new laws impose new and surprising obligations on ... · previously employers were only required to...
TRANSCRIPT
“When verifying
information on
an employment
application, i.e.
prior employers,
educational
background,
existence of
criminal
convictions,
etc., to be on
the safe side, an
employer should
disclose the
substance of any
information
gathered.”
N U M B E R
FROM THE LATHAM & WATKINS LITIGATION DEPARTMENT BULLETIN NO. 236 NOVEMBER 19, 2002
236
”
“New Laws Impose New and SurprisingObligations on Employers DoingBackground Checks or Investigations
Amendments to the Investigative
Consumer Reporting Agencies Act
The state Investigative Consumer Reporting
Agencies Act (California Civil Code section
1786 et seq.), and the federal Fair Credit
Reporting Act, (15 USC. §1681a(e)), have
long required employers who use third parties
to conduct certain types of investigations and
background checks of employees or prospective
employees to make certain disclosures to the
employee.1 In an attempt to increase protections
against identity theft,2 the California Legislature
amended the Investigative Consumer Reporting
Agencies Act twice during the past year. First,
Assembly Bill 655, effective January 1, 2002,
amended the Consumer Reporting Agencies
Act (CRAA) greatly heightening California
employers’ disclosure obligations in conjunction
with background investigations and included
investigations conducted directly by the
employer. Assembly Bill 1068, effective
September 28, 2002, increases the disclosure
obligations introduced by the prior amendments,
but also clarifies important exceptions to the
disclosure requirements when an employer
investigates an employee suspected of
wrongdoing.
Previously employers were only required to
give notice of an employee’s right to review
an investigative consumer report if that report
was obtained through an investigative
consumer reporting agency.3 Now, California
Civil Code section 1786.53, requires employers
who do their own background checks—an
increasingly common practice with Internet
subscription services—to make the same
disclosures to the individual concerned as
would be required if an outside agency
performed the investigation.4
Prior law provided employers with an exception
to the requirement of giving an employee
notice of a background check if performed
solely for the purpose of promotion or reas-
signment.5 With the most recent amendment,
the only exception to notice is if the employer
seeks such information for employment pur-
poses due to suspicion held by an employer of
wrongdoing or misconduct by the subject of
the investigation.6
BULLETIN NO. 236 NOVEMBER 19, 20022
CLIENT ALERT
Employers’ Requirements Under the New Law
The most recent amendments to the Investigative
Consumer Reporting Agencies Act, which became
effective September 28, impose the following require-
ments on employers:
• If, at any time, an employer seeks an investigative
consumer report for employment purposes (defined
as for the purpose of “evaluating a consumer for
employment, promotion, reassignment, or retention
as an employee”),7 other than suspicion of wrong-
doing or misconduct by the subject of the
investigation, the employer may procure such a
report only if at any time prior to obtaining the
report the employer meets three conditions: (i)
it is for a permissible purpose, (ii) the employer
provided the employee with a clear and conspicuous
disclosure in writing, and (iii) the employee has
authorized in writing the procurement of
the report.8
• The clear and conspicuous disclosure in writing
that an employer must provide to its employee
prior to requesting an investigative consumer
report must be in the form of a document that
consists only of the required disclosure. This
document must include the information that:
(i) an investigative consumer report may be
obtained, (ii) the permissible purpose of the
report (i.e. employment purposes) is identified,
(iii) the report may include information on the
employee’s character, general reputation, personal
characteristics and mode of living, (iv) identifies
the name, address, and telephone number of the
investigative consumer reporting agency conducting
the investigation, and (v) notifies the employee in
writing of the nature and scope of the investigation
requested, including a summary of the employee’s
right to inspect the files. 9
• An investigative consumer reporting agency can
require that an employer certify to it that it has
made the applicable disclosures to the employee
and that it agrees to provide a copy of the report
to the subject of the investigation.10
• The employer must provide the employee with a
written form, on which the employee may check
a box indicating that the employee wishes to receive
a copy of any investigative consumer report of
which the employee is the subject.11 This notice
to request a copy of the report may be contained
in the disclosure document discussed above or
may be a separate consent form.12 If the employee
wishes to receive such a copy, the employer must
send a copy of the report to the employee within
three business days of the date the employer
received the report. The employer may contract
with a third party to send this copy.13 The copy of
the report must also include the name, address,
and telephone number of issuer of the report.14
This will allow the employee the opportunity to
find any inaccuracies and take steps to correct them.
• An employer that engages in data collection of
matters of public record for employment purposes,
in lieu of using the services of an investigative
consumer reporting agency, must provide the
information in the public record on no more that
one occasion to the employee or prospective
employee within seven days of the date the
employer obtains the information regarding the
employee.15 Employers must also provide on any
job application form, or other written form, a box
that the employee may check, permitting the
employee or perspective employee to waive his
or her right to receive a copy of any such public
record obtained by the employer in this manner.16
Even if the employee waived his or her right to
receive a copy of the record, the employer must
provide to the employee a copy of the public
record if the employer takes an adverse action
as a result of receiving the information in the
record.17 If the employer obtains this information
for the purpose of conducting an investigation for
suspicion of employee wrongdoing or misconduct,
the employer may withhold the information until
BULLETIN NO. 236 NOVEMBER 19, 20023
CLIENT ALERT
the end of the investigation. Once the investigation
has concluded, the employer must provide a copy
of the public record to the subject of the investi-
gation, unless the employee has waived his or her
rights as discussed above.18
The penalties for noncompliance with these provisions
are severe. Any employer that fails to comply with
any requirements is liable to the employee who is the
subject of the report in an amount equal to $10,000
or the individual’s actual damages, whichever is greater,
attorneys fees and costs, and punitive damages.19
Putting the Law into Practice—What This
Really Means for Employers
What is an investigative consumer report?
An investigative consumer report includes information
on “character, general reputation, personal characteristics,
or mode of living” obtained through any means.20
Thus, the disclosure requirements apply to almost every
request for background information on an employee,
unless the requested report is limited to specific factual
information relating to an employee’s credit record, or
such credit information is obtained directly from a creditor
or a consumer reporting agency.21
What is an investigative consumer reporting agency?
Assembly Bill 655 expanded the definition of investigative
consumer reporting agency to include “any person who,
for monetary fees or dues, engages in whole or in part
in the practice of collecting, assembling, evaluating,
compiling, reporting, transmitting, transferring, or
communicating information concerning consumers
for the purposes of furnishing investigative consumer
reports to third parties, but does not include any
governmental agency whose records are maintained
primarily for traffic safety, law enforcement, or licensing
purposes, or any licensed insurance agent, insurance
broker, or solicitor, insurer, or life insurance agent.”22
While an employer does not, in most circumstances,
qualify as an investigative consumer reporting agency,
as it does not collect information for monetary fees,
under the new law, the fact that an employer does not
employ a third party to investigate no longer excuses it
from notifying an employee.
What types of information requests require compliance
with the new disclosure requirements?
If your company seeks the type of report that meets
the definition of investigative consumer report, it should
document the information received and follow the
disclosure guidelines. For example, requests for DMV
reports made by an employer almost certainly should
be disclosed, as this is precisely the type of information
that is susceptible to identity theft.
What does my company need to disclose when
checking references?
While personal references do not appear to be as
vulnerable to identity theft, as the references are likely
people who know the employee well and whose
names are in most cases provided by the employee,
this sort of information may meet the broad definition
of an investigative consumer report and should probably
be disclosed.
What if my company is merely verifying information
on an employment application?
When verifying information on an employment application,
i.e. prior employers, educational background, existence
of criminal convictions, etc., to be on the safe side, an
employer should disclose the substance of any information
gathered. These types of factual inquiries are arguably
encompassed in the definition of investigative consumer
report.
Are there any exceptions to the reporting guidelines?
The conservative approach that employers are encouraged
to follow to avoid liability under this law is to notify an
employee or applicant anytime a request for information
is made about that person, with exceptions only for
those inquiries made due to a suspicion that the
employee is engaged in wrongdoing or misconduct,
or for purely specific factual information relating to an
employee’s credit record.
BULLETIN NO. 236 NOVEMBER 19, 20024
CLIENT ALERT
Does my company need to disclose information
gathered during an investigation of employee
misconduct, such as an investigation of a sexual
harassment complaint?
Under Assembly Bill 655, the wording of the statute was
unclear as to whether an exception to the reporting
requirements existed when an employee, who is the
subject of the investigation is suspected of wrong-doing
that does not rise to the level of “criminal activity.”23
Assembly Bill 1068 clarified this issue by amending the
language of the exception to the disclosure requirement
to cover any suspicion of employee misconduct or wrong-
doing, not just those that rise to the level of criminal
activity. 24 Therefore, whereas under the prior amendment
the safe approach when investigating an employee in
conjunction with alleged sexual harassment would have
been to follow the disclosure requirements, such an inves-
tigation may now fall under the exception to the disclosure
requirement under the most recent amendment.
Endnotes
1 The term “consumer,” used in the Investigative Consumer Reporting
Agencies Act, encompasses “a natural individual who has made an
application to a person for employment purposes.” Cal. Civ. Code
§1786.2(b). Thus, the term “employee” is used throughout this
article to apply to both prospective and current employees.
2 Identity theft is the unauthorized use of another person’s personal
identifying information to obtain credit, goods, services, money or
property. The most common form of identity theft is financial fraud;
a thief opens accounts or utility services and obtains loans in a victim’s
name. For victims of identity theft, the costs can be significant and long
lasting. With A.B. 655, the legislature is grasping for a way to deal
with the increasing rate of identity theft by allowing consumers access
to investigative reports containing information about them.
3 Cal. Civ. Code §1786 (1998), amended by Stats. 2001, c. 354
(A.B. 655).
4 Cal. Civ. Code § 1786.53.
5 “If, at any time, an investigative consumer report is sought for
employment purposes other than promotion or reassignment, the
person procuring or causing the report to be made shall, not later
than three days after the date on which the report was first requested,
notify the consumer...” Cal. Civ. Code §1786 (1998) amended by
Stats. 2001, c. 354 (A.B. 655) (emphasis added). The Senate recom-
mended that the law be amended to narrow the notice exception to
apply only to situations of suspected wrongdoing by the subject of the
investigation. The recommendation was based on comments by the
Privacy Rights Clearinghouse. The Privacy Rights Clearing house pointed
out it is common when a company merges with, or is purchased by,
another company, checks are run on all current employees, and that
these employees are as vulnerable to harm from incorrect information
in their reports as job applicants would be. Comm. Rep. A.B. 655,
2001-02 Reg. Sess. (August 21, 2001).
6 Cal. Civ. Code §1786.16 (c).
7 Cal. Civ. Code §1786.2 (f).
8 Cal. Civ. Code §1786.16 (a) (2). An investigative consumer reporting
agency may furnish an investigative consumer report to an employer for
the “Permissible Purpose” of using the information for employment
purposes. Cal. Civ. Code 1786.12 (d) (1).
9 Cal. Civ. Code §1786.16 (a) (2) (B).
10 Cal. Civ. Code §1786.16 (a) (4)-(5).
11 Cal. Civ. Code §1786.16 (b).
12 Cal. Civ. Code §1786.16 (b).
13 Cal. Civ. Code §1786.16 (b).
14 Cal. Civ. Code §1786.16 (b).
15 Cal. Civ. Code §1786.53 (b) (1) and (c).
16 Cal. Civ. Code §1786.53 (b) (2).
17 Cal. Civ. Code §1786.53 (b) (4). “Adverse Action” means a denial
of employment or any decision made of an employment purpose that
adversely affects any current or prospective employee. Cal. Civ. Code
§1786.53 (a) (1).
18 Cal. Civ. Code §1786.53 (b) (3).
19 Cal. Civ. Code §1786.50 (b).
BULLETIN NO. 236 NOVEMBER 19, 20025
CLIENT ALERT
20 Cal. Civ. Code §1786.2 (c). Under the Fair Credit Reporting Act,
the federal equivalent of Civil Code §1786, the term “investigative
consumer report” means a consumer report or portion thereof in
which information on a consumer’s character, general reputation,
personal characteristics, or mode of living is obtained through personal
interviews with neighbors, friends, or associates of the consumer
reported on or with others with whom he is acquainted or who may
have knowledge concerning any such items of information. However,
such information shall not include specific factual information on a
consumer’s credit record obtained directly from a creditor of the consumer
or from a consumer reporting agency when such information was
obtained directly from a creditor of the consumer or from the consumer.
15 USC. § 1681a(e). Note that California law does not require that the
information on a consumer’s character be obtained through personal
interviews, but rather applies to such information obtained through
“any means.”
21 Cal. Civ. Code §1786.2 (c).
22 Cal. Civ. Code §1786.2 (d).
23 Under the prior Section 1786.16(a) as amended by A.B. 655, set
forth notice requirements that applied “[i]f, at any time, an investigative
consumer report is sought for employment purposes other than suspicion
of wrongdoing by the subject of the investigation...” (emphasis added).
Section 1786.16(c) as amended by A.B. 655, however, set forth an
exception to subdivision (a) when an investigative consumer report
procured or caused to be prepared by an employer “if the purpose of
the employer is to determine whether or not to retain an employee
when there is a good faith belief that the employee is engaged in any
criminal activity likely to result in a loss to the employer.”
24 Section 1786.16(a) as amended by A.B. 1068 now sets forth notice
requirements that apply “[i]f, at any time, an investigative consumer report
is sought for employment purposes other than suspicion of wrongdoing
or misconduct by the subject of the investigation...” (emphasis added).
A.B. 1068 also deleted the “criminal activity” language of Section 1786.16(c)
and replaced it with language that is consistent with subdivision (a). Section
1786.16(c) as amended by A.B. 1068 now sets forth an exception to
subdivision (a) when an investigative consumer report procured or caused
to be prepared by an employer “if the report is sought for employment
purposes due to suspicion held by an employer of wrongdoing or
misconduct by the subject of the investigation.”
BULLETIN NO. 236 NOVEMBER 19, 20026
CLIENT ALERT
If you have any
questions about this
Client Alert, please
contact Ashley Johnson
or Joseph B. Farrell in
our Orange County
office, or any of the
following attorneys.
Client Alert is published by Latham & Watkins as anews reporting service to clients and other friends.The information contained in this publication shouldnot be construed as legal advice. Should furtheranalysis or explanation of the subject matter berequired, please contact the attorneys listed to theright or the attorney whom you normally consult. Acomplete list of our Client Alerts can be found on ourWeb site at:
www.lw.com
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