California Bans Most Credit Checks For Employment Purposes

Looking For A Job In California? No Need To Be Afraid Of A Credit Check For Most Positions.

California Gov. Jerry Brown signed into law an important new protection for California jobseekers in early October. The bill prohibits most employers from using credit scores and credit history in making hiring decisions. California is the seventh state in the country to ban the practice of credit checks by most employers. Another 20 states are considering such measures.

Based on a survey by the Society of Human Resource Management, about 60 percent of companies throughout the U.S. use credit history as a factor in the hiring process. This number has steadily risen in the past decade, from only 19 percent in 1996 and 35 percent in 2003.

The new law makes it illegal for most businesses to rely on credit checks during the hiring process. The California law, however, does not prohibit credit checks in all hiring circumstances. The legal issue will fall on whether the credit check is a necessity for the position. For example, a business that deals with money, crime or large transactions, such as a financial institution or law enforcement agency, may argue that it is a legal necessity to check the credit of its employees in an effort to prevent or detect the possibility of fraud or abuse.

Supporters and Critics of the California Employment Law

The largest credit check company, TransUnion, lobbied heavily against the measure in California. TransUnion is under pressure to stop providing all employers with credit score information. It's likely that the practice will continue until a state bans the practice such as California did. A federal law imposes limits on the amount of information available to employers through credit checks, but the California law goes much further to protect consumers and prospective employees.

Employers may use a prospective employee or job applicant's credit report during the hiring process only when the candidate is being considered for:

  • A managerial position
  • A position in the state Department of Justice, as 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 sensitive 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 bank or credit card account of the employer, authorized to transfer money on behalf of the employer or authorized to enter into financial contracts on behalf of the employer.
    A position that involves access to confidential or proprietary information or trade secret
  • A position that involves regular access to cash totaling ten thousand dollars ($10,000) or more

If a prospective employer is requiring a credit check as part of the pre-screening process, he or she must provide written notice as to which exception applies.

Supporters of the bill noted that during a down economy, many prospective employees have low credit scores or poor credit history due to bad loans, overdue mortgage payments and high credit card debt. These factors shouldn't prevent an otherwise eligible candidate from employment in California. Labor advocates and civil rights groups argued in favor of the California bill.

Credit Checks Are 'Disguises' for Discrimination

The bill also may have the effect of limiting race discrimination in the hiring process. According to the Huffington Post, minorities, on average, have credit scores 5 to 35 percent lower than the credit scores of their white counterparts. One civil rights advocate said, "These credit checks are often used as disguises for other kinds of racial bias."

Some people believe that checking credit score histories allows employers to more quickly evaluate unemployed people. The theory is that an unemployed applicant will have a poorer credit score than an employed applicant. President Obama has said that he wants to ban unemployment discrimination of this nature, although there has been no law on the issue yet.

The California credit check law is set to take effect Jan. 1, 2012. If you live in California and you believe that your employer has wrongfully reviewed or requested a credit score either before or after the law takes effect, you should contact a skilled Pasadena employment law attorney.