‘Job Killer’ Bill Banning Credit Report Use for Employment Passes Senate Fiscal Committee

(August 17, 2011) A California Chamber of Commerce-opposed bill banning most employers from using consumer credit reports for employment purposes passed the Senate Appropriations Committee yesterday.

AB 22 (Mendoza; D-Norwalk) unfairly limits private employers’ ability to use consumer credit reports for legitimate employment purposes, unless the information in the report is “substantially job-related” and for a “managerial position.”

Objective Information

The CalChamber and a coalition of employer associations have pointed out that employers utilize employee credit reports to assist in the overall evaluation of an applicant. Like other pre-employment screening tools, such as a minimum grade point average or college degree requirement, employee credit reports provide objective information regarding an individual’s past behavior or character as an indicator of their likely future behavior.

Notably, sworn police officers and financial institutions, which AB 22 exempts, utilize employee credit reports for this very purpose. In a letter the Federal Deposit Insurance Corporation (FDIC) sent to financial institutions regarding pre-employment background screening, the FDIC encourages financial institutions to incur the cost of completing comprehensive background checks to minimize “theft and embezzlement; and prevent litigation over hiring practices.”

Similarly, the U.S. Police Jobs website states “a solid, responsible financial history . . . is a strong indication of the applicant’s reliability, dependability, and integrity.” The website further states that “bad credit (especially substantial debt), may be an indicator of someone who may be prone to corruption.”

Valuable Information

CalChamber agrees with the FDIC and U.S. Police Jobs that an employee’s credit report can provide valuable information regarding an applicant’s overall responsibility, reliability, and integrity, which can help employers reduce future litigation and loss.

These desired employee characteristics are not unique to financial institutions or police officers, but rather are values that all employers seek when determining whether to hire an applicant.

Employees in many industries, such as in-home care, hospitals, restaurants, and retail stores, have access not only to the employer’s assets and financial information, but also to the assets and financial information of the public, as well as access to medical and personal information.

As reflected in various studies, employee theft is on the rise. A 2009 report conducted by Jack L. Hayes International evaluated 25 major retailers with more than 18,000 stores. The report documented 70,000 employee apprehensions for theft—an average of one apprehension for employee theft in every 28.4 employees, and more than $51 million in potential loss.

The National Retail Security Survey released in 2009 also confirmed that employee theft was responsible for more than 40% of retail employer loss nationwide, amounting to approximately $15.9 billion. The FBI has indicated that employee theft is the fastest growing crime in America.

The U.S. Chamber of Commerce estimates that a third of all corporate bankruptcies are a direct result of employee theft. Accordingly, all employers need the ability to obtain and review the objective information provided in an employee credit report, which AB 22 improperly seeks to limit.

Existing Safeguards

Employers in California are already significantly limited in their use of information from employee credit reports. Specifically, the Federal Fair Credit Reporting Act and California’s Consumer Credit Reporting Agencies Act require an employer to:

(1) notify the individual that it may obtain a credit report for purposes of the employment action at issue and also provide information about the company utilized by the employer for obtaining a report;

(2)  have the consent of the employee to obtain the report, and if requested, give the employee a copy of the report as well;

(3)  provide the individual with a copy of the report and a “Summary of Your Rights Under the Fair Credit Reporting Act” if the employer intends to take an adverse action, such as not hiring the applicant based upon information contained in the credit report; and

(4) if an adverse action is taken, disclose to the individual the credit reporting agency that provided the report as well as provide notice of the individual’s right to dispute any information in the report and also obtain another free report from the credit reporting agency. Existing law provides the needed protections for applicants and/or consumers with regard to employee credit reports.

‘Managerial Positions’

Finally, although other states, such as Oregon and Illinois, have recently enacted legislation limiting the use of employee credit reports, such legislation is not nearly as restrictive as AB 22. The legislation passed in these other states allows employee credit reports to be utilized for any position where a credit report is “substantially job related” and/or is a “bona fide occupational” requirement.

Conversely, AB 22 limits the use of credit reports to “managerial positions” where credit history is “substantially job related,” thus ignoring the other numerous non-managerial positions in the workforce where employees have unsupervised access to employers’ and consumers’ financial information, trade secret information and assets.

Key Vote

AB 22 passed the Senate Appropriations Committee on August 15, 5-2.

Ayes: Alquist (D-San Leandro), Kehoe (D- San Diego), Lieu (D-Torrance), Pavley (D-Agoura Hills), Price (D-Los Angeles), Steinberg (D-Sacramento).

Noes: Emmerson (R-Hemet), Walters (R-Laguna Nigel).

No Vote Recorded: Runner (R-Antelope Valley).

The bill will be considered next by the entire Senate.

Staff Contact: Jennifer Barrera