A method includes receiving a first packet having a first virtual local area network (VLAN) identifier (ID) directly from a first virtual switch using a first physical overlay switch located at an edge of an internet protocol (IP) network, encapsulating the first packet with an overlay header and tunneling the first encapsulated packet via Layer-3 operations across the IP network to a second physical overlay switch in response to a determination that a source of the packet is physically separated from a destination of the packet by the IP network, receiving a second encapsulated packet having a second overlay header from the second physical overlay switch, de-encapsulating the second encapsulated packet to create a second packet having a second VLAN ID, and sending the second packet having the second VLAN ID directly to the first virtual switch operating in the first hypervisor domain.