New Law Restricts Employer Use of Consumer Credit Reports for Background Checks

October 2011

On October 9, 2011, Governor Jerry Brown signed Assembly Bill 22 (“AB 22”) which may greatly affect the hiring practices of many employers throughout the state. AB 22, which takes effect on January 1, 2012, prohibits most private employers from obtaining consumer credit reports regarding current or prospective employees unless the employee falls within an excepted category specifically identified in the bill (see exceptions below). The bill also requires employers to provide written notice, including an explanation of why the employer is seeking the report, to the applicant whose credit report is sought. With the passage of AB 22, California joins several states which currently restrict the rights of employers to access employee credit reports including Washington, Oregon, Maryland, Illinois, Hawaii, and Connecticut.

Prior to the passage of AB 22, an employer could request a credit report for employment purposes so long as it presented prior written notice of the request and informed the employee or applicant if it took any adverse action, including refusal to hire or promote the employee, based on the report. Consumer credit reports are documents that track an individual’s creditworthiness and reduce the data into a score, known as a FICO score, which indicates the likelihood that a consumer will pay his or her bills. Credit reports are often divided into sections. The first section typically contains personal data about the individual including his or her address, social security number, and employment history. The second section provides a summary of the individual’s credit history including the number and types of accounts held by the person, the number of accounts that are past due, and the number of accounts in good standing.

Employee credit reports are often used by employers to evaluate and screen potential hires. Consumer credit reports serve legitimate employment purposes by providing background information about potential hires who might have unsupervised access to large amounts of cash and/or valuable non-financial assets. For many employers, employee credit reports are one of the only tools available to objectively learn about an individual’s past behavior and character as well as predict possible future behavior. A 2010 survey from the Society for Human Resource Management found that 60 percent of employers polled conducted credit checks on some of their employees.

Opponents of the bill, argue that this restriction will place California companies at a competitive disadvantage. It is important to note that in the past, institutions including the Federal Deposit Insurance Corporation have championed the use of consumer credit reports by employers in order to minimize the risk of theft, litigation, and loss. The U.S. Chamber of Commerce estimates that one third of all corporate bankruptcies are a direct result of employee theft. Most California employers will no longer be able to obtain what may be priceless information about applicants’ overall dependability, trustworthiness, and integrity—qualities essential to superior job performance.

The bill includes a number of exceptions including exceptions for:

• Individuals involved in or seeking employment in a financial institution;
• Individuals employed by or seeking employment with law enforcement or the state Justice Department;
• Individuals in or applying for certain exempt managerial positions (meaning those who are exempt from overtime and work in semiprofessional, professional, technical, clerical, mechanical or similar fields);
• Individuals who have regular access to at least one person’s bank or credit card account information, date of birth, and Social Security number (with the exception of those who routinely solicit and process credit card applications at retail stores);
• Individuals who have regular access to their employer’s confidential and proprietary information (including trade secrets);
• Individuals who are authorized to transfer money, enter into financial contracts, or sign checks or use credit cards on behalf of their employer;
• Individuals who have regular access to more than $10,000 in cash;
• Individuals in positions for which the information contained in the report is required by law to be disclosed or obtained;

What this means for you:

Employees who are damaged as a result of an employer’s violation of AB 22 may bring suit against their employers.  However, an employer is not liable if it can show, by a preponderance of the evidence, that it maintained reasonable procedures to ensure compliance with the restriction.

Employers who negligently violate the new law may be subject to fines and lawsuits by employees demanding loss of earnings, court costs, attorney’s fees, and actual damages.  Employers who willfully violate AB 22 may be subject to punitive damages, in addition to the damages listed above, in the form of fines of at least $100 and less than $5,000 for each violation, and any other relief the court deems proper.

Employers should adjust their screening and evaluation processes for new hires so practices are in compliance with the law when it takes effect on January 1, 2012.

Employers should not request consumer credit reports unless they are certain the employee falls within one of the exceptions listed in the bill.

Even when employers are permitted to obtain credit reports because the position falls within one of the exceptions listed above, employers must first provide written notice to the applicant or employee which specifies the legitimate basis for requesting the report. The notice must include a box for the applicant to check if he or she would like to request a copy of the report. If the employee requests a copy, the employer must provide the report free of charge at the same time the employer receives its own copy. If employment or promotion is denied based on the information in the credit report, the employer must inform the applicant of this and provide the name and address of the credit reporting agency that supplied the report.

The law does not prohibit employers from seeking background checks from credit reporting agencies and other firms that detail the applicant’s employment and salary information, so long as those reports exclude credit-related information.

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.