Seyfarth Synopsis: Employers have been scammed into sending sensitive W-2 information to malicious third parties. This article outlines the key steps California employers must immediately take if subject to this unfortunate event.

In 2003, California became the first state to enact a data breach notification law: the California Data Protection Act. Since then, over 30 states have enacted similar statutes and, in recent years, California has enacted a number of amendments to its original law.

Data breaches often result from “phishing” scams. These scams usually arise when a fraudulent email message that appears to be legitimate is sent to a human resources manager or payroll employee requesting the previous year’s W-2 statements. In reality, the email is a phishing scam sent by a third party. The IRS has recognized the detrimental and costly impact these scams have    on employers, employees, and the tax system. In 2016, the IRS issued an alert to payroll and human resource professionals, advising, “If your CEO appears to be emailing you for a list of company employees, check it out before you respond.” The IRS gave examples of the details contained in these emails:

  • “Kindly send me the individual 2015 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review.”
  • “Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary)?”
  • “I want you to send me the list of W-2 copy of employees wage and tax statement for 2015, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.”

www.irs.gov/newsroom/irs-alerts-payroll-and-hr-professionals-to-phishing-scheme-involving-w2s

It usually is not until after the recipient attaches the requested information to the email and hits “send” that the employer realizes that it has been the victim of a scam. Once this occurs, employers must promptly act.

Who is Covered?

California’s data protection notification law covers any entity that does business in California and either (1) owns or licenses computerized data that includes personal information or (2) maintains computerized data that includes personal information that the person or business does not own. The law also protects everyone in California, including its residents and any employees working in the state.

How is “Personal Information” Defined?

The law defines “personal information” to include an individual’s first name or first initial and last name in combination with one or more of the following (when either the name or the data elements are not encrypted):

  • social security number,
  • medical information, which means information regarding an individual’s medical history, mental or physical condition, or medical treatment or diagnosis by a health care professional,
  • information collected through an automated license plate recognition system,
  • driver’s license number or California identification card number,
  • health insurance information, which means an individual’s health insurance policy number or subscriber number, any unique identifier used by a health insurer to identify the individual, or any information in an individual’s health insurance application or claims history, including any appeals records, and
  • any account number or credit or debit card number in combination with any security code, access code or password allowing for access to the individual’s financial account.

“Personal information” also includes a user name or email address, in combination with a password or security question and answer that would permit access to an online account.

An employer scammed into disclosing W-2 statements will have disclosed “personal information” because those statements contain employee names and social security numbers.

Notices are not required if the information is encrypted, which means the information has been “rendered unusable, unreadable, or indecipherable to an unauthorized person through a security technology or methodology generally accepted in the field of information security.” That said, notices are required if there is reason to believe that any encryption key or security credential has been acquired by an unauthorized person and there is reason to believe the key or credential could render the personal information readable, decipherable, or usable.

What Must a Covered Employer Do If A Breach Occurs?

  1. Contents of Notice

An employer affected by a breach must provide a specific notice to affected individuals. The notice must be labeled “Notice of Data Breach” and have text that is no smaller than 10-point type font. The notice must contain the specific headings, which must be clearly and conspicuously displayed on the notice, and information:

  • What Happened”—a description of the incident, including the date on which it occurred (or an estimated date or a date range when it likely occurred);
  • What Information Was Involved”—the types of personal information likely to have been breached;
  • What We Are Doing”—a description of the employer’s response to the breach; and
  • What You Can Do” and “For More Information.” It is unclear what information must appear under these headers, but if the breach exposed a social security number or a driver’s license or California identification number, the law requires that the notice include the addresses and toll-free numbers of the three major credit bureaus (Equifax, Experian, and Transunion).

The notice also must contain:

  • the employer’s name and contact information,
  • whether the notice was delayed due to any law enforcement investigation, and
  • the date of the notice.

The notice may, but need to include:

  • information about what the employer has done to protect individuals whose information has been breached, and
  • advice on steps the individual may take for self-protection.

Different notices are required for a system security breach involving personal information for an online account or for login credentials of an email account.

  1. Timing of the Notice

Notice must be given in the most expedient time possible, without unreasonable delay. The notice may be delayed only if

  • law enforcement indicates that notification will impede a criminal investigation,
  • the employer needs time to determine the nature and scope of the breach, or
  • the employer needs time to restore the reasonable integrity of the data system.
  1. Manner of Notice

The notice can be in writing or by email (if done in compliance with the federal ESIGN Act). The law allows for substitute notice (email, website posting, and notification to major statewide media) if written notice will cost more than $250,000, if the affected number of individuals to be notified exceeds 500,000, or if the employer lacks sufficient contact information.

  1. Notice to the Attorney General

If more than 500 California residents will receive notice, the employer also must notify the California Attorney General and provide an electronic sample copy of the notice at https://oag.ca.gov/privacy/databreach/reporting. The sample notice should not include any personally identifiable information.

  1. Offer to Provide Identity Theft Protection Services

If the breach includes an individual’s name in combination with a social security number, driver’s license numbers, or California identification card number, then the employer must offer affected individuals identity theft protection and mitigation services. These services must be provided at no cost to the affected individual for no less than 12 months. The notice must contain information necessary for the individual to take advantage of the offer.

The California Attorney General’s Recommendations

The California Attorney General has issued annual reports analyzing data breach notices and providing recommendations to companies for implementing data breach plans, including recommending that companies take these steps:

  • Implement the Center for Internet Security’s Critical Security Controls as the “minimum level of information security” if they handle personal data. The Attorney General has stated that“[t]he failure to implement all the Controls that apply to an organization’s environment constitutes a lack of reasonable security.”
  • Implement “strong encryption” for personal information on laptops and other portable devices, and consider full encryption on desktop computers when not in use.
  • Encrypt digital personal information when moving or sending personal information out of their secure network.
  • Encourage individuals affected by a breach of social security numbers or driver’s license numbers to place a fraud alert on their credit files and make this option very prominent in their breach notices.
  • Make multi-factor authentication available on consumer-facing online accounts that contain sensitive personal information.
  • Provide training to employees and contractors on data security controls.
  • Improve the readability of breach notification letters.

What Employers Should Consider Doing

In the event of a data breach, employers must be ready to promptly respond. As a result, employers should consider taking proactive measures by reviewing and, if necessary, updating their current procedures for responding to a breach to ensure compliance with California law.  Employers also should consider these steps:

  • Appoint a team responsible for complying with California’s data breach notification requirements.
  • Review and, if necessary, strengthen safeguards for personal information to reduce the risk of a data breach.
  • Create template data breach notification letters.
  • Investigate and select an entity to provide identification protection services in the event of a breach requiring the provision of such services.
  • Train payroll and human resources professionals to inquire further any time they receive a request for employee information.

Nationwide employers also should stay abreast of the continual amendments to data breach notification laws in other states, because the employer must comply with the law of each state where an affected individual resides.