The development comes as a shock to many state workers.
"We were just talking earlier that it's not going to happen. All of sudden you gave us the bad news. What's next. No job?" said Eden DeLaCruz, a state worker.
The ruling is a second victory for Schwarzenegger on the minimum wage issue.
"It underscores the fact that we need to get a budget as quickly as possible. We don't want to pay minimum wage," said Aaron McLear, the governor's press secretary.
A budget agreement won't be that quick, considering most lawmakers have left Sacramento. They're not calling it "summer recess" because they could be called back anytime.
State Controller John Chiang is not convinced he has to follow the order. He's exploring legal options, including an appeal to the Supreme Court. He thinks the ruling left some room to exempt antiquated payroll systems like California's.
"The payroll system was designed to do the right thing, to pay people the proper wage for the hours earned. Not for political failure when the governor and Legislature don't get a budget enacted on a timely basis," Chiang said.
"He can't figure out his computers? That's absurd. He's been in office for four years. I think that's long enough to do your job. Incompetence is not a defense," argued McLear.
While the governor and the controller posture, state workers like health physicist Valerie Brown are caught in the middle.
After enduring 46 days of unpaid furloughs and spending most of her savings, she's out of options if she's paid $7.25 an hour.
"Selling the house, we've been engaged in that. We're working, trying to get assets from family. They're strapped too. I don't know what we're going to do, to be honest with you," said Brown.
If he wanted to, the governor could ask a judge to find Chiang in contempt of court if he continues to defy the order and fine him for every day of defiance. Workers would receive back-pay once the budget is passed.