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Credit Checks
Both federal and state laws restrict the use of credit information in the hiring process.1 In the employment context, a consumer credit report is any written, oral or other communication of any information by a consumer credit reporting agency (CRA) bearing on an individual’s credit worthiness, credit standing or credit capacity, which is used as a factor in evaluating an applicant for employment, promotion, reassignment or retention.
Under California law, employers and prospective employers (not including certain financial institutions) are generally prohibited from using a consumer credit report for employment purposes. The prohibition applies to all consumer credit reports as defined above, but does not apply to reports that both:
In other words, if an employer runs a report that just includes the applicant’s employment history and no additional credit information that report would not be prohibited. The prohibition against the use of credit reports for employment purposes does not apply to the following positions:
Under the exception for managerial positions, if you want to obtain and use a credit report, you must make sure that the position properly meets the test for the executive exemption under Wage Order 4. If you misclassify the employee as exempt at the time of recruitment and run a credit check based on the misclassification, you could be liable.
If one of the exceptions applies and you are able to obtain and use the report, there are still restrictions on how you go about obtaining the report. The FCRA places additional restrictions on your ability to use credit reports for employment purposes. If information from a credit report is used for employment purposes, you must complete the following actions:
If a report is requested by the employee or applicant, the employer must request that a copy be provided to the employee at the time the employer requests the report from the CRA. The report must be at no charge to the employee, and must be given at the same time as the employer’s report.
Before taking adverse action based on the credit report, you must provide the person with a Pre-Adverse Action Disclosure, a copy of the credit report and the FCRA - Summary of Your Rights.
You must also notify the individual after you take any adverse action based at least in part on information contained in a credit report. The notification must be in writing and must include all of the following information:
Name, address and telephone number of the consumer reporting agency that provided the report, including a toll-free telephone number if it is a nationwide consumer reporting agency
If you take an adverse action based on the type of information covered by the FCRA and you obtained this information from an entity affiliated with you by common ownership or control, you must notify the person of the adverse action. You must inform the person that he/she can obtain a disclosure of the nature of the information you relied upon by writing a request within 60 days of receiving the Adverse Action Notice. If the person makes a request, you must disclose the nature of the information no later than 30 days after receiving the request.
If you take adverse action based on the report and the person requests a copy of the report from you, you must furnish the person with that report and the FCRA - Summary of Your Rights within three business days from receipt of the request.
Under California law, employers and prospective employers (not including certain financial institutions) are generally prohibited from using a consumer credit report for employment purposes. The prohibition applies to all consumer credit reports as defined above, but does not apply to reports that both:
- Verify income or employment; and
- Do not include credit-related information in that verification report, such as credit history, credit score, or credit record
In other words, if an employer runs a report that just includes the applicant’s employment history and no additional credit information that report would not be prohibited. The prohibition against the use of credit reports for employment purposes does not apply to the following positions:
- A managerial position (as defined in the executive exemption of Wage Order 4 of the IWC)
- A position in the state Department of Justice
- A sworn peace officer or other law enforcement position
- A position for which the information in the report is required by law to be disclosed or obtained
- A position that involves regular access (for any purpose other than 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
- 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
- A “named signatory” on an employer’s bank or credit card account is more than just a person who is authorized to use a company credit card. Instead, it appears the intent of this law is to cover positions where an individual is the one signing the credit card agreement on behalf of the company. No specific definition has been provided by regulation or case law.
- A position that involves access to confidential or proprietary information (including trade secrets), defined as information that both:
- Derives independent economic value, actual or potential, from not being 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
- Is the subject of an effort that is reasonable under the circumstances to maintain the secrecy of the information
- A position that involves regular access to cash totaling $10,000 or more of the employer, a customer or client, during the workday
Under the exception for managerial positions, if you want to obtain and use a credit report, you must make sure that the position properly meets the test for the executive exemption under Wage Order 4. If you misclassify the employee as exempt at the time of recruitment and run a credit check based on the misclassification, you could be liable.
If one of the exceptions applies and you are able to obtain and use the report, there are still restrictions on how you go about obtaining the report. The FCRA places additional restrictions on your ability to use credit reports for employment purposes. If information from a credit report is used for employment purposes, you must complete the following actions:
- Make a clear and conspicuous written disclosure to the applicant before the report is obtained, in a document consisting solely of the disclosure, that a consumer report can be obtained. The notice must:
- Inform the person that a report will be used
- Identify the specific basis allowing use of the report (which exception applies)
- Inform the person of the source of the report
- Contain a box that the person can check off if he/she wishes to receive a copy of the report
- Obtain prior written authorization from the applicant. As a best practice, you should provide the FCRA - Summary of Your Rights at the same time you make the disclosure of your intent to obtain a report.
- Certify to the CRA that you made the disclosure and obtained authorization, and that you will not use the information in violation of any federal or state equal opportunity law or regulation. You must also certify that if you take any adverse action based on the credit report, you will provide a copy of the report and a summary of the FCRA rights to the person.
If a report is requested by the employee or applicant, the employer must request that a copy be provided to the employee at the time the employer requests the report from the CRA. The report must be at no charge to the employee, and must be given at the same time as the employer’s report.
Before taking adverse action based on the credit report, you must provide the person with a Pre-Adverse Action Disclosure, a copy of the credit report and the FCRA - Summary of Your Rights.
You must also notify the individual after you take any adverse action based at least in part on information contained in a credit report. The notification must be in writing and must include all of the following information:
Name, address and telephone number of the consumer reporting agency that provided the report, including a toll-free telephone number if it is a nationwide consumer reporting agency
- A statement that the consumer reporting agency did not make the adverse decision and is not able to explain why the decision was made
- A statement setting forth the person’s right to obtain a free disclosure of his/her file from the consumer reporting agency if requested within 60 days
- A statement setting forth the person’s right to dispute the accuracy or completeness of any information provided by the consumer reporting agency directly with that agency
If you take an adverse action based on the type of information covered by the FCRA and you obtained this information from an entity affiliated with you by common ownership or control, you must notify the person of the adverse action. You must inform the person that he/she can obtain a disclosure of the nature of the information you relied upon by writing a request within 60 days of receiving the Adverse Action Notice. If the person makes a request, you must disclose the nature of the information no later than 30 days after receiving the request.
If you take adverse action based on the report and the person requests a copy of the report from you, you must furnish the person with that report and the FCRA - Summary of Your Rights within three business days from receipt of the request.