Historically, employers have been free to obtain and use background information about an applicant or employee for employment purposes, except for minimal regulation by the federal Fair Credit Reporting Act and some states regarding how the information is obtained. Recently, however, states have begun to focus on the kind of information that is obtained in a background check and how that information is used against an applicant or employee. Reflecting that trend, several states have adopted employee-friendly state legislation restricting employers from obtaining and using credit information about an applicant or employee. The recent legislative attention paid to credit checks stems from the economic fallout attributable to the current recession. The financial hardship that many people have suffered as a result of the recession has contributed to increases in credit-card debt, delinquent loan repayments, home foreclosures, and bankruptcy. State legislators are concerned that employers are unfairly using such credit information to disqualify applicants and employees from jobs to which the credit information bears no reasonable relationship. This week California became the seventh state – joining Washington, Hawaii, Oregon, Illinois, Maryland, and Connecticut – to enact legislation regulating employers' use of credit information for employment purposes.   

The New California Statute

Effective January 1, 2012, California’s new credit-check statute will generally prohibit employers from obtaining and using an applicant’s or employee’s credit information for employment purposes. There are, however, a number of exceptions to the California statute’s coverage. First, employers may obtain and use credit information for employment purposes in connection with managerial positions that qualify for the executive exemption under California's wage and hour laws, positions in the California Department of Justice, and sworn police officers and other law enforcement positions. The statute also does not apply to (1) positions for which credit information is required by law to be disclosed or obtained; (2) positions that involve regular access to other persons’ bank or credit card account information, social security numbers, and dates of birth, unless such access is for the routine solicitation of credit card applications in a retail establishment; (3) positions in which the employee would be a named signatory on the employer’s bank or credit card account, would be authorized to transfer money on behalf of the employer, or would be authorized to enter into financial contracts on behalf of the employer; (4) positions that involve access to certain confidential information or trade secrets; and (5) positions that involve regular access to cash totaling $10,000 or more of the employer, a customer, or a client. Finally, California’s statute does not apply to certain financial institutions. When an employer wishes to obtain credit information for employment purposes, the employer must notify the applicant or employee of the specific statutory exception allowing the employer to obtain and use that information.

Practical Implications 

California employers that use credit information for employment purposes should carefully review their background-check practices and ensure that they comply with the new credit-information statute, as well as with existing federal and state laws regarding the process by which background information is obtained. Notably, unlike other state statutes regulating the use of credit information, California’s new statute does not have a blanket exception allowing the use of credit information for employment purposes when the information is "relevant” to the position in question. Instead, California’s statute specifically lists the positions for which such information is deemed relevant and the very limited categories of employers that are exempt from the statute. Thus, California employers should become familiar with the exceptions and strictly adhere to them. Background-check practices that do not comply with applicable federal and state laws make an easy target for plaintiffs' attorneys, and because such practices are often applied uniformly to all applicants and employees, they make a perfect subject for a class action that can result in substantial liability for an employer.