BILL ANALYSIS Ó
AB 22
Page 1
Date of Hearing: March 22, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 22 (Mendoza) - As Amended: March 8, 2011
SUBJECT : EMPLOYMENT: CREDIT REPORTS
KEY ISSUE : SHOULD EMPLOYERS BE BANNED FROM USING CONSUMER
CREDIT REPORTS IN EMPLOYMENT DECISIONS, EXCEPT WHEN THE
INFORMATION IS SUBSTANTIALLY JOB-RELATED AND THE POSITION SOUGHT
IS EITHER MANAGERIAL, A SWORN PEACE OFFICER, OR THE INFORMATION
IS ALREADY REQUIRED BY LAW?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill is substantially similar to bills approved by this
Committee in each of the past three years that were ultimately
vetoed by Governor Schwarzenegger. This year's effort,
sponsored this time by the California Labor Federation, would
ban the use of consumer credit reports in employment unless two
criteria are both met. First, the information in the credit
report must be substantially job-related, where the applicant or
promotion candidate would have access to money, other assets, or
confidential information. Second, the position sought is either
managerial, a sworn peace officer, or the information is already
required to be disclosed by law or to be obtained by the
employer. This bill would also exempt financial institutions
already subject to existing privacy requirements under federal
law. The author and other proponents contend that high
unemployment and the current economic crisis increase the urgent
need for this worker protection. Moreover, the author and
supporters contend that credit scores are not accurate
predictors of employability. Finally, they also argue this
measure will remedy the disparate impact of using credit reports
against women and people of color. A coalition of credit
reporting agencies, business associations, and manufacturing
groups oppose this bill, contending that it would deprive
employers of valuable information in decision-making processes,
including hiring decisions. Prescreening through credit
reports, the opposition argues, may ultimately prevent employee
theft and misuse of sensitive information. Several associations
representing local government oppose this bill unless amended to
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restore an exemption for city and county positions from the
general prohibition against use of credit reports-a provision
that was amended out of the bill earlier this month. This bill
is also referred to the Assembly Labor and Employment Committee.
SUMMARY : Prohibits, except as specified, the use of consumer
credit reports for employment purposes. Specifically, this
bill :
1 Prohibits an employer from using a consumer credit report for
employment purposes unless:
a) The information contained in the report is substantially
job-related, meaning that the position has access to money,
other assets or confidential information; and
b) The position of the person for whom the report is sought
is any of the following:
i) A managerial position.
ii) A position in the state Department of Justice
iii) A sworn peace officer or other law enforcement
position.
iv) A position for which the information contained in
the report is required to be disclosed by law or to be
obtained by the employer.
2)Provides that these provisions do not apply to a person or
business subject to the federal Gramm-Leach-Bliley Act
(governing financial institutions) and implementing
regulations, if the person or business is subject to
compliance oversight by a state or federal regulatory agency
with respect to those laws.
EXISTING LAW :
1)Requires, under the federal Fair Credit Reporting Act (FCRA),
that the employer using a third-party to perform a background
check must notify the applicant and obtain consent for the
background check. (15 U.S.C. Section 1681 et seq.)
2)Requires, under the FCRA, that if an adverse decision is made
based upon the background check, the employer must provide the
applicant notice of the adverse decision and the name,
address, and telephone number of the consumer reporting agency
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making the report. The employer is also required to give the
employee a copy of the report and information on how to
dispute the contents of the report. (15 U.S.C. Section 1681
et seq.)
3)Requires, under California's Consumer Credit Reporting
Agencies Act (CCRAA), every consumer credit reporting agency
to allow a consumer, upon request and with proper
identification, to visually inspect all files pertaining to
him or her that the agency maintains at the time of the
request. (Civil Code Section 1785.1 et seq.)
4)Allows, under the CCRAA, consumers to dispute inaccurate
information and requires a consumer credit reporting agency to
reinvestigate disputed information without charge. (Civil
Code Section 1785.1 et seq.)
5)Authorizes, under the California's Investigative Consumer
Reporting Agencies Act, investigative consumer reports to be
given only to third parties the investigative consumer
reporting agency believes is using the information for (1)
employment purposes, (2) determining a consumer's eligibility
for insurance, (3) hiring a residential unit, or (4) other
specified reasons. (Civil Code Section 1786 et seq.)
6)Prohibits, under the federal Gramm-Leach-Bliley Act (GLB), a
financial institution from disclosing a consumer's nonpublic
personal information to a nonaffiliated third party unless the
financial institution (1) provides the consumer with a clear
and conspicuous disclosure of the financial institution's
specified privacy policies and practices, (2) gives the
consumer the opportunity to stop the disclosure before the
information is initially disclosed (opt-out), and (3) provides
the consumer with an explanation of how to exercise his or her
right to opt-out. (15 U.S.C. Section 6801 et seq.)
COMMENTS : This bill seeks to ban the use of consumer credit
reports in employment, unless two criteria are met. First, the
information in the credit report must be substantially
job-related, where the applicant or promotion candidate would
have access to money, other assets, or confidential information.
Second, the position sought must be either managerial, in the
state Department of Justice, a sworn peace officer, or one in
which the information in the report is required to be disclosed
by law or to be obtained by the employer. Finally, this bill
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also would exempt financial institutions already subject to
existing privacy requirements under federal law.
Because the bill requires both criteria to be met in order for a
credit report to be used for an employment purpose, its
limitation on the use of credit reports is more restrictive than
if only one of the two criteria were sufficient to authorize
such use. Setting aside consideration of peace officer,
Department of Justice, and other positions where law requires
it, under this bill the only remaining category of position that
an employer may use a credit report to evaluate an applicant is
a "managerial position"-and only where the information in the
credit report also rises to the level of "substantially
job-related," as defined.
Background on credit reporting laws : Currently, employers
frequently use credit reports to evaluate job applicants. Three
national reporting agencies, TransUnion, Equifax, and Experian,
provide credit information to employers often through
intermediary companies. Credit checks for employment purposes
have risen dramatically in recent years, and reportedly 43
percent of employers currently perform credit checks on job
applicants.
The federal Fair Credit Reporting Act (FCRA) was enacted to
promote accuracy, fairness, and privacy of personal information
assembled by consumer credit reporting agencies. (15 U.S.C.
Section 1681 et seq.) The FCRA regulates how employers may use
consumer reports, which are defined as reports containing
information pertaining to a person's credit worthiness, credit
standing, credit capacity, character, general reputation,
personal characteristics, or mode of living. The FCRA does not
exempt employers from complying with state laws governing
background checks.
The FCRA only applies where an employer uses a third-party to
perform a background check. In that event, the FCRA requires
that the employer notify the applicant and obtain consent for
the background check. The FCRA requires that, if an adverse
decision is made based upon the background check, the employer
must provide the applicant notice of the adverse decision and
the name, address, and telephone number of the consumer
reporting agency making the report. The employer is also
required to give the employee a copy of the report and
information on how to dispute the contents of the report.
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California's Consumer Credit Reporting Agencies Act (CCRAA), the
state's counterpart to the FCRA, generally regulates consumer
credit reporting agencies. (Civil Code Section 1785.1 et seq.)
Among other things, the CCRAA requires every consumer credit
reporting agency to allow a consumer, upon request and with
proper identification, to visually inspect all files pertaining
to him or her that the agency maintains at the time of the
request. The CCRAA permits consumers to dispute inaccurate
information and requires a consumer credit reporting agency to
reinvestigate disputed information without charge.
Additionally, California law, the Investigative Consumer
Reporting Agencies Act, generally regulates investigative
consumer reporting agencies. (Civil Code Section 1786 et seq.)
Such agencies are defined as any person, corporation, or other
entity that collects, reports, or transmits information
concerning consumers for the purpose of providing investigative
consumer reports to third parties, as specified. Investigative
consumer reports may be given only to third parties the agency
believes is using the information for (1) employment purposes,
(2) determining a consumer's eligibility for insurance, (3)
hiring a residential unit, or (4) other specified reasons.
Federal law, the Gramm-Leach-Bliley Act (GLB), prohibits a
financial institution from disclosing a consumer's nonpublic
personal information to a nonaffiliated third party unless the
financial institution (1) provides the consumer with a clear and
conspicuous disclosure of the financial institution's specified
privacy policies and practices, (2) gives the consumer the
opportunity to stop the disclosure before the information is
initially disclosed (opt-out), and (3) provides the consumer
with an explanation of how to exercise his or her right to
opt-out. (15 U.S.C. Section 6801 et seq.)
In the past, generally only banks and financial service
companies routinely ran credit checks on potential employees.
But employers in other sectors increasingly are including credit
checks in the screening process presumably to assess applicants'
honesty and integrity, among other traits. According to the
sponsor, the California Labor Federation, data shows that in
1998 only 25% of employers researched the credit history of job
applicants, but by 2006 that figure had reached 43% and
currently stands at 60%.
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Prior Legislation: In each of the past three years, former
Governor Schwarzenegger vetoed substantially similar legislation
to this bill that had been approved by this Committee and both
houses of the Legislature.
AB 482 (Mendoza) of 2010 differed slightly from this bill in
that its definition of the key term "substantially job-related"
would have allowed an employer to use a credit report of a
person seeking a position having access to trade secrets, as
defined, and the bill made a number of Legislative findings and
declarations.
AB 943 (Mendoza) of 2009 omitted the trade secret provision, but
did contain an express exemption from the general prohibition on
use of a credit report for positions in city or county
government, so long as the information in the credit report is
substantially job-related. Because this bill, as amended March
8, 2011, removed that exemption, it now reflects the version of
AB 943 that was vetoed by the Governor in 2009. That particular
veto message stated:
This bill is similar to legislation I vetoed last year on
the basis that California's employers and businesses have
inherent needs to obtain information about applicants for
employment and existing law already provides protections
for employees from improper use of credit reports. As with
last year's bill, this measure would also significantly
increase the exposure for potential litigation over the use
of credit checks.
Before introducing AB 482, the author subsequently conducted
research to determine whether increased litigation has been a
problem in other states where similar laws have been enacted,
but was not able to find any evidence of increased litigation
over credit checks for employment purposes in other states.
Thus, there appears to be little basis for the contention that
this bill would significantly increase exposure for potential
litigation over the use of credit checks.
AB 2918 (Lieber) of 2008 would have prohibited, except as
specified, the user of a consumer credit report from procuring a
consumer credit report for employment purposes unless the report
is either substantially job-related, as defined, or required by
law to be disclosed to or obtained by the use of the report. AB
2918 was also vetoed by the Governor.
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SB 986 (Escutia) of 2005 would have required that when a
consumer credit report or investigative credit report is used
for employment purposes, the information be directly related to
the skills necessary to perform the job. SB 986 was never heard
in policy committee.
Recently Enacted Legislation in Other States . In 2007,
Washington enacted a law (SB 5827) that prohibits a person from
procuring a consumer report for employment purposes where any
information contained in the report bears on the consumer's
credit worthiness, credit standing, or credit capacity, unless
the information is either substantially job-related and the
employer's reasons for the use of such information are disclosed
to the consumer in writing, or is required by law. Last year,
Oregon passed a law (SB 1045) barring the practice unless a
similar disclosure is given to the employee or prospective
employee and the information is substantially job-related.
In 2009, Hawaii passed HB 31 which prohibits inquiry into and
consideration of a prospective employee's credit history or
credit report unless the prospective employee has received a
conditional offer of employment, which may be withdrawn if
information in the credit history or credit report is directly
related to a bona fide occupational qualification, as defined.
Finally, Illinois passed HB 4658 last year, which prohibits
consumer reports for employment purposes unless credit history
is an established bona fide occupational requirement, as
defined.
In all of these states, categorical exemptions from the
prohibition were made for peace officers, employees of financial
institutions, and for those positions where a credit report was
required by law for employment purposes. The Hawaii and
Illinois statutes include an exemption from the prohibition for
managerial positions, but the Oregon and Washington statutes did
not. It should also be noted that none of those state statutes
categorically exempted city and county employees from the
prohibition on credit reports for employment purposes.
ARGUMENTS IN SUPPORT : Supporters of the bill, including many
labor unions, worker rights advocates, consumer advocates and
the ACLU, make several arguments for the policy of prohibiting
the use of credit reports for employment purposes. First,
supporters contend that a person's credit score says nothing
about his or her character or ability to do a job effectively
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and responsibly. Second, they warn that credit reports often
contain errors that may seriously impact innocent subjects of
those reports. Third, supporters contend that the use of credit
reports for employment purposes disproportionately impacts
female and minority workers typically concentrated in low-wage
jobs. Finally, considering these factors, several proponents
assert that it is "particularly unfair" to allow employers to
perform credit checks on job applicants "in the midst of such a
severe economic downturn."
Credit reports are not a predictor of job performance or
employability. Supporters generally contend that the use of
credit reports for employment purposes is improper in many cases
because these reports do not predict employability or future job
performance. In its letter to the Committee, Unite Here, a
labor union representing hospitality and service workers in
California, states:
Credit reports were designed to predict the likelihood that
a consumer would default on a loan, not whether he would
steal or behave irresponsibly in the workplace. The
definitive study on this issue, presented to the American
Psychological Society in 2003, concluded that credit
history does not correlate with employee conduct. Even
TransUnion, which sells credit reports to employers and has
led efforts against similar legislation in other states,
has produced no evidence that credit reports make employers
safer. At a legislative hearing in Oregon, TransUnion
representative Eric Rosenberg admitted "At this point we
don't have any research to show any statistical correlation
between what's in somebody's credit report and their job
performance or their likelihood to commit fraud."
Credit reports often contain erroneous information that should
not impact employment decisions . Supporters point to two
studies that bolster their contention that credit reports should
not be used for employment purposes because they are too often
inaccurate. First, they cite a Texas Department of Insurance
study from 2004 that found that 25% of credit reports have
errors serious enough to result in the denial of credit to the
subject of the report. In addition, supporters cite a 2007
Zogby survey reporting that 37 percent of people surveyed had
found an error in their credit report and half of these
respondents indicated that they could not easily fix the
mistakes. Proponents also contend that many events outside an
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individual's control, such as identify theft, data breaches,
negligence by credit reporting agencies, and the improper sale
of credit information can also result in damaging misinformation
appearing on an individual's credit report through no fault of
their own.
Disproportionate impact on minorities. Supporters contend that
the use of credit reports for employment purposes
disproportionately impacts female and minority workers typically
concentrated in low-wage jobs. For example, the same Texas
study from 2004 found that the average credit score of African
Americans is roughly 10 to 35 percent lower than whites, while
the average score for Latinos is roughly 5 to 25 percent lower
than whites. According to supporters, this evidence suggests
that employer policies that potentially exclude workers based on
credit reports have a disparate impact on African Americans and
Latinos even though these credit reports are rarely job-related.
Supporters also note that, for this reason, the Equal
Employment Opportunity Commission (EEOC) has expressed concern
about the potential racial disparate impact of the use of credit
reports for employment purposes.
Credit reports are particularly misleading in difficult economic
times. Supporters state that, beyond the impact on the
individuals who are denied work, using credit reports as a
barrier to employment is bad for the economy. Supporters argue
that it creates a vicious cycle of poverty for people who have
fallen on hard times. For instance, a foreclosure can cause a
drop of 250 points or more on an individual's credit score,
which can significantly decrease opportunities for credit and
employment. In its letter of support to the Committee, Consumer
Action neatly summarizes this argument made by several other
supporters:
During times of high unemployment, credit reports are
particularly misleading. Our state unemployment rate
exceeded 12% last year, and about half of the unemployed
have been jobless for six months or more. The state of our
struggling economy ensures that more bills will be paid
late as the gap in employment stretches on much longer than
we have been accustomed to in recent years. . . Often the
chief reason for tarnished credit is that unemployed
individuals by definition have no income with which to pay
their bills, which leads to a drop in credit scores. The
use of credit checks in this context perversely can prevent
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someone from landing a job largely because they do not
presently have a job.
ARGUMENTS IN OPPOSITION : A coalition of credit reporting
agencies, business associations, and manufacturing groups
strongly opposes this measure. These opponents argue generally
that consumer credit reports provide valuable information to
employers, including in making hiring decisions. In their
letter of opposition, the coalition states:
(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 . . . have access
to only to the employer's assets and financial information,
but also the assets and financial information of the
public.
As reflected in various studies, employee theft is on the
rise. The National Retail Security Survey released in 2009
also confirmed that employee theft was responsible for over
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 one-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.
This bill is also opposed by a number of apartment associations
representing owners and managers of rental units across the
state. These associations share the concerns of the coalition
with respect to restrictions on evaluating potential employees,
and also argue that the bill may expose tenants and others to an
increased risk of theft or other harm if unscrupulous employees
inappropriately misuse their access to a tenant's personal
information or home. For example, the California Apartment
Association states "Many employees have access to tenants'
rental units. Information contained on a credit report can be
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useful to evaluate whether an applicant might be in a situation
that would lend itself to dishonest activity either in the role
of fiduciary or while in another person's home."
OPPOSE UNLESS AMENDED: On March 8, 2011, the author amended the
bill to remove a provision categorically exempting positions in
city or county government from the general prohibition on use of
a credit report for employment purposes, so long as the
information in the credit report is substantially job-related.
Subsequently, the Committee received a number of letters from
associations representing local government and special districts
taking a position of "opposed unless amended" to once again
categorically exempt cities, counties, and local agencies from
the prohibition. For example, the California State Association
of Counties, the League of California Cities, and the Regional
Council of Rural Counties state:
Counties and cities use credit reports in
pre-employment screening for employees that work in our
police and sheriffs' offices and have access to highly
sensitive information and evidence and for personnel in
various fiscal offices (Treasurer-Tax Collector,
Assessor, etc.) who have access to cash, assets, and
other confidential financial information. We believe
that the targeted use of credit reports is critical to
hiring a dependable public workforce with the
responsibility to handle taxpayer information and
money.
Even without any categorical provision for city and county
positions, this bill would still allow use of credit report
information by a city or county, or any employer for that
matter, as long as the information in the credit report is
substantially job-related and the position is managerial.
It would appear then that the concerns voiced by those who
oppose this bill unless amended should be viewed as applying
to non-managerial positions in city and county government.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation (sponsor)
AFSCME
American Civil Liberties Union
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California Commission on the Status of Women
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Employment Lawyers Association (CELA)
Consumer Federation of California
California Nurses Association
California Teamsters Public Affairs Council
Consumer Attorneys of California
Consumer Action
East Bay Community Law Center
Engineers and Scientists of California
International Longshore & Warehouse Union
Privacy Rights Clearinghouse
Professional & Technical Engineers, Local 21
UNITE HERE!
United Food and Commercial Workers Union, Western States Council
Opposition
Apartment Association of Greater Los Angeles
Apartment Association, California Southern Cities, Inc.
Apartment Association of Orange County
Associated General Contractors
California Apartment Association
California Association of Licensed Investigators
California Automotive Wholesalers' Association
California Chamber of Commerce
California Chapter of the American Fence Association
California Employment Law Council
California Fence Contractors' Association
California Framing Contractors' Association
California Grocers Association
California Hospital Association
California Independent Grocers Association
California New Car Dealers Association
California Restaurant Association
California Retailers Association
CoreLogic
Engineering Contractors' Association
Experian
Flasher/Barricade Association
Marin Builders' Association
National Federation of Independent Business
San Diego County Apartment Association
Santa Barbara Rental Property Association
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TechAmerica
TransUnion
Oppose Unless Amended
Association of California Healthcare Districts
Association of California Water Agencies
California Association of Joint Powers Authorities
California Special Districts Association
California State Association of Counties (CSAC)
League of California Cities
Regional Council of Rural Counties
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334