This Friday’s Five discusses five issues California employers should remember about whether they may require credit checks from applicants or employees.  And if employers can obtain the information, what additional considerations they should take into account when using this information for employment decisions and privacy concerns.

1.      Credit checks are different than background checks.

Since January 1, 2012, Labor Code section 1024.5 restricts which positions employers can require credit checks.  It is important to note that credit reports or credit checks are different than background checks.  The law defines “consumer credit report” as “any written, oral, or other communication of any information by a consumer credit reporting agency bearing on a consumer’s credit worthiness, credit standing, or credit capacity, which is used or is expected to be used, or collected in whole or in part, for the purpose of serving as a factor in establishing the consumer’s eligibility for: … (2) employment purposes….” See Civil Code section 1785.3(c).  It is important for employers to understand the difference between obtaining a credit report versus a more general background check.

2.      California employers can only preform credit checks for a limited number of positions.

Employers are only permitted to obtain consumer credit reports for applicants/employees who meet one of the following categories:

  • A managerial position (defined as an employee who meets the executive exemption set forth in the Industrial Welfare Commission’s Wage Orders).
  • A position in the state Department of Justice.
  • That of a sworn peace officer or other law enforcement position.
  • A position for which the information contained in the report is required by law to be disclosed or obtained.
  • A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person: (A) Bank or credit card account information. (B) Social security number. (C) Date of birth.
  • A position in which the person is, or would be, any of the following: (A) A named signatory on the bank or credit card account of the employer. (B) Authorized to transfer money on behalf of the employer. (C) Authorized to enter into financial contracts on behalf of the employer.
  • A position that involves access to confidential or proprietary information, including a formula, pattern, compilation, program, device, method, technique, process or trade secret that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from the disclosure or use of the information, and (ii) is the subject of an effort that is reasonable under the circumstances to maintain secrecy of the information.
  • A position that involves regular access to cash totaling ten thousand dollars ($10,000) or more of the employer, a customer, or client, during the workday.

 3.      If employers can conduct a credit check, employers must notify employees of certain information.

The law requires that the employer provide the following information to the applicant/employee prior to obtaining a consumer credit report:

 The notice shall inform the person that a report will be used, and shall identify the specific basis under subdivision (a) of Section 1024.5 of the Labor Code for use of the report. The notice shall also inform the person of the source of the report, and shall contain a box that the person may check off to receive a copy of the credit report. If the consumer indicates that he or she wishes to receive a copy of the report, the user shall request that a copy be provided to the person when the user requests its copy from the credit reporting agency. The report to the user and to the subject person shall be provided contemporaneously and at no charge to the subject person.

 4.      If the position is denied based upon the applicant’s/employee’s credit information, the employer must provide an additional notification.

The law requires that if an applicant/employee is denied employment “either wholly or partly” because of information obtained in a consumer credit report, the employer must provide the following information:

 Whenever employment involving a consumer is denied either wholly or partly because of information contained in a consumer credit report from a consumer credit reporting agency, the user of the consumer credit report shall so advise the consumer against whom the adverse action has been taken and supply the name and address or addresses of the consumer credit reporting agency making the report. No person shall be held liable for any violation of this section if he or she shows by a preponderance of the evidence that, at the time of the alleged violation, he or she maintained reasonable procedures to assure compliance with this section.

 5.      Employers must keep all financial information confidential. 

Disclosure of credit information obtained for an applicant or employee would be a violation of the individual’s right of privacy.  Therefore, employers must take steps to safeguard this information and ensure that only employees who have a need to know have access to the information, and that these employees understand that it is confidential information that cannot be shared even with other employees in the company that do not have a reason to know the information.

Based on last week’s post about the lawsuit filed against LinkedIn alleging that it violated the federal Fair Credit Reporting Act (FCRA), I thought it would be good to point out a few issues the arise when employers conduct background checks.  This article is not comprehensive, and this area of the law is very detailed, but the article is to remind employers to use caution when implementing these policies, as the exposure for violations could be huge.

1.      Treat everyone equally.

If an employer makes the decision to obtain background reports for applicants or employees, the practice of obtaining the reports needs to be uniformly applied.  Simply by complying with the federal and state requirements for background reports and credit checks does not shield an employer from discrimination claims or other claims that the practice used by the employer is illegal.

2.      California employers can only conduct credit checks (which are different from background checks) for certain types of employees.

Since 2012, California employers can only perform credit checks on employees who meet very specific categories.

 3.      If using a third-party to perform the background check, federal and state law must be complied with. 

Generally speaking, three applicable laws apply to California employers who perform background checks: the federal Fair Credit Reporting Act (FCRA), California Investigative Consumer Reporting Agencies Act (ICRAA), and the California Consumer Credit Reporting Agencies Act (CCRAA).  Just as the three names of the statutes indicate, the laws are complex and are very detailed.  For example, the FCRA defines a “consumer report” as “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for…employment purposes….”  Alternatively, California’s ICRAA uses the term “investigative consumer report”, and this pertains to generally the same items as the FCRA but not credit reports.  California’s CCRAA applies to credit reports, and defines the term “consumer credit report” to refer to credit reports and credit worthiness of an employee.  As one can easily see, the interaction of these three laws becomes very complex, and is not an area that most employers feel comfortable wading into without experienced legal counsel.

The laws generally require employers to:

  1. Obtain written authorization from the employee to conduct the background check
  2. Provide notice about background checks
  3. If taking an adverse employment action based on the information obtained through the background check, additional notices must be provided to the employees.

For example, before the employer takes an adverse employment action, they must provide the employee with a notice that includes a copy of the consumer report being relied upon in the decision.  The employer must also provide a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act”.

After the adverse employment action has been taken, the employer must provide certain information to the employee, such as:

  • The employment decision was taken because of the information in the report
  • The name, address, and phone number of the company that compiled the report
  • The company that compiled the report did not make the hiring decision, and
  • That the employee has the right to dispute the accuracy or completeness of the report, and to get an additional free report from the reporting company within 60 days.

As explained above, California employers can only perform credit checks for a very limited set of positions, and cannot perform a credit check on every employee.  In addition, the CCRAA requires additional disclosures to the employee if a credit check is performed.  See Cal. Civ. Code section 1785.20.5.

4.      Even if conducting a background check in-house, if an employer searches public records, these records must be disclosed to the employee within seven days.

Generally, if the employer conducts the background checks itself, the FCRA, ICRAA and CCRAA do not apply to the process.  One exception to this rule is that the ICRAA requires that if the employer searches “public records” the employer must produce a copy of the public record to the employee within seven days of receiving the information (this applies to records received either in written or oral form).  “Public records” are defined as “records documenting an arrest, indictment, conviction, civil judicial action, tax lien, or outstanding judgment.”

 

5.      Employers are required to provide certain notice to the third-party conducting the background check.

Employers using outside credit reporting agencies must provide a certification to the reporting agency that the employer obtained the permission from the applicant/employee to obtain a background report, complied with the FCRA, and does not discriminate against the applicant or employee or otherwise use the information for an illegal purpose.

This is a very brief and general introduction to the laws that apply to background checks in the employment setting.  Here are some resources for employers to learn more about their requirements under federal law:

The Fair Credit Reporting Act & social media: What businesses should know (FTC)

Background Checks: What Employers Need to Know (FTC)

The interaction between the federal FCRA, and California’s own requirements under the ICRAA and CCRAA adds another level of complexity to the analysis.  It is important for employers to review these laws closely to ensure compliance, and it is highly recommended to have experienced legal counsel review the practices.

California’s new labor code provision severely restricts an employer’s ability to conduct credit checks on employees. Labor Code 1024.5, which took effect on January 1, 2012, only allows employers to conduct credit checks for employees who meet one of the following categories:

    • A managerial position.

    • A position in the state Department of Justice.

    • That of a sworn peace officer or other law enforcement position.

    • A position for which the information contained in the report is required by law to be disclosed or obtained.

    • A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person: (A) Bank or credit card account information. (B) Social security number. (C) Date of birth.

    • A position in which the person is, or would be, any of the following: (A) A named signatory on the bank or credit card account of the employer. (B) Authorized to transfer money on behalf of the employer. (C) Authorized to enter into financial contracts on behalf of the employer.

    • A position that involves access to confidential or proprietary information, including a formula, pattern, compilation, program, device, method, technique, process or trade secret that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from the disclosure or use of the information, and (ii) is the subject of an effort that is reasonable under the circumstances to maintain secrecy of the information.

    • A position that involves regular access to cash totaling ten thousand dollars ($10,000) or more of the employer, a customer, or client, during the workday.

A “managerial position” is defined as an employee who qualifies for the executive exemption set forth in the Industrial Welfare Commission’s Wage Orders. The test of who qualifies as an exempt executive is very detailed, and it is determined by the amount of pay and actual duties the employee performs. So employers need to approach this prong with caution and obtain guidance to ensure the employee actually qualifies as an exempt executive.

The new law also added the requirement under California Civil Code section 1785.20.5 that employers must notify the employee in writing of the basis in Labor Code section 1024.5 as set forth above that applies to permit the employer to perform the credit check. The new law does not change the other obligations already in effect that employers had to comply with prior to conduct a credit check. These obligations include informing the employee in writing that a credit check would be performed, the source of the credit check, and that the employee may receive a free copy of the credit check. Finally, if an adverse employment action is taken by the employer based on the report, the employee must be notified of the name and address of the reporting agency making the report.