March 11, 2014

California Enacts New Law Restricting Use of Credit Checks for Employment Purposes

Governor Brown has signed legislation that restricts California employers from using consumer credit information for employment purposes. The law goes into effect on January 1, 2012.

Summary of the Law

Effective January 1, 2012, employers and prospective employers in California, except certain financial institutions, will be restricted from using consumer credit report information in the hiring and promotion process after Governor Jerry Brown recently signed Assembly Bill 22 into law.

AB 22 limits the use of pre-employment credit checks for most employers. However, the law carves out narrow exceptions for the use of consumer credit information for employment purposes to persons in the following positions: ƒ

  • A managerial position; 
  • A position in the state Department of Justice;
  • A sworn peace officer or other law enforcement position;
  • A position for which the information contained in the report is required by law to be disclosed or obtained;
  • A position that involves regular access to any one person’s bank or credit card information, Social Security number and date of birth for any purpose other than routine solicitation and processing of credit card applications in a retail establishment;
  • A position in which the person is or would be a named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf; ƒ
  • A position that involves access to confidential or proprietary information (i.e., trade secrets); or
  • A position that involves regular access to $10,000 or more of cash.

AB 22 requires an employer to provide written notice to persons for whom a consumer credit report is being sought for employment purposes that informs them of the specific reason(s) for obtaining the report. For example, “Employer seeks consumer credit information from Applicant because he or she is being considered for a managerial position.”

The notice must also inform the person of the source of the credit report, with a box that the person can check to receive a copy of the report. If employment is denied because of information contained in a credit report, the employer must advise the applicant and provide the name and address of the credit reporting agency making the report.

Practical Implications for Employers

This new law bans most California employers from using consumer credit information in making personnel decisions unless the position falls within narrow exceptions. California’s law is more restrictive than the federal Fair Credit Reporting Act, which also regulates the use of credit checks in employment decisions. Many employers only use credit checks when there is a business justification for doing so and the credit information is germane to the job in question. Employers who use credit checks more broadly will find themselves most impacted by this new law.