Posted by & filed under Legal News and Compliance.

The State of California is joining several other states in creating guidelines for the use of credit checks by potential employers.  Governor Jerry Brown signed into law a bill that will restrict the use of credit checks during the employment process.  Currently, many companies utilize credit reports as one of the tools used in a background check process.  As of January 1, 2012, this practice will no longer be allowed, except in particular instances as defined by Assembly Bill (AB) 22.

The exceptions to this new bill include those companies or agencies that are hiring individuals for the following types of employment:

  • 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 specified personal information for any purpose other than the 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;
  • A position that involves access to confidential or proprietary information; or
  • A position that involves regular access to $10,000 or more of cash.

With any of the positions above, the new bill requires that the applicant be notified that a credit check will be performed and have a right to a copy of this report.  If a prospective candidate is not hired due to the findings on the report, the applicant must be told that the decision was a result of the findings.

This bill is a result of the criticism that has emerged during the recession about the use of credit information in employment decisions.  Due to layoffs and job loss, people have ended up with poor credit, which in many instances has resulted in applicants not being considered further as potential candidates.   The underlying concern has been that a credit report is not an indication of job performance, and that using these reports in a hiring decision can discriminate against people with bad credit who would otherwise make good employees.

If you are unclear about this bill, or have questions about whether a position you are looking to hire falls into the specific categories outlined above and in AB 22, it is important to reach out to an employment attorney to address any uncertainties or concerns you might have about using a credit report.  It is also important that hiring managers and HR personnel review/update policies and procedures to make sure that credit reports, as of January 1, 2012, are only being run in situations where they are compliant with California and federal law.