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Credit Report Use Limited In California Employment Decisions per AB 22

A common question asked by start-ups or even just average average businesses is what information they can ask or use in vetting their potential employees.  Some common forms used may be background checks, drug screening, and reference checks.  Due to the economy creating many credit problems for average citizens (even more so with entrepreneurs who often use their own personal credit to bootstrap their company), I will take a look at the use of credit reports in making employment related decisions.

Existing federal law provides that, subject to certain exceptions, an employer may not get a credit report without prior disclosure of that the employer wants to obtain one and the employee consents. Existing federal law further requires, subject to certain exceptions, an employer, before taking any adverse action based on the report, to provide the consumer with a copy of the report and a written description of certain rights of the consumer.

California enacted AB 22 which amended California Civil Code Section 1785.20.5 to provide additional protections in this state to protect the potential employee when dealing with similar uses of credit reports.  This law went into effect January 1, 2012.  In addition the California Labor Code added Chapter 3.6 to include additional requirements.  The law provides that the employer needs to follow the same federal requirements of disclosure that they want to obtain a credit report, but also requires the employer to state why they want it.  The law goes on to further indicate that credit reports can only be requested for the following certain categories of types of positions (except by certain financial institutions): (1) a position in the state Department of Justice,

(2) a managerial position,

(3) that of 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 to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment,

(6) 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,

(7) a position that involves access to confidential or proprietary information, as specified, or

(8) a position that involves regular access to $10,000 or more of cash, as specified.

When dealing with a tech or start-up company, number 7 could be pretty broad to cover almost all employees.  The full text of that category is:

“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.”

You can see how that category could be pretty broadly applied; however, employers should take caution to be clear that if they request a credit report, it is for the reason that they feel could fall into this category and be able to back that up if it were to ever go to court.  The fact that someone has bad credit could be thought to indicate how trustworthy the person may be or whether they are wise with their personal financial decisions.  With the economy being the way it has been the last few years and the fact that entrepreneurial type of employees may have suffered more than most when trying to keep a company afloat puts an undue burden on them if the employer also wants to see their credit report.  I would say to limit the use unless you see a very clear and compelling reason to do so.