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Employee Background Checks: Beware of State Law

By Katharine K. Sangha

Employers that use background checks should be familiar with the requirements of the federal Fair Credit Reporting Act (“FCRA”). As we have discussed on this blog, prior to obtaining a consumer report on an employee or applicant for employment, an employer must provide notice and obtain written consent. If an employer decides to take adverse action against an employee or applicant based in whole or in part on the contents of a consumer report (such as deciding to terminate an employee’s employment or deciding not to hire an applicant), the employer must comply with the FCRA’s adverse action requirements.  

In addition to the requirements of the FCRA, employers should be aware that some states have laws which impose additional restrictions or obligations on employers with respect to consumer reports.  

State laws can increase employers’ obligations concerning the use of employee and applicant background checks. For example, the FCRA does not restrict employers from obtaining credit reports, a type of consumer report, on employees or applicants. Under California law, however, an employer may only request a credit report for employment purposes when an individual holds or is applying for one of the following positions:

  1. A managerial position.
  2. A position in the California’s Department of Justice.
  3. A sworn peace officer or other law enforcement position.
  4. A position for which the information contained in the report is required by law to be disclosed or obtained.
  5. A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person:
    • Bank or credit card account information.
    • Social security number.
    • Date of birth.
  6. A position in which the person is, or would be, any of the following:
    • A named signatory on the bank or credit card account of the employer.
    • Authorized to transfer money on behalf of the employer.
    • Authorized to enter into financial contracts on behalf of the employer.
  7. A position that involves access to confidential or proprietary information, including a formula, pattern, compilation, program, device, method, technique, process or trade secret that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from the disclosure or use of the information, and (ii) is the subject of an effort that is reasonable under the circumstances to maintain secrecy of the information.
  8. A position that involves regular access to cash totaling ten thousand dollars ($10,000) or more of the employer, a customer, or client, during the workday.

See Cal. Lab. Code § 1024.5(a).

Prior to requesting a credit report on a California employee or applicant, California’s Consumer Credit Reporting Agencies Act requires, among other things, that the employer provide notice to the individual identifying the specific basis under the Labor Code allowing the employer to request a credit report.  

California is just one example. Other states that have enacted laws regulating employer use of consumer reports, often called mini-FCRAs, include Arizona, Georgia, Kansas, Maine, Massachusetts, Minnesota, New Jersey, New York, Oklahoma, and Washington. Employers should be careful to comply with any applicable state law requirements, in addition to the provisions of the FCRA, when requesting consumer reports on employees or applicants.