Background Investigations Part II:
California's Legislature Sees the Light and Eliminates Some Significant Burdens on California's Employers

By Robert Blumberg and Rod Fliegel
September 2002

For years, an employer's obligations under the California's Investigative Consumer Reporting Agencies Act (ICRA), Civil Code section 1786 et seq., mirrored their obligations under the Federal Consumer Reporting Act (FCRA), 15 U.S.C. section 1681 et seq. Last year, based upon the stated goal of combating the growing crime of "identity theft," California's Legislature substantially revised the ICRA, greatly increasing the burden on California's employers. Once most employers recognized what had happened, it was too late. The law had already been passed and was in force, leaving many employers scrambling to comply with the law's new requirements. Now, based upon the significant outcry of employers in the state, and substantial lobbying efforts, the Legislature has agreed to "clarify" the ICRA in several significant regards. This bill has been signed by Governor Davis and is effective immediately.

The Amendments That Were Enacted Last Year

By enacting Assembly Bill 655 (AB 655) last year, the Legislature significantly expanded the ICRA. The amendments required an employer to notify applicants or current employees every time a background check was obtained, and set forth specific requirements regarding timing and what information must be provided. AB 655 also contained two dramatic changes to existing law: First, it specifically required that an employer provide a copy of the report to the consumer within seven days of receipt, whether requested or not. Second, the law extended its scope to cover background checks and investigations conducted in-house by an employer, without the use of a consumer reporting agency.

The Newly Enacted Amendments

1. Employers must obtain notice and consent every time an investigative consumer report is obtained.

First the bad news: While apparently seeking to ease the burden on employers, the Legislature has increased employers' burden in one significant respect. Whereas the FCRA has always required written consent prior to seeking a consumer report, the ICRA previously only required notice. Now the ICRA has expanded the notice requirement to include an explicit provision requiring written consent from the consumer every time a consumer report is sought. This differs significantly from the FCRA, which permits a single consent form to be signed covering all subsequent reports.

Specifically, the ICRA now requires that prior to requesting a report, an employer must provide a written disclosure to the consumer containing the following information:

• The fact that an investigative consumer report may be obtained.
  
  
• Identifying the permissible purpose for obtaining the report, i.e., for employment purposes such as hiring or promotion.
  
  
• Indicating that the report may include information on the consumer's character, general reputation, personal characteristics, and mode of living.
  
  
• Identifying the name, address, and telephone number of the investigative consumer reporting agency conducting the investigation.
  
  
• Notifying the consumer of the specific nature and scope of the investigation requested, and providing the consumer with a summary of his or her right to view the information compiled by the consumer reporting agency.
  
  
• Providing that the consumer must authorize in writing the procurement of the report on the disclosure form.

The authorization form must be separate from other documents, and cannot be contained in the application or handbook. Thus, employers must now have a single form that not only provides information to the consumer, but also requires the consumer to acknowledge, on that form, their consent to having the report made. A single consent form may, however, be used to comply with both the ICRA and FCRA.

2. Notice and consent is not required for investigations into misconduct or wrongdoing.

Last year's amendments created ambiguity regarding whether notice was required for investigations into suspected employee misconduct, such as theft or sexual harassment. One provision seemed to exempt all such investigations. Another provision appeared to exempt only investigations into suspected criminal activity (e.g., theft). By the new amendments, the first provision has been expanded to include any suspicion of misconduct or wrongdoing. The second provision, which created the ambiguity, was eliminated. Further, these provisions have been clarified by a new provision specifically indicating that the notice and consent requirements do not apply to investigations into misconduct or wrongdoing. Thus the law can now be read broadly to exempt any investigation by an outside entity into employee misconduct or wrongdoing from the notice and, more significantly, the consent requirements of the ICRA. C.C.§1786.16(a)(2). It should be noted that there is still some dispute regarding whether the notice and consent requirement under the FCRA applies to investigations into misconduct such as sexual harassment.

3. Employers are not required to provide employees suspected of misconduct with a copy of the investigation report.

One of the most serious consequences of last year's amendments emanated from the requirement that the applicant or employee receive a copy of any report prepared by a consumer reporting agency. Although there was a limited exception in the notice provision for misconduct investigations (see above), no such exception was included in the provision requiring the employer to provide a copy of the report to the accused person. Many employers feared that they would be unable to properly investigate claims of sexual harassment and other wrongdoing if the witnesses learned that the alleged wrongdoer would immediately receive a copy of the report.

To remedy this unintended consequence, the Legislature amended the ICRA to state that no copy of the report is required "if a report is sought for employment purposes due to suspicion held by an employer of wrongdoing or misconduct by the subject of the investigation." CC §1786.16(c).

4. Consumers must affirmatively request a copy of the report, which can be sent directly by the consumer reporting agency.

Last year's amendments placed the burden on the employer to promptly provide the subject of the report with a copy. This burden has been somewhat reduced. Now the employer must provide a "check box" which permits the consumer to indicate affirmatively that he or she wants to receive a copy of any report obtained by the employer. This check box can be included on the disclosure and consent form, or as a separate document. More importantly, the Legislature has clarified that this duty is delegable. It is advisable for an employer to agree with its consumer reporting agency that the consumer reporting agency will send a copy of the report directly to any consumer indicating a desire to receive the report at the same time that the report is sent to the employer. CC §1786.16(b).

5. An employer does not have to disclose in-house investigations or reference checks unless it obtains certain public records.

Among the most serious and controversial ramifications of last year's amendments was the provision that required all employers to disclose to applicants and employees the result of in-house investigations. As written, this would have included reference checks, as well as investigations into wrongdoing such as sexual harassment, discrimination or theft. This section has been almost completely rewritten.

Now the law states that an employer only has an obligation to disclose information obtained directly by the employer "that is a matter of public record." Public records are defined as "records documenting an arrest, indictment, conviction, civil judicial action, tax lien, or outstanding judgment." Where an employer receives such information, it must provide the consumer with a copy within seven days. Further, the consumer can waive their right to receive these reports by a "check box" on the job application or any other written form. However, even where the consumer has waived his or her right to receive this information, it must be provided if the employer takes adverse action based upon the information obtained from these public records. CC §1786.53.

In addition, a new section was specifically added indicating that the ICRA does not alter the ability of employers to exclude reference information from personnel files, as provided by California Labor Code §1198.5, and that the ICRA is not intended to force the disclosure of information protected by the attorney-client privilege and attorney work-product doctrine. CC §1786.55.

6. The provision requiring notice of adverse action is reinstated.

Last year's amendments deleted the provision of the ICRA requiring notice to a consumer where the employer decides to take adverse action based upon the contents of the report. The Legislature has reinstated this requirement, which is similar to a requirement that remains in the FCRA. Where an employer denies employment "either wholly or partly because of information contained in an investigative consumer report" the employer must notify the consumer of that fact along with the name and address of the consumer reporting agency. Under the FCRA, where adverse action is taken based upon the contents of a consumer report, a copy of the report must also be provided with this notice.

These Amendments Will Take Effect Immediately Upon Enactment
AB 1068 was signed into law on September 28, 2002. Recognizing the significant problems and potential liability that would face California's employers if the law were not changed, the Legislature has passed these amendments as a "clarification" of existing law and on an urgent basis. As a result, the amendments became effective immediately upon enactment. Further, because these changes are meant to be a "clarification" of existing law, they arguably eliminate liability for failure to comply with last year's amendments to the extent that those obligations have been deleted by the current amendments. On the other hand, employers must immediately comply with the newly enacted notice and consent provisions of the ICRA.

Summary

• California employers must provide notice and obtain consent every time they hire a consumer reporting agency to conduct a background check, except for investigations into suspected misconduct or wrongdoing.
  
  
• On the consent form, employers must provide a means for the consumer to obtain a copy of the report, and should decide in advance who will provide the report to the consumer.
  
  
• Employers do not have to provide a copy of the report regarding investigations into suspected misconduct or wrongdoing.
  
  
• Employers must notify the consumer if adverse action is taken based upon the contents of the background check, and may have to provide a copy of the report.
  
  
• Employers must provide consumers with public records reports obtained directly by the employer, unless the consumer waives this right.
  
  
• Employers do not have to provide information regarding background checks, reference checks or investigations conducted in-house other than these enumerated public records.

Robert Blumberg is a shareholder in Littler Mendelson's Los Angeles office and Rod Fliegel is a shareholder in Littler Mendelson's San Francisco office. If you would like further information, please contact your Littler attorney at 1.888.Littler, info@littler.com, Mr. Blumberg at RBlumberg@littler.com, or Mr. Fliegel at RFliegel@littler.com

ASAPTM is published by Littler Mendelson in order to review the latest developments in employment law. ASAPTM is designed to provide accurate and informative information and should not be considered legal advice. © 2002 Littler Mendelson. All rights reserved.

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