New Laws Impose New and Surprising Obligations on ... · Previously employers were only required to give notice of an employee’s right to review an investigative consumer report

“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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