California Employment Law Update

by Emilio Gonzalez and Stuart Miller
[Spring 2002]

Two developments deserve special attention from California employers. First, new obligations have been placed on employers who use investigative consumer reports as part of their employment application and/or evaluation process. Second, new developments at the California Division of Labor Standards Enforcement may impact how employers treat vacation time for their exempt employees.

I. California's Investigative Consumer Report Statutes

Some California employers use "investigative consumer reports" (ICRs) to conduct background checks on applicants or employees. An ICR is a report "in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through any means." Cal. Civ. Code Section 1782.6. Typically, information for an ICR is obtained through personal interviews with neighbors, friends, or associates of the employee/applicant. Recent amendments to California's Investigative Consumer Report statutes impose new disclosure obligations on employers who use ICRs as part of their employment application and/or evaluation process.

Obligation to Provide Notice When Employer Requests an ICR: Employers must notify the employee/applicant when an investigative consumer report (ICR) is sought "not later than three days after the date on which the report was first requested" unless the employer requested the ICR because it suspects that the employee is engaged in "wrongdoing." (Civ. Code § 1786.16 (a)(2)).

Note: Under federal law, an employee or job applicant must be informed that the employer may, at its discretion, request an ICR. The decision to do so then triggers the California employer's further obligation to notify the employee/applicant that an ICR has in fact been sought.

Obligation to Provide Information About the Agency and the Employee's Rights: This three-day notification must include "the name and address of the investigative consumer reporting agency conducting the investigation, the nature and scope of the investigation requested, and a summary of the provisions of Section 1786.22 of the Civil Code" (which describes the obligations of a reporting agency with respect to the employee/applicant, including the manner in which the reporting agency will make files available for inspection). Civ. Code § 1786.16 (a)(2).

Obligation to Provide Copy of the ICR: The employer now is required to provide an actual copy of the report to the employee, as well as information on who issued the report and how to contact them, either at the time of the meeting or interview between the employee and the employer or within seven days of the date the employer receives the report, whichever is earlier. Civ. Code § 1786.16 (b). (Under prior California law, and under current federal law, the employer was required to provide only a written disclosure of the "nature and scope of the investigation requested" upon a written request by the employee. See 15 U.S.C. § 1681d (b)).

Obligations and Penalties Apply to In-House ICRs: An employer that prepares its own investigative report on an employee instead of using the services of an investigative reporting agency shall provide the consumer with the copy of that report at the time of the meeting or interview between the employee and the employer or within seven days of the date the employer receives the report, whichever is earlier. Civ. Code § 1786.53 (new section). This applies to any background checks conducted by the employer.

Penalty for Failure to Provide Copy of the ICR: Failure by the employer to provide a copy of the ICR as required by law exposes it to "any actual damages sustained by the consumer as a result of the failure or, except in the case of class actions, ten thousand dollars ($10,000), whichever sum is greater." New Section 1786.29; Section 1786.50. Civ. Code §§ 1786.29 (new section ) and 1786.50.

Certain Information Excluded from an ICR: An ICR requested by an employer cannot contain certain information listed in Section 1786.18 (such as bankruptcies that antedate the report by more than 10 years, paid tax liens, etc.) under any circumstances. Previously, an ICR requested by an employer investigating an employee who was to earn more than $75,000 per year could contain such information.

Aside from the changes listed above, employers should also be aware of the following obligations:

Obligation to certify that the ICR has been requested for a proper use and that the employer has provided notice to applicants of their rights under Section 1786.22: Employers are required to certify to the reporting agency the purpose for which the information is sought and that the information will not be used for any other purpose. Civ. Code § 1786.21(a). Employers must also certify to the reporting agency that they: (1) made the proper disclosure to the employee (i.e., provided the appropriate three-day notice, along with the summary of the employee's rights with regard to the reporting agency) and (2) will comply with the obligation to provide the employee a copy of the report. Civ. Code § 1786.16 (a)(4)

No Obligation by Employer to Allow Employee to Inspect Files Relating to the ICR: Employers are not required to make employee files relating to ICRs available for inspection unless the employer conducted the ICR itself. The statute states that the "investigative consumer reporting agency shall, upon request and proper identification of any consumer, allow the consumer to visually inspect all files maintained regarding the consumer at the time of the request." (Emphasis added.) Section 1786.22 describes the manner in which the reporting agency must make files available for inspection.

Comment: These changes in the law are substantial, and will greatly impact the manner in which employers perform "due diligence" on prospective employees. We recommend employers consult with employment counsel to review the process they use to screen and investigate prospective employees.

II. DLSE Limits Unilateral Deductions from Vacation Pay Accrued by Exempt Employees.

On March 1, 2002, the Department of Labor Standards Enforcement sent a letter to the Industrial Welfare Commission in which the DLSE asserts that under recent amendments to the California Labor Code, an exempt employee's salary is still determined on a weekly standard, not a monthly standard. Thus, employers may force employees to take days off without pay so long as the employees receive a full salary for any week in which they perform any work without regard to the number of days or hours worked.

The letter goes on to state that "deductions from salaries allowed under 29 C.F.R. § 541.118 (a) -(c) of the federal regulations are also permitted under state law." This language suggests that an employee's exempt status will not be affected if deductions are made from his salary for absences for a day or more for personal reasons, or in certain circumstances, for absences occasioned by sickness or disability. To this extent, California and federal law appear to be in agreement.

However, the letter also notes that "vacation is treated differently under state law than federal law . . . [u]nder California law accrued vacation constitutes 'wages'." The effect of this language is unclear. Presumably, this means that an employer is not allowed to unilaterally deduct any absent time from the employee's accrued vacation time, as to do so would be a "deduction" of "wages," which would jeopardize a California employee's exempt status. Therefore, employers should not unilaterally deduct vacation time from an exempt employee's accrued vacation balance as a means of managing an unexpected day off. Employers should, in addition to seeking permission from exempt employees to deduct work days off from vacation pay, avoid allowing employees to use their vacation time in increments of less than one day, since this may be characterized as a deduction in wages which is inconsistent with the employee's exempt status.

California wage and hour law continues to be a minefield for well intentioned employers. We will keep you apprised of further legal developments.

This Employment Law Advisory is a publication of the Employment Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in employment law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. Copyright © 2002, Davis Wright Tremaine LLP.

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