In Sakkab v. Luxottica Retail North America, Inc., the Ninth Circuit affirmed the California Supreme Court’s Iskanian v. CLS Transportation Los Angeles, LLC decision (originally summarized in our June 2012 issue), which held that pre-dispute arbitration agreements between employers and employees cannot require waiver of representative claims under PAGA.

Sakkab filed a putative class action lawsuit against Luxottica alleging that the company misclassified its employees as exempt in order to avoid paying overtime and providing meal and rest breaks. The district court granted Luxottica’s motion to compel arbitration and dismissed Sakkab’s complaint based on the arbitration provision in its Retail Associates Guide that Sakkab signed. The provision contained a waiver of collective or representative actions. The court relied on the United States Supreme Court’s decision in AT&T Mobility LLC v. Concepcion (originally summarized in our April 2011 Litigation Alert), which held that the Federal Arbitration Act (“FAA”) would preempt a state rule regarding waiver of PAGA claims.

By the time the Ninth Circuit heard Sakkab’s appeal, the California Supreme Court had decided Iskanian, which held that PAGA waivers are unenforceable. In coming to the ultimate conclusion that pre-dispute agreements that waive PAGA claims are unenforceable under California law, and that the FAA does not preempt this rule, the Ninth Circuit analyzed the purpose of PAGA. PAGA was enacted to provide civil penalties for certain California Labor Code violations that previously carried only criminal penalties. Further, it allowed employees, on behalf of the state (the Labor Workforce and Development Agency) to recover such penalties and keep a percentage of the penalties it recovered, with the remainder being given to the state. This alleviated strained state resources, which did not have the bandwidth to pursue such Labor Code violations.

The court noted that “a law established for a public reason may not be contravened by private agreement.” It agreed with the Iskanian court that agreements with PAGA waivers would harm the state’s interests in enforcing the Labor Code and receiving civil penalties that serve as a deterrent for labor violations. In addition, it stated that Congress’s intent in enacting the FAA was not to allow the contracting parties’ expectations to “trump” any and all other interests.

In reversing and remanding the lower court’s decision, the court noted that Sakkab did not argue that the entire arbitration provision should be rendered void due to its unlawful PAGA waiver and tasked the lower court with deciding this issue and whether his non-PAGA claims should be litigated or arbitrated.

Employers should examine their arbitration agreements to ensure compliance with this ruling, which provides further clarity that PAGA waivers are not enforceable in California.