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CIRCUIT COURT ALLOWS ORACLE TRAINERS TO PROCEED WITH OVERTIME LAWSUIT

December 20, 2011

Three former Oracle Corp. employees who trained the software giant’s customers in various states may proceed with their California law overtime pay claims regarding work performed in that state as nonresidents, the U.S. Court of Appeals for the Ninth Circuit held Dec. 13 (Sullivan v. Oracle Corp., 9th Cir., No. 06-56649, 12/13/11).

The court reversed summary judgment to Oracle on the three plaintiffs’ claims seeking damages for failure to pay overtime under the California Labor Code and a similar claim under the state’s unfair competition law, predicated on the alleged Labor Code violations. But the court affirmed summary judgment to the company on two plaintiffs’ separate unfair competition law claims, based on work they performed in states other than California and predicated on Oracle’s alleged violations of the Fair Labor Standards Act.

The court had made the same rulings in 2008 but then withdrew its opinion and certified to the California Supreme Court certain questions regarding the applicability of the Labor Code and the unfair competition law. The state court answered that both laws cover overtime work performed in California for a California-based employer by nonresidents and that the unfair competition law does not apply to alleged FLSA overtime violations outside of the state.

Oracle argued that, if the Labor Code covered the plaintiffs’ work in California, it violated the 14th Amendment’s due process clause and the dormant commerce clause, but the Ninth Circuit disagreed. As to the due process clause, Oracle has sufficient contacts with California to allow application of the Labor Code in the case, Judge William A. Fletcher wrote for the court. Regarding the dormant commerce clause, he found that California applies its Labor Code to in-state work performed by state residents in the same manner as in-state work performed by nonresidents.

Delaware corporation Oracle has its principal place of business in California. It previously classified its instructors who trained customers in software use as “teachers” exempt from the overtime provisions of both the Labor Code and the FLSA.

Donald Sullivan worked as an Oracle instructor from June 1998 to January 2004, Deanna Evich was an instructor from August 1999 to July 2004, and Richard Burkow was an instructor from March 1998 to April 2002. Sullivan and Evich lived in Colorado, while Burkow resided in Arizona. All three primarily worked outside California.

A group of plaintiffs sued the company in 2003, alleging that Oracle misclassified the instructors as exempt from overtime pay. The U.S. District Court for the Central District of California certified one class of plaintiffs seeking damages under the Labor Code and a second class of plaintiffs seeking damages under the FLSA. The parties settled the lawsuit with the exception of California law claims “for periods of time they may have worked in the State of California when they were not a resident of the State.” The court dismissed those claims without prejudice.

Oracle reclassified its California-based instructors and started paying them overtime in 2003 pursuant to the Labor Code, and the company reclassified all of its United States-based instructors and began paying them overtime in 2004 pursuant to the FLSA. But the company did not retroactively compensate Sullivan, Evich, or Burkow for pre-reclassification overtime they had worked.

The three plaintiffs brought Labor Code claims that Oracle failed to pay overtime to instructors who resided outside California for work performed in the state, as well as claims for violation of California’s unfair competition law, which was predicated on the alleged Labor Code violations. Evich and Burkow also filed a claim for a different violation of the unfair competition law, predicated on FLSA violations, in which the two plaintiffs alleged they are entitled to overtime pay for work performed throughout the United States.

The district court granted summary judgment to Oracle on all three claims. The court ruled that the Labor Code and the unfair competition law does not cover workers who live and work primarily outside California, and that applying the Labor Code in that manner would breach the due process clause.

On appeal, the Ninth Circuit reversed the district court’s decision as to the three plaintiffs’ Labor Code and unfair competition law claims, but it affirmed the lower court’s holding on Evich’s and Burkow’s separate unfair competition law claims. The appeals court found that the Labor Code and the unfair competition law covered the overtime work that Sullivan, Evich, and Burkow performed in California. However, the unfair competition law does not apply to overtime work performed outside the state, even if Oracle violated the FLSA, the court said.

After both parties filed rehearing petitions, the Ninth Circuit withdrew its opinion and certified three state law questions to the California Supreme Court.

As to whether the Labor Code applies to overtime work performed in California for a California-based employer by state nonresidents, the state court answered that it applies. Regarding whether the unfair competition law covers such overtime work, the court said it does. Finally, the court responded that the unfair competition law does not apply to overtime work performed outside California for a California-based employer by state nonresidents if the employer ran afoul of FLSA overtime requirements.

Oracle contended that the Labor Code’s overtime requirements do not cover work performed in California by Colorado or Arizona residents and that the unfair competition law also does not apply to such work. Meanwhile, Evich and Burkow argued that the unfair competition law applies to alleged FLSA violations outside California. But the Ninth Circuit said the state supreme court’s related answers are conclusive as to both parties’ arguments.

Additionally, Oracle contended that, if the Labor Code did apply to the plaintiffs’ California work, the code violated the 14th Amendment’s due process clause and the dormant commerce clause.

The U.S. Constitution typically does not bar a state court’s application of its own state’s law, the Ninth Circuit responded. It pointed to the U.S. Supreme Court’s holding in Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), that, for a state’s law to be applied constitutionally in a particular case, the state must have “a significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.”

In light of these principles, the appeals court disagreed with Oracle’s due process clause theory. “The contacts creating California interests are clearly sufficient to permit the application of California’s Labor Code in this case,” the court said. “The employer, Oracle, has its headquarters and principal place of business in California; the decision to classify Plaintiffs as teachers and to deny them overtime pay was made in California; and the work in question was performed in California.”

The court then rejected Oracle’s dormant commerce clause argument that applying the Labor Code to the plaintiffs’ work in California would lead to increased economic and administrative burdens on businesses that operate across state lines. California treats state residents and nonresidents equally with respect to its application of the Labor Code to work performed in the state, the court found.  12.20.2011