New Credit Check Law Takes Effect

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Consumer credit report law

California recently became the seventh state to address the use of credit reports for employment background screening purposes. California Governor Jerry Brown signed Assembly Bill 22 (AB 22) which restricts when employers lawfully can use “consumer credit reports.” AB 22 is effective as of January 1, 2012.

Credit Report Restrictions
The new law limits when private and public sector employers can use consumer credit reports for employment screening purposes.

Specifically, employers will be permitted to use consumer credit reports only if the individual is applying for or works (or will work) in one of the excluded positions, including as a bona fide manager or that affords regular access to large amounts of cash or sensitive information (e.g., trade secrets). There is a limited exception for certain employers such as financial institutions.

Credit Report Notifications
Before an employer orders a consumer credit report from a “consumer reporting agency” (such as HireRight) for employment purposes, the statute requires the employer to comply with notice requirements. The employer must notify the applicant/employee in writing which type of position the applicant or employee is being considered for that allows the employer to obtain a consumer credit report.

Then, after receiving the consumer credit report, if the employer rejects the applicant/employee based in whole or in part on the information in it, the employer must notify the applicant/employee and provide the name and address of the consumer credit reporting agency that provided the report.

The Nationwide Trend
Former Gov. Schwarzenegger vetoed similar legislation in each of the past three years. In doing so, Gov. Schwarzenegger stated that California employers “have inherent needs to obtain information about applicants for employment” and that the bill would “significantly increase the exposure for potential litigation over the use of credit checks.”

But, California is hardly the first state to pass such legislation. Six other states have enacted similar credit reporting laws including Hawaii, Washington, Oregon, Illinois, Maryland and Connecticut.  Similar legislation has also been proposed and is still pending in the District of Columbia, Florida, Georgia, Michigan, Minnesota, Nebraska, New Jersey, New York, Ohio, Pennsylvania, South Carolina, and Vermont.

Federal legislation has also been proposed but has not gain much traction to date. Not all legislative efforts to pass similar bills in other states have succeeded. In 2011 alone, similar legislation failed in several states, including Alabama, Arkansas, Indiana, Kentucky, Missouri and Montana.

Implications for Employers
California employers should consult with their legal counsel and review their background screening policies and procedures to ensure compliance with these requirements. Employers operating in states that have legislation regarding the use of credit reports should evaluate whether they are subject to the legislation, and, if so, which provisions, if any, they can rely on to perform the employment screening.

Multi-state employers should evaluate compliance with the laws in the six other states that regulate the use of credit history information by employers. Employers also should be aware that the Equal Employment Opportunity Commission is intensifying its investigations into the use of credit history information under Title VII of the Civil Rights Act of 1964.

While the use of credit reports continues to be scrutinized by legislators nationwide, employers should continue to include it as part of their employment screening program where allowed to limit the risk of hiring individuals with a history of poor financial behavior.

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HireRight is a leading provider of on-demand employment background checks, drug and health screening, and electronic Form I-9 and E-Verify solutions that help employers automate, manage and control background screening and related programs.

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