decide the case (this is what Cane had also pointed out). Russell stated the laws that apply to an employer are the FLSA and the law of the state where the employee works.
Justice Werdegar then asked whether that meant that employees who work stints in multiple different states are governed by the different state law wherever they happen to work?
Russell somewhat sidestepped that question and stated that it wasn't a burden to make employers comply with California law because complying with California law generally has you comply with all states' laws (note, this is actually not true in all circumstances -- e.g. commission sales exemption is broader under California law than under FLSA; tip-pooling laws more onerous in Massachusetts than California).
Justice Werdegar finally asked Russell a question about issue (2). She asked if it really was a violation of California law if an employee who worked totally outside California experiences an FLSA violation, even when the only contact to California was that the company's headquarters is in California?
Russell said, yes, and said that similar conclusions were reached in Wersheba v. Apple and Norwest. So long as the bad conduct occurred in California, UCL applied. None of the justices explored the question of whether "misclassification" is bad conduct in California, or whether the conduct is where the work is performed and where the employee is paid.
Justice Boren then asked "what about the statute of limitations?" Russell stated that the UCL borrows the violation of the underlying law and applies its own (4-year) statute of limitations. So the UCL's statute of limitations would apply regardless of the statute of limitations for the underlying law. On the other hand, the UCL has lesser remedies than some of the underlying laws it borrows. I'm not sure that is what Justice Boren was asking.
As stated above, except perhaps Justice Werdegar, the justices who spoke seemed uniformly skeptical of Oracle's position that employees who visit California to work are governed only by the state law from the state where they principally worked. It appeared that Justice Baxter was not accepting the notion that this was not a residence issue, but an issue of where the primary employment relationship was. If forced to bet, I'd predict 6-1 or 7-0 for Sullivan on that issue.
The only questions asked about the nationwide UCL/FLSA claim seemed to question the notion of applying California law to employees who worked totally outside California. Justice Boren's questions suggested that he may be concerned about this issue. Justice Werdegar expressed at least some skepticism of the notion of applying California law to employees working out of state who experienced a violation of federal law. Five of the seven justices made no comment whatsoever on the issue though, so there is a lot more ambiguity. If forced to bet, I'd bet they follow the Ninth Circuit's original ruling and state that the UCL cannot apply to create a nationwide UCL/FLSA class under the facts of the case.