SAN FRANCISCO—A California Supreme Court ruling that employees who work in the state for California-based employers are entitled to overtime pay is likely to cause significant administrative burdens for some employers, observers say.

However, in a unanimous ruling based on the U.S. Fair Labor Standards Act of 1938, the California Supreme Court also decided that employees of California-based companies cannot collect overtime for work they perform in other states.

The ruling in Donald Sullivan et al. vs. Oracle Corp et al. concerned three employees of Redwood Shores, Calif.-based Oracle who lived in Colorado and Arizona, but spent time working in California.

The state high court's ruling followed a 2008 decision by the 9th U.S. Circuit Court of Appeals in San Francisco, which made essentially the same decision. However, it subsequently withdrew its opinion and asked the state Supreme Court to decide the underlying questions of California law.

Nonresidents

In its ruling, the state high court held that the labor code's overtime provisions do apply to work performed in California by nonresidents. “California's overtime laws apply by their terms to all employment in the state, without reference to the employees' place of residence,” the court ruled. “That the overtime laws speak broadly, without distinguishing between residents and nonresidents, does not create ambiguity or uncertainty,” the ruling said.

However, California overtime laws do not apply to overtime work performed outside the state for California-based employers by workers who are primarily employed outside of the state. “Neither the language of (the state's unfair competition law) nor its legislative history provides any basis for concluding the legislature intended the UCL to operate extraterritorially,” according to the state high court's ruling.

Employees in other states

Enzo Der Boghossian, a partner with law firm Proskauer Rose L.L.P. in Los Angeles, said while the ruling addresses only the case of employees who live in Arizona and Colorado, ”there's no question” it would apply to employees who live in other states and work in California as well.

The ruling is clear that it applies only to employees who put in a full day's work in California, and not, for instance, to the interstate truck driver who “may fall under the jurisdiction of a number of different state labor laws” within a day's time, Mr. Der Boghossian said.

“The total impact of the case remains to be seen, but for the time being, it's safe to say that California-based employers who regularly employ out-of-state resident employees and have those employees perform work occasionally in California will have to ensure that they're paying proper overtime under California state law to those employees for the work they perform” in the state, Mr. Der Boghossian said. “It's going to create a potential accounting and payroll nightmare for some companies.”

Laura Maechtlen, a partner with law firm Seyfarth Shaw L.L.P. in San Francisco, agreed that the ruling means some California employers must apply a patchwork of overtime laws, “which will probably be a nightmarish administrative burden for some employers.”