By Pam Devata and Dana Howells

Complying with the federal Fair Credit Reporting Act (the FCRA) is not easy. Compliance with both the FCRA and California restrictions on credit and background checks is much more challenging. Given California’s extra-strength privacy protections and penchant for workplace regulation, it is not surprising that California has peculiarities when it comes to credit and other background checks.  In Part 1 of a three part blog, we take a dive into credit checks—California style.

California is one of  a growing number of states with laws restricting use of credit history for employment. Effective January 1, 2012, California Labor Code Section 1024.5 generally prohibits the use of credit reports for employment purposes by private sector employers.  If an exception to Section 1024.5 permits an employer to use credit reports, California employers must comply with both the FCRA and the California Consumer Credit Reporting Agencies Act, which are not always congruent. 

Comparing and contrasting the FCRA with the California Consumer Credit Reporting Agencies Act

What FCRA requires—in a nutshell.  Prior to conducting a background check on an applicant or employee through a third party, an employer must:

• Provide a notice/disclosure to the employee/applicant that the employer will seek a credit report.  The disclosure must be clear, conspicuous, and made in a document consisting solely of the disclosure.  This is a huge area of class action litigation.
• Supply a copy of  “A Summary of Your Rights Under the Fair Credit Reporting Act.”
• Obtain written authorization/consent from the applicant/employee. 

Prior to taking adverse employment action against an applicant/employee based, in whole or in part, on a consumer credit report (or investigative consumer report—more about those in Part 2), employers must follow a two-step notification process required by the FCRA:

• Send a pre-adverse action notice with the specific language, a copy of the credit report and another copy of A Summary of Your Rights Under the Fair Credit Reporting Act;
• Wait a reasonable amount of time (five business days, according to one Federal Trade Commission pronouncement; and
• If the information in the report is not disputed and nothing else changes the decision, send a final adverse action notice, which also requires specific language.

California complications—in a nutshell.  Using credit reports for employment is generally prohibited in California–so the disclosure form must state which exception in Labor Code 1024.5 permits the employer to seek a credit report.

If an exception to  Labor Code Section 1024.5 allows an employer to obtain a credit report, an employer must give written notice to the employee/applicant informing them that such a report will be used, and the source of the report.  

Above and beyond the FCRA requirements outlined above, the California notice must contain:

• a check-box for applicants/employees to indicate whether they want a copy of the credit report.  If this box is checked, the employer must request that  a copy of the credit report be provided to the employee/applicant simultaneously with the employer’s receipt of the credit report. This report must be provided to the applicant employee—free of charge—regardless of whether adverse action is taken or not;
• the specific name, address and website of the consumer reporting agency (“CRA”) (and, if a national CRA, a toll free number);
• information that the applicant/employee has a right to find out whatever is in the CRA’s file. This can be done by personal inspection, by telephone, or by requesting the CRA to send a copy of the file via certified mail. California applicants/employees must also be advised of their right to bring someone else along to the inspection and the ground rules if they do. 

A one-time continuing authorization to obtain updated credit reports throughout the employment relationship is possible under the FCRA, but the effectiveness of a one-time authorization is not  clear under the California statute, which uses different language.  Applicant/employees must receive written notice prior to a request for a consumer credit report which will be used for employment purposes.

Practical tip: California’s ban on using credit reports for employment purposes (absent an exception) does not expressly include verification of past employment or income, reference checks and the like.  If an employer wants a background check, but is not seeking credit information, an employer may want to reassure California applicants/employees that their credit information will not be sought.  

Many standard FCRA disclosure forms reference “credit history” as included in the report.  In California, unless an exception to Labor Code 1024.5 applies, an employer may want to avoid stating they will seek credit information, and potentially take one or more of these additional actions:

1. Include an explicit statement that no credit information will be sought. Employers who check credit for some positions and not others can use a check-box indicating that credit will/will not be checked.
2. Counteract the misimpression that credit history will be included (caused by the FCRA disclosure) by adding a statement such as the following: “Credit history will only be requested where consistent with applicable law and where such information is substantially related to the duties and responsibilities of the position for which you are applying.”   
3. For financial institutions, even though they may be subject to an exception, include an express statement that the credit report will sought based on the company’s status as a covered financial intuition under applicable federal law and the relationship of credit history to the duties and responsibilities of the position.

Pre-adverse Action and Adverse Action Notices in California.

What if information appears on a credit report that makes an individual not qualified? California law is arguably simpler than the FCRA here, but it really doesn’t matter because employers have to follow the stricter FCRA steps of giving a pre-adverse action notice with a copy of the credit report and summary of rights notice.  

Whether the box requesting a copy was checked or not, the employer should provide the applicant/employee with a copy of the credit report with the pre-adverse action notice.  No pre-adverse action notice is specified in the California statute, but one is needed for FCRA compliance.  In California, whenever adverse action is taken based on a credit report, an employer should give applicants/employees notice advising them that employment is denied either wholly or partly because of information included in a consumer credit report from a CRA plus the name and addresses of the CRA.

We’ll examine other background checks in Checking Out Applicants: California Background and Criminal History Checks (Part 2) coming next week.

Edited by Julie Yap