Identity Theft Law Leaves Employers Uncertain

By Claudette G. Wilson and Michael S. Kalt
Law Week - Friday, May 3, 2002

The law abhors uncertainty.  So do employers, particularly in a litigious environment where every new Labor Code provision might give rise to class-action lawsuits.  Unfortunately, although enacted with the best of intentions, California’s new “identity theft” legislation (A.B. 655) interjects considerable uncertainty.

The law’s purpose and requirements

Enacted on Jan. 1, 2002, the law amends California’s Investigative Consumer Reporting Agencies Act in an effort to prevent identity theft.  The law reflects a concern that employers were conducting investigative background checks and making adverse employment decisions based on false and negative information obtained, without disclosing this information, thus allowing the theft to remain undetected.

The law is designed to assist applicants in identifying and correcting any “misinformation” by requiring an employer to turnover the report or other information to the applicant.

Unanswered Questions

Most employers did not expect the law to seriously affect their employment practices.  However, the language in the statute is so broad that several provisions have the potential to seriously impact California employers.

For example, the new disclosure requirements now require employers to automatically provide copies of any report that includes information concerning a consumer’s “character, general reputation, personal characteristics or mode of living obtained through any means” to applicants. (Prior to the enactment of the A.B. 655, an employer only had to disclose the “nature and scope” of the investigation upon a written request by the applicant.)  Employers who fail to comply with the new provision are subject to statutory damages totaling $10,000 or actual damages (whichever is greater), as well as attorney’s fees and costs, and potentially, punitive damages.

Perhaps most problematic is a new provision, Civil Code section 1786.53, which requires employers to comply with the disclosure provisions even when they perform their own investigations.  This provision was designed to prevent employers from circumventing the disclosure requirements by conducting the searches themselves, such as via the Internet.  Unfortunately, as drafted, the section speaks broadly and suggests employers who conduct their own investigations must disclose any “information bearing on character and reputation.”  However, if they use a reporting agency, disclosure appears required only where the information gathered results in a “report.”

What about reference checks?

The crucial question is how broadly “information” is to be defined under section 1786.53 and whether it extends to reference checks conducted by employers.

It’s important to clarify that there are two different types of reference checks: confirmation references, which confirm prior employment information such as dates worked, salary and titles, and opinion references, which seek more detailed opinions regarding prior performance and work habits.

It seems fairly clear that A.B. 655 should not apply to confirmation references as the innocuous information sought seems to fall outside the statutory definition of the type of information that needs to be disclosed.

However, things get murkier when employers contact reference to obtain information regarding performance and work habits with prior employers.  Such material begins to look a lot like information bearing on “character, reputation and personal characteristics” that must be disclosed under A.B. 655.

Extending these new disclosure requirements to include “references” would be nonsensical and counterproductive for several reasons.  First, it would not further the goal of A.B. 655, as “identity theft” issues do not come to light when employers contact the very individuals identified by applicants during the hiring process. Second, such an expansive interpretation of A.B. 655 would lead to the illogical result of providing applicants with greater rights than current employees.  Under California law, current employees do not have the right to inspect letters of reference.

These results suggest A.B. 655 was not intended to apply so broadly, particularly since there is nothing in the legislative history to support such an application.  However, given the uncertainty associated with this new legislation and the hefty penalty, employers may decide to be more circumspect in contacting reference.  Prior employers may also decide not to provide any reference. In short, prior and prospective employers may jointly adopt a “don’t ask, don’t tell reference policy.  This would only lead to potentially dangerous results.

One way to clarify this issue is through the courts via more law suits against employers.  Another and less costly means would be through legislative clarification at the earliest opportunity.