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Up-to-date information for employers on topics and issues that may affect workplace operations. The posts are current as of the date of the posting.

STATE EMPLOYMENT CREDIT CHECK LAW TAKES EFFECT

by Jennifer Brown Shaw and Timothy L. Reed | The Daily Recorder | Jan 17, 2012

Introduction

California employers may wish to obtain employees’ and applicants’ credit information as part of their hiring processes and for other employment-related reasons. Assembly Bill 22, which took effect on January 1, 2012, significantly restricts employers’ ability to procure credit reports. The new law specifically applies to credit checks and does not address criminal record and other background checks.

Laws Governing Use of Credit Reports for Employment-Related Purposes

Both federal and state laws govern the procurement and use of credit reports for employment purposes. Employers must comply with both the federal Fair Credit Reporting Act (“FRCA”) and California’s Consumer Credit Reporting Agencies Act (“CCRAA”).

The FRCA requires an employer to disclose in writing that it will be obtaining a credit report for employment purposes. The employer generally must obtain an applicant’s or employee’s written consent before obtaining a credit report.

Before taking any adverse action (e.g., refusing to hire a prospective job candidate), the FRCA requires an employer to provide notice of the possible adverse action and give the applicant or employee a chance to correct an error. The employee must also provide the employee with a description of the employee’s rights under the FRCA and provide a copy of the report when it takes an adverse action.

Similarly, the CCRAA requires an employer that requests a credit report for employment purposes to provide written notice to the employee or prospective employee whose information is being sought. That notice must contain information regarding the source of the report and a box the employee may check to receive a free copy of the report. Should an adverse action be taken based on the contents of a credit report, an employer must inform the employee that the action was taken based on the report and provide contact information for the consumer credit reporting agency making the report.

Assembly Bill 22

Assembly Bill 22 is codified at section 1024.5 of the California Labor Code. It prohibits an employer from using an applicant’s or employee’s consumer credit report, except in limited circumstances. An employer may obtain a credit report only for the following types of jobs: (1) managerial (i.e., one that falls under the executive exemption to minimum wage and overtime law); (2) a position for which credit information must be obtained or disclosed by law; (3) a job involving regular access to certain personal information (i.e., bank or credit card account information, social security numbers, or dates of birth) for any purpose other than routine solicitation and processing of credit cards in a retail establishment; (4) a position in which an employee is or would be a named signatory on an employer’s bank or credit card account, or would be authorized to transfer money or enter into financial transactions on behalf of an employer; (5) a position involving access to confidential or proprietary information; (6) a position involving regular access to $10,000.00 or more of cash; (7) a position in the California Department of Justice; or (8) a law enforcement position.

AB 22 also requires employers to provide employees notice of the type of position for which the report is being sought.

AB 22 does not prescribe the penalties for violations. However, violation of California’s CCRAA can result in significant civil liability and punitive damages when credit information is unlawfully obtained or used. Civil Code section 1785.31 allows for recovery of actual damages, lost wages, emotional distress, and certain punitive damages, as well as attorney’s fees and litigation costs.

Tips for Employers

An employer seeking credit information for an applicant or employee in California must ensure the employee whose information is being sought falls under one of the categories set forth in AB 22. There may be disputes over matters such as whether the employee is properly classified as exempt (and therefore should not have been subjected to credit reports). Therefore, it pays to be conservative regarding the positions for which credit information is sought.

If AB 22 permits checking credit, employers must adhere to the procedural requirements set forth in both the FRCA and CCRAA.

Finally, the Equal Employment Opportunity Commission has expressed concern that credit checks may have an adverse impact on some minorities. Therefore, employers should ensure that credit checks are “job related and consistent with business necessity.” Complying with AB 22 will aid that effort. However, compliance with AB 22 will not mean a credit check could not be unlawful under anti-discrimination laws.

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