LANDLORD – TENANT SECURITY DEPOSIT REQUIREMENTS

ISSUE: What happens if a residential landlord fails to provide a written accounting to the tenant, regarding the tenant’s security deposit, within 21 days of lease termination as required by Civil Code Section 1950.5?

SHORT ANSWER: If, within the statutory 21 day period, the landlord has not provided the tenant with a written accounting of the portion of the security deposit the Landlord plans to retain, the right to retain all or part of the security deposit under section 1950.5, subdivision (f), has not been perfected, and the landlord must return the entire deposit to the tenant.  However, if a landlord has failed in good faith to take advantage of the summary deduct-and-retain procedure allowed under section 1950.5, subdivision (f), the landlord may still recover damages for unpaid rent, repairs and cleaning (Civ. Code § 1950.5, subd. (e)) in a subsequent judicial proceeding provided that the landlord has suffered such damages and that the amount claimed is reasonable (Civ. Code § 1950.5, subd. (k)). (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 749-750.)  Further, there are two additional exceptions to the good faith justification for not timely itemizing or returning the deposit:  1) When a repair to be done by the landlord cannot reasonably be completed within 21 calendar days after the tenant vacates, or if documents from a person or entity providing services, materials, or supplies are not in the landlord's possession within 21 calendar days after the tenant vacates, Civil Code section 1950.5(g)(3), allows the landlord to use a repair estimate in calculating the security deposit refund; or,  2)  The total amount deducted for repairs and cleaning does not exceed $125, or the tenant waived the rights specified in Civil Code section 1950.5(g)(2) and (g)(3), in writing. 

DISCUSSION:

California Code of Civil Procedure section 1950.5 and case law govern the timely itemization concerning and disposition of a security deposit.  There are several steps a landlord must follow in order utilize the deposit.

First, there is a definitional issue.  There is a need to understand what a deposit is and how it can be used by the landlord, as that may bear on good or bad faith retention of the deposit. As provided in 1950.50 (a): “This section applies to security for a rental agreement for residential property that is used as the dwelling of the tenant.

(b) As used in this section, “security” means any payment, fee, deposit, or charge, including, but not limited to, any payment, fee, deposit, or charge, except as provided in Section 1950.6 [relating to an “application screening fee”], that is imposed at the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing a new tenant or that is imposed as an advance payment of rent, used or to be used for any purpose, including, but not limited to, any of the following:

(1) The compensation of a landlord for a tenant's default in the payment of rent.

(2) The repair of damages to the premises, exclusive of ordinary wear and tear, caused by the tenant or by a guest or licensee of the tenant.

(3) The cleaning of the premises upon termination of the tenancy necessary to return the unit to the same level of cleanliness it was in at the inception of the tenancy. The amendments to this paragraph enacted by the act adding this sentence shall apply only to tenancies for which the tenant's right to occupy begins after January 1, 2003.

(4) To remedy future defaults by the tenant in any obligation under the rental agreement to restore, replace, or return personal property or appurtenances, exclusive of ordinary wear and tear, if the security deposit is authorized to be applied thereto by the rental agreement.” (Cal. Civ. Code § 1950.5.)

The security deposit can be utilized by the Landlord for the items listed in 1-4 above.  However, the use categories are not limited, as the statute provides, the list is “including but not limited to,” which may allow landlord attorneys to argue for a broader use of the security deposit (such as late fees, attorney’s fees, agent commission fees, etc.)   

Second, Section 1950.5 (f)(1) provides in pertinent part:  “Within a reasonable time after notification of either party’s intention to terminate the tenancy, or before the end of the lease term, the landlord shall notify the tenant in writing of the tenant’s option to request an initial inspection and of the tenant’s right to be present at the inspection. [A]t a reasonable time, but no earlier than two weeks before the termination or the end of lease date, the landlord, or an agent of the landlord, shall, upon the request of the tenant, make an initial inspection of the premises prior to any final inspection the landlord makes after the tenant has vacated the premises. The purpose of the initial inspection shall be to allow the tenant an opportunity to remedy identified deficiencies, in a manner consistent with the rights and obligations of the parties under the rental agreement, in order to avoid deductions from the security.” 

In other words, after notice of intent to terminate the lease, the landlord is required to give the tenant notice of tenant’s right to be involved in a property inspection to allow the tenant an opportunity to remedy alleged deficiencies, which may impact on the landlord’s use or return of the security deposit.

Finally, Section 1950.5 (g)(1) provides in pertinent part:  “No later than 21 calendar days after the tenant has vacated the premises, but not earlier than the time that either the landlord or the tenant provides a notice to terminate the tenancy under Section 1946 or 1946.1, Section 1161 of the Code of Civil Procedure, or not earlier than 60 calendar days prior to the expiration of a fixed-term lease, the landlord shall furnish the tenant, by personal delivery or by first-class mail, postage prepaid, a copy of an itemized statement indicating the basis for, and the amount of, any security received and the disposition of the security, and shall return any remaining portion of the security to the tenant. (2) Along with the itemized statement, the landlord shall also include copies of documents showing charges incurred and deducted by the landlord to repair or clean the premises . . . .”

From the plain language of the statute, the California Supreme Court has held:  “we conclude that a landlord (1) must return a tenant's security deposit within the specified period after the termination of the tenancy, (2) may retain all or part of the security deposit as compensation for unpaid rent, repairs, and cleaning, and (3) must provide a written accounting of any amounts retained within the specified period. If, within the specified [21 day] period, the landlord has not provided the tenant with a written accounting of the portion of the security deposit he plans to retain, the right to retain all or part of the security deposit under section 1950.5, subdivision (f), has not been perfected, and he must return the entire deposit to the tenant.” (Emphasis added.)  (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 744-745).

In Granberry, Defendant landlords owned or operated between 1200 and 1500 residential rental units. During the period relevant to this case, April 27, 1978, to April 27, 1981, it was defendants' practice to charge tenants an increased rental fee for the first 31 days of tenancy, but to charge a reduced fee for all subsequent months.  Defendants never returned this fee in whole or in part; rather, they simply retained it as part of the rental payment for the first month.

Plaintiffs, a class of former tenants, sued for a refund of the amount by which the rent they had paid for the first 31 days of their tenancy exceeded the amount they paid in each of the following months. After motions and appeals and a remand, a jury found that the excess rental payments were security deposits within the meaning of section 1950.5, subdivision (b), but that defendants had not retained them in bad faith. (Id. at p. 743.)

The California Supreme Court stated the issue:  “The issue now before us is whether, notwithstanding their good-faith lack of compliance, defendants may set off amounts allegedly due for unpaid rent, repairs, and cleaning against money due plaintiffs as a refund of their security deposits. We conclude that defendants may do so.”  (Id.)

In other words, while landlords are statutorily required to comply with the 21 Day Rule, and return the security deposit for failure to do so, there is a good faith exception, which allows the landlord to claim set off in a subsequent action concerning the security deposit. According to the Granberry Court, “[i]f a landlord has failed in good faith to take advantage of the summary deduct-and-retain procedure allowed under section 1950.5, subdivision (f), the landlord may still recover damages for unpaid rent, repairs and cleaning (Civ. Code § 1950.5, subd. (e)) in a subsequent judicial proceeding provided that landlord has suffered such damages and that the amount claimed is reasonable (Civ. Code § 1950.5, subd. (k)). (Granberry v. Islay Invs. (1995) 9 Cal.4th 738, 749-750.)

An obvious question is what is a good faith (or bad faith) failure to comply with the statute regarding the security deposit?

Neither Section 1950.5 nor case law is clear.  In Granberry, good faith seemed to be the landlord’s determination (albeit incorrect determination) that the money collected was increased rent, suggesting that a reasonable but mistaken characterization of the deposit might be good faith. 

In one case, a class was certified on a claim bad faith retention of security deposits.  (Peviani v. Arbors at California Oaks Prop. Owner, LLC (2021) 62 Cal. App. 5th 874, 882, reh'g denied (Apr. 29, 2021), review denied (July 14, 2021). In Peviani, the court stated:  “the elements of an action for wrongful retention of a security deposit under Civil Code section 1950.5 are: (1) the plaintiff paid a security deposit; (2) the security deposit was for a residential property; (3) the plaintiff used the property as a dwelling; and (4) the amounts deducted by the defendant were not reasonably necessary. If the plaintiff is seeking punitive damages, then it must also be shown that the defendant made the deductions in bad faith. (Civ. Code, § 1950.5, subds. (a), (e) & (l).)”  (Id. at p. 882.)   (See Civil Code section 1950.5(l) for the penalties or damages that may be assessed against the landlord for a bad faith claim or retention by a landlord of the tenant’s security deposit or any portion thereof.)

While Peviani addressed class certification, the facts alleging bad faith included: the landlords had a pattern and practice of improperly retaining security deposits by charging for normal wear and tear, adding frivolous charges, charging for repairs that were never performed, charging for unrepaired damage caused by previous tenants, and charging for utility bills that were already paid.  However, that case specifically addressed class certification not bad faith.

In an unpublished case, the court of appeal affirmed that Granberry “explicitly limited its holding to cases involving good faith failures only. (Alcoser v. Thomas (Cal. Ct. App. Feb. 16, 2011) (No. A124848, 2011 WL 537855, at 9–10 (Not Officially Published).  Like Peviani, Alcoser involved claims of bad faith retention of security deposits, which included the landlord not giving an itemization or charging for but not timely making repairs, or charging for repairs for pre-existing damages.  The jury found bad faith on these facts.  Again, however, this was an unpublished case and may not be formally relied on.  

There are two additional exceptions to the 21 Day Rule (in addition to a good faith failure to comply): 

1.      When a repair to be done by the landlord or the landlord's employee cannot reasonably be completed within 21 calendar days after the tenant vacates, or if documents from a person or entity providing services, materials, or supplies are not in the landlord's possession within 21 calendar days after the tenant vacates, Civil Code section 1950.5(g)(3) allows the landlord to use a repair estimate in calculating the security deposit refund. The landlord may deduct the amount of a good faith estimate of the charges that will be incurred and provide that estimate in or with the itemized statement. If the reason for the estimate is because the documents from a person or entity providing services, materials, or supplies are not in the landlord's possession, the itemized statement shall include the name, address, and telephone number of that person or entity. Within 14 calendar days of completing the repair or receiving the documentation, the landlord shall complete the requirements in Civil Code section 1950.5(g)(1)–(2), including refunding the appropriate amount of the security deposit.

2.      Additionally, under Civil Code section 1950.5(g)(4), the landlord need not give the tenant the documentation required by Civil Code section 1950.5(g)(2) or (g)(3) if either:

a.       The total amount deducted for repairs and cleaning does not exceed $125, or

b.      The tenant waived the rights specified in Civil Code section 1950.5(g)(2) and (g)(3), but the waiver shall only be effective if signed at the same time as (or after) a notice to terminate under Civil Code section 1946 or section 1946.1 or Code of Civil Procedure section 1161 was given, or no earlier than 60 calendar days before the expiration of a fixed-term lease; the waiver must substantially include the text of paragraph (2).   

In sum, the residential landlord must handle the security deposit with care:  There are several requirements to meet in order to properly account for and/or retain some or all of the tenant’s security deposit.  The failure to be aware of and comply with the foregoing could subject the landlord to a forced return of the entire security deposit and an imposition of damages.  

DISCLAIMER

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement. 

Can Employers Do Background (Criminal and Credit) Checks of Potential Employees?

SHORT ANSWERS

                As to criminal background checks, the answer is yes but there is a question of timing.  The employer cannot do a criminal conviction history check prior to making an offer.  California law makes it an unlawful employment practice for an employer with five or more employees to include any question on an employment application regarding an applicant’s conviction history (or even to inquire into or to consider an applicant’s conviction history), until after the employer has made a conditional offer of employment to the applicant.  This means the employer can make a conditional offer(s) based on the results of a criminal conviction background check. 

                Also, once the employer obtains the report, realize that, if it is negative, potentially withdrawing the offer has certain statutory requirements that the employer must meet before withdrawing the offer. 

                As to credit background check requirements, as opposed to the criminal background check, the answer is yes but the limitations are both more and less.  Under California law, an employer cannot use a consumer credit report for employment purposes unless the employment is for a few defined employment positions.  Those potentially relevant in most positions include:  1) a managerial position, 2) a position that involves access to confidential information (including financial information, security data, trade secrets), 3) a position that involves regular access to bank or credit card information, social security number or date of birth, or, 4) a position that involves regular access to cash totaling $10,000 or more of the employer, customer, or client [which would include a donor; cash could include credit and checks].

                So, regarding credit checks, there is a limitation on the “who.”   In California, an employer cannot do credit checks on just any prospective employee; it must be a person who falls into one of the specified positions.

                Unlike the criminal history background check, there is no requirement for the employer to wait and condition employment on the results of a credit report.  The law says that in the limited positions summarized above, an employer can request a credit report “for employment purposes,” which means as part of the pre-screening process, which means not necessarily as a part of the job offer.   

                However, the employer needs to provide prior written notice of the request for a credit report which informs the prospective employee that a report will be used for employment purposes and the notice must identify the specific basis for the use of the report (i.e., the employment position for which it is to be used).  Along with the notice to obtain and consider the credit report, there must also be a written provision which informs the prospective employee that he/she has the right to receive a copy of the report contemporaneously at no charge.  Moreover, under Federal law, the prospective employee must give written authorization for the credit report in a separate document (not part of the employment application) and in that separate document the employer must also specifically disclose in writing that the credit report is only obtained for employment purposes; and (ii) the person has authorized in writing the procurement of the report by the employer.  

                While an employer could technically obtain a credit report of a prospective employee without a conditional offer of employment, due to the onerous notice and disclosure requirements, the better practice is to make an offer conditioned on the employer obtaining and evaluating the credit report, along with the criminal background report. 

                If employment is denied based on the credit report, there are many requirements that employer must follow in written communication with the prospective (and now rejected) employee.

                Finally, as a general rule, any time an employer uses an applicant’s or employee’s background information to make an employment decision, regardless of how it got the information, the employer must comply with federal laws that protect applicants and employees from discrimination. That includes discrimination based on race, color, national origin, sex, or religion; disability; genetic information (including family medical history); and age (40 or older). These laws are enforced by the Equal Employment Opportunity Commission (EEOC). In addition, when the employer runs background checks through a company in the business of compiling background information, it (the company AND the employer) must comply with the Fair Credit Reporting Act (FCRA).  If an employer makes the decision to obtain background reports for applicants or employees, the practice of obtaining the reports needs to be uniformly applied.  Simply by complying with the federal and state requirements for background reports and credit checks does not shield an employer from discrimination claims or other claims that the practice used by the employer is illegal.

LONGER LEGAL DISCUSSION

CALIFORNIA LAW ON EMPLOYER BACKGROUND CHECKS (CONVICTION HISTORY)

                The Fair Chance Act, effective January 1, 2018, added a new section to the Fair Employment and Housing Act (at Government Code section 12952) making it illegal for most employers in California to ask about the criminal record of job applicants before making a job offer. This means ads, job applications, and interview questions cannot include inquiries into an applicant’s criminal record. The purpose of the law is to allow applicants to be judged based on their qualifications.

                Government Code section 12952 provides:

(a) Except as provided in subdivision (d), it is an unlawful employment practice for an employer with five or more employees to do any of the following:

(1) To include on any application for employment, before the employer makes a conditional offer of employment to the applicant, any question that seeks the disclosure of an applicant’s conviction history.

(2) To inquire into or consider the conviction history of the applicant, including any inquiry about conviction history on any employment application, until after the employer has made a conditional offer of employment to the applicant.

(3) To consider, distribute, or disseminate information about any of the following while conducting a conviction history background check in connection with any application for employment:

(A) Arrest not followed by conviction, except in the circumstances as permitted in paragraph (1) of subdivision (a) and subdivision (f) of Section 432.7 of the Labor Code.

(B) Referral to or participation in a pretrial or post-trial diversion program.

(C) Convictions that have been sealed, dismissed, expunged, or statutorily eradicated pursuant to law, or any conviction for which the convicted person has received a full pardon or has been issued a certificate of rehabilitation.

(4) To interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this section.

(b) This section shall not be construed to prevent an employer from conducting a conviction history background check not in conflict with the provisions of subdivision (a).

[Comment:  The following becomes relevant if the employer intends to deny or withdraw an employment offer based on the person’s conviction history]:

(c) (1) (A) An employer that intends to deny an applicant a position of employment solely or in part because of the applicant’s conviction history shall make an individualized assessment of whether the applicant’s conviction history has a direct and adverse relationship with the specific duties of the job that justify denying the applicant the position. In making the assessment described in this paragraph, the employer shall consider all of the following:

(i) The nature and gravity of the offense or conduct.

(ii) The time that has passed since the offense or conduct and completion of the sentence.

(iii) The nature of the job held or sought.

(B) An employer may, but is not required to, commit the results of this individualized assessment to writing.

(2) If the employer makes a preliminary decision that the applicant’s conviction history disqualifies the applicant from employment, the employer shall notify the applicant of this preliminary decision in writing. That notification may, but is not required to, justify or explain the employer’s reasoning for making the preliminary decision. The notification shall contain all of the following:

(A) Notice of the disqualifying conviction or convictions that are the basis for the preliminary decision to rescind the offer.

(B) A copy of the conviction history report, if any.

(C) An explanation of the applicant’s right to respond to the notice of the employer’s preliminary decision before that decision becomes final and the deadline by which to respond. The explanation shall inform the applicant that the response may include submission of evidence challenging the accuracy of the conviction history report that is the basis for rescinding the offer, evidence of rehabilitation or mitigating circumstances, or both.

(3) The applicant shall have at least five business days to respond to the notice provided to the applicant under paragraph (2) before the employer may make a final decision. If, within the five business days, the applicant notifies the employer in writing that the applicant disputes the accuracy of the conviction history report that was the basis for the preliminary decision to rescind the offer and that the applicant is taking specific steps to obtain evidence supporting that assertion, then the applicant shall have five additional business days to respond to the notice.

(4) The employer shall consider information submitted by the applicant pursuant to paragraph (3) before making a final decision.

(5) If an employer makes a final decision to deny an application solely or in part because of the applicant’s conviction history, the employer shall notify the applicant in writing of all the following:

(A) The final denial or disqualification. The employer may, but is not required to, justify or explain the employer’s reasoning for making the final denial or disqualification.

(B) Any existing procedure the employer has for the applicant to challenge the decision or request reconsideration.

(C) The right to file a complaint with the department.

(d) . . .  [Intentionally omitted]

(f) For purposes of this section:

(1) “Conviction” has the same meaning as defined in paragraphs (1) and (3) of subdivision (a) of Section 432.7 of the Labor Code.

(2) Notwithstanding paragraph (1), the term “conviction history” includes:

(A) An arrest not resulting in conviction only in the specific, limited circumstances described in subdivision (f) of Section 432.7 of the Labor Code, when an employer at a health facility, as defined in Section 1250 of the Health and Safety Code, may ask an applicant for certain positions about specified types of arrests.

(B) An arrest for which an individual is out on bail or his or her own recognizance pending trial.

Labor Code section 432.7 provides more definition (or limitations) of discoverable criminal background and the penalties for violating this law.  Per Labor Code section 432.7: 

(a) (1) An employer, whether a public agency or private individual or corporation, shall not ask an applicant for employment to disclose, through any written form or verbally, information concerning an arrest or detention that did not result in conviction, or information concerning a referral to, and participation in, any pretrial or post trial diversion program, or concerning a conviction that has been judicially dismissed or ordered sealed pursuant to law, including, but not limited to, Sections 1203.4, 1203.4a, 1203.45, and 1210.1 of the Penal Code. An employer also shall not seek from any source whatsoever, or utilize, as a factor in determining any condition of employment including hiring, promotion, termination, or any apprenticeship training program or any other training program leading to employment, any record of arrest or detention that did not result in conviction, or any record regarding a referral to, and participation in, any pretrial or post trial diversion program, or concerning a conviction that has been judicially dismissed or ordered sealed pursuant to law, including, but not limited to, Sections 1203.4, 1203.4a, 1203.45, and 1210.1 of the Penal Code. This section shall not prevent an employer from asking an employee or applicant for employment about an arrest for which the employee or applicant is out on bail or on his or her own recognizance pending trial.

. . .  [Intentionally omitted]

(3) For purposes of this section:

(A) “Conviction” includes a plea, verdict, or finding of guilt, regardless of whether a sentence is imposed by the court.

(B) “Conviction” does not include, and shall not be construed to include, any adjudication by a juvenile court or any other court order or action taken with respect to a person who is under the process and jurisdiction of the juvenile court.

. . .  [Intentionally omitted]

(c) If a person violates this section, or Article 6 (commencing with Section 11140) of Chapter 1 of Title 1 of Part 4 of the Penal Code, the applicant may bring an action to recover from that person actual damages or two hundred dollars ($200), whichever is greater, plus costs, and reasonable attorney’s fees. An intentional violation of this section shall entitle the applicant to treble actual damages, or five hundred dollars ($500), whichever is greater, plus costs, and reasonable attorney’s fees. An intentional violation of this section is a misdemeanor punishable by a fine not to exceed five hundred dollars ($500).

. . . [Intentionally omitted]

(f) (1) Except as provided in paragraph (2), this section does not prohibit an employer at a health facility, as defined in Section 1250 of the Health and Safety Code, from asking an applicant for employment either of the following: . . . 

[Intentionally omitted

(n) Nothing in this section shall prohibit an employer, whether a public agency or private individual or corporation, required by state, federal, or local law to conduct criminal background checks for employment purposes or to restrict employment based on criminal history from complying with those requirements, or to prohibit the employer from seeking or receiving an applicant’s criminal history report that has been obtained pursuant to procedures otherwise provided for under federal, state, or local law. [. . .  Omitted]   

                The California Department of Fair Employment and Housing has provided some guidelines as to what can be asked regarding criminal history, which fairly summarizes the law and what an employer can ask and what happens when the employer wants to withdraw the offer:

“After a conditional offer of employment, what can an employer ask me about my criminal history?

After a conditional offer, an employer may ask you if you have any history of convictions. But employers may not ask about or consider information about (1) an arrest that did not result in a conviction (subject to the exceptions in Labor Code § 432.7(a)(1) and (f)); (2) referral to or participation in a pretrial or post trial diversion program; or (3) convictions that have been sealed, dismissed, expunged or statutorily eradicated pursuant to law.

                The following is an example of a permissible question after a conditional offer:

 Have you ever been convicted of a misdemeanor or felony? Answer “NO” if : (1) you have never been convicted of a misdemeanor or felony; (2) the misdemeanor or felony was sealed, dismissed, expunged, or reversed on appeal; (3) you withdrew your plea after completing a court program and were not convicted of a misdemeanor or felony.

The law provides you with important rights if the employer wants to take back (rescind) your conditional job offer because of your criminal history.

Individualized assessment: The employer must make an individualized assessment about your conviction history. That means that an employer has to consider the nature and gravity of your criminal history (the harm caused by the criminal conduct), the amount of time that has passed since the conviction, and the nature of the job you are seeking (the essential functions and the  job environment). The employer cannot simply say that they won’t hire anyone convicted of a certain crime.

Notification in writing: The employer must notify you in writing of the preliminary decision that your conviction history disqualifies you from employment.

Notice of disqualifying conviction: The employer must provide you a notice of the convictions that disqualify you from employment.

Copy of conviction history report: If the employer obtained a copy of your conviction history report, they must provide you with a copy of the report.

Chance to respond: The employer has to give you at least five business days to respond to the preliminary decision to take back your job offer (and has to tell you that you can respond). If you dispute the conviction history report, and you tell the employer within five days, then you get an additional five days to respond. The employer has to tell you that your response can include any evidence challenging the accuracy of the conviction history report, plus any evidence of your rehabilitation or circumstances that you believe are important for the employer to consider about your life or the crime. Examples of this type of evidence include your employment history, an explanation of circumstances about your involvement in the crime, and rehabilitation efforts such as education or training.

Consideration of your response: The employer must consider any information you submit in response.

Final notification in writing: After considering any information you submit, the employer must notify you in writing of any final disqualification from the job, any procedure the employer has to challenge that final disqualification, and your right to file a complaint with the Department of Fair Housing and Employment.”  See  https://www.dfeh.ca.gov/resources/frequently-asked-questions/criminalhistoryinfoinemploymentfaqs/

[These statements from DFEH is also a general summary of the Fair Chance Act, Government Code section 12952(c)(2).]

FEDERAL LAW ON EMPLOYER BACKGROUND CHECKS (CONVICTION HISTORY)

Although there is no federal prohibition on when an employer can ask applicants about criminal history, the U.S. Equal Employment Opportunity Commission (EEOC) states, "as a best practice, and consistent with applicable laws, the Commission recommends that employers not ask about convictions on job applications and that, if and when they make such inquiries, the inquiries be limited to convictions for which exclusion would be job related for the position in question and consistent with business necessity." 

Further, the EEOC has taken the position that use of criminal history may sometimes violate Title VII of the Civil Rights Act of 1964. This can happen, the EEOC says, when employers treat criminal history differently for different applicants or employees. A person cannot be denied employment based on a criminal record alone. Instead, the decision to hire or not must be based on a “business necessity,” which requires the employer to consider:

1.       The nature and gravity of the offense or offenses.

2.       The time that has passed since the conviction and or completion of the sentence.

3.       The nature of the job held or sought.

Because California law is so comprehensive and protective in this area, following California law (and making the offer conditional on a criminal check) provides the protection the employer needs, from a risk management perspective. 

CALIFORNIA LAW ON EMPLOYER BACKGROUND CREDIT CHECKS

California law makes it illegal for most businesses to rely on credit checks during the hiring process. However, California law 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. Depending on the position, an employer should be able to require credit checks for some positions (but not all). 

Per California Labor Code section 1024.5:

(a) An employer or prospective employer shall not use a consumer credit report for employment purposes unless the position of the person for whom the report is sought is any of the following:

(1) A managerial position.

(2) A position in the state Department of Justice.

(3) That of a sworn peace officer or other law enforcement position.

(4) A position for which the information contained in the report is required by law to be disclosed or obtained.

(5) A position that involves regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person:

                                (A) Bank or credit card account information.

                                (B) Social security number.

                                (C) Date of birth.

(6) A position in which the person is, or would be, any of the following:

                                (A) A named signatory on the bank or credit card account of the employer.

                                (B) Authorized to transfer money on behalf of the employer.

                                (C) Authorized to enter into financial contracts on behalf of the employer.

(7) A position that involves access to confidential or proprietary information, including a formula, pattern, compilation, program, device, method, technique, process or trade secret that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who may obtain economic value from the disclosure or use of the information, and (ii) is the subject of an effort that is reasonable under the circumstances to maintain secrecy of the information.

(8) A position that involves regular access to cash totaling ten thousand dollars ($10,000) or more of the employer, a customer, or client, during the workday.

(b) This section does not apply to a person or business subject to Sections 6801 to 6809, inclusive, of Title 15 of the United States Code and state and federal statutes or regulations implementing those sections if the person or business is subject to compliance oversight by a state or federal regulatory agency with respect to those laws [i.e., financial institutions].

(c) The following definitions apply to this section:

(1) “Consumer credit report” has the same meaning as defined in subdivision (c) of Section 1785.3 of the Civil Code, but does not include a report that (A) verifies income or employment, and (B) does not include credit-related information, such as credit history, credit score, or credit record.

(2) “Managerial position” means an employee covered by the executive exemption [if this is relevant, we can discuss the definition:  mostly one who manages others and makes discretionary decisions for the company] set forth in subparagraph (1) of paragraph (A) of Section 1 of Wage Order 4 of the Industrial Welfare Commission (8 Cal. Code Regs. 11040).

Prior to the employer obtaining credit information (for the defined prospective positions), Civil Code section 1785.20.5 has certain requirements:

(a) Prior to requesting a consumer credit report for employment purposes, the user of the report shall provide written notice to the person involved.  The notice shall inform the person that a report will be used, and shall identify the specific basis under subdivision (a) of Section 1024.5 of the Labor Code for use of the report.  The notice shall also inform the person of the source of the report, and shall contain a box that the person may check off to receive a copy of the credit report.  If the consumer indicates that he or she wishes to receive a copy of the report, the user shall request that a copy be provided to the person when the user requests its copy from the credit reporting agency.  The report to the user and to the subject person shall be provided contemporaneously and at no charge to the subject person.

(b) Whenever employment involving a consumer is denied either wholly or partly because of information contained in a consumer credit report from a consumer credit reporting agency, the user of the consumer credit report shall so advise the consumer against whom the adverse action has been taken and supply the name and address or addresses of the consumer credit reporting agency making the report.  No person shall be held liable for any violation of this section if he or she shows by a preponderance of the evidence that, at the time of the alleged violation, he or she maintained reasonable procedures to assure compliance with this section.

If the candidate fits one of the definitions above, the employer can obtain a credit report on the prospective employee.    

FEDERAL LAW ON EMPLOYER CREDIT CHECKS

The Federal Fair Credit Reporting Act (FCRA) provides federal requirements for employers seeking to obtain credit reports on prospective employees.  It is not as limited as to the type of employees.  However, in this area, a California employer will be governed by the more restrictive law (California), so it should follow the limitations based on position.  However, the conditions for obtaining and utilizing credit reports under Federal law seem to independently apply, even if California law applies on the limited positions set forth above.  Therefore, when a prospective employee meets one of the qualifications for one of positions mentioned above, the employer should also comply with the following rules regarding obtaining and using credit reports regarding notice and disclosure:

15 US Code section 1681b et seq. provides in pertinent part as follows:

. . .

               (b) Conditions for furnishing and using consumer reports for employment purposes

(1) Certification from user

A consumer reporting agency may furnish a consumer report [e.g., a credit report] for employment purposes [this impacts both the agency used, like Good Hire, and the employer] only if—

(A) the person [the employer] who obtains such report from the agency certifies to the agency that— (i) the person has complied with paragraph (2) [below] with respect to the consumer report, and the person [the employer] will comply with paragraph (3) with respect to the consumer report if paragraph (3) becomes applicable; and (ii) information from the consumer report will not be used in violation of any applicable Federal or State equal employment opportunity law or regulation; and

(B) the consumer reporting agency provides with the report, or has previously provided, a summary of the consumer’s rights under this subchapter, as prescribed by the Bureau under section 1681g(c)(3) 1 of this title.

(2) Disclosure to consumer

(A) In general

Except as provided in subparagraph (B), a person may not procure a consumer report, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless— (i) a clear and conspicuous disclosure has been made in writing to the consumer at any time before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and (ii) the consumer has authorized in writing (which authorization may be made on the document referred to in clause (i)) the procurement of the report by that person.

(3) Conditions on use for adverse actions

(A) In general

Except as provided in subparagraph (B), in using a consumer report for employment purposes, before taking any adverse action based in whole or in part on the report, the person intending to take such adverse action shall provide to the consumer to whom the report relates— (i) a copy of the report; and (ii) a description in writing of the rights of the consumer under this subchapter, as prescribed by the Bureau under section 1681g(c)(3) 1 of this title.

(B) Application by mail, telephone, computer, or other similar means

If a consumer described in subparagraph (C) applies for employment by mail, telephone, computer, or other similar means, at any time before a consumer report is procured or caused to be procured in connection with that application— (i) the person who procures the consumer report on the consumer for employment purposes shall provide to the consumer, by oral, written, or electronic means, notice that a consumer report may be obtained for employment purposes, and a summary of the consumer’s rights under section 1681m(a)(3) 1 of this title; and (ii) the consumer shall have consented, orally, in writing, or electronically to the procurement of the report by that person. 

In sum, per California law, criminal background checks (as defined above) should only be done with a conditional offer.  Financial background checks, as a best practice, should also be done with a conditional offer and should be limited to the defined positions mentioned in Labor Code section 1024.5.  If the employer intends to deny employment based on a background check, the employer must consider and implement the protocol set forth in referenced in the statutes above. 

STANDARDIZED POLICIES

The following is from the Federal government (the EEOC), but California (Dept. of Fair Housing and Employment says something similar) and provides a common sense approach on how and why the pre-hiring processes on background checks should be standardized:

“In all cases, make sure that you're treating everyone equally. It's illegal to check the background of applicants and employees when that decision is based on a person's race, national origin, color, sex, religion, disability, genetic information (including family medical history), or age (40 or older). For example, asking only people of a certain race about their financial histories or criminal records is evidence of discrimination. When making personnel decisions - including hiring, retention, promotion, and reassignment - employers sometimes want to consider the backgrounds of applicants and employees. For example, some employers might try to find out about the person's work history, education, criminal record, financial history, medical history, or use of social media.  As a general rule [my comment:  and, of course, there is a need to follow the law mentioned above], it is not illegal for an employer to ask questions about an applicant's or employee's background, or to require a background check. However, any time you use an applicant's or employee's background information to make an employment decision, regardless of how you got the information, you must comply with federal laws that protect applicants and employees from discrimination. That includes discrimination based on race, color, national origin, sex, or religion; disability; genetic information (including family medical history); and age (40 or older). These laws are enforced by the Equal Employment Opportunity Commission (EEOC). In addition, when you run background checks through a company in the business of compiling background information, you must comply with the Fair Credit Reporting Act (FCRA).”

In closing, treating all prospective employees alike as they relate to background checks (and, as mentioned, being mindful of the foregoing limitations), is the best practice. 

Disclaimer

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.   

Employers Must Reimburse Employees For Work Related Cell Phone Use

Question Presented: 

 Employers and employees frequently inquire about whether an employer must reimburse an employee when the employee uses their personal cell phone for the employer’s business?

Short Answer: 

Yes. When employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them.

Longer Answer with Practice Recommendations: 

1. An Employer Must Reimburse An Employee For The Employee’s Use Of A Personal Cell Phone For Work Related Duties.

In a 2014 case, an employee in California brought a lawsuit against his employer on behalf of customer service managers (essentially a class action on this issue!) who were not reimbursed for expenses pertaining to the work-related use of their personal cell phones, alleging labor code violations and unfair business practices, and seeking declaratory relief and statutory penalties. The California Court of Appeal agreed there were violations and held (which means, it’s now the law):

“We hold that when employees must use their personal cell phones for work-related calls, Labor Code section 2802 requires the employer to reimburse them. Whether the employees have cell phone plans with unlimited minutes or limited minutes, the reimbursement owed is a reasonable percentage of their cell phone bills.”  (Cochran v. Schwan's Home Services, Inc. (2014) 228 Cal. App. 4th 1137, 1140.)

Per the Cochran court, “The purpose of this statute is “ ‘to prevent employers from passing their operating expenses on to their employees.’“ (Id. at p. 1144.)

Labor Code section 2802, referenced by the court, governs this area [concerning reimbursement for all necessary employee expenditures or losses, not just cell phone use) and provides the backdrop for the court’s opinion:

(a)    An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.

(b)   All awards made by a court or by the Division of Labor Standards Enforcement for reimbursement of necessary expenditures under this section shall carry interest at the same rate as judgments in civil actions. Interest shall accrue from the date on which the employee incurred the necessary expenditure or loss.

(c)    For purposes of this section, the term “necessary expenditures or losses” shall include all reasonable costs, including, but not limited to, attorney’s fees incurred by the employee enforcing the rights granted by this section.

(d) In addition to recovery of penalties under this section in a court action or proceedings pursuant to Section 98, the commissioner may issue a citation against an employer or other person acting on behalf of the employer who violates reimbursement obligations for an amount determined to be due to an employee under this section. The procedures for issuing, contesting, and enforcing judgments for citations or civil penalties issued by the commissioner shall be the same as those set forth in Section 1197.1. Amounts recovered pursuant to this section shall be paid to the affected employee.

The Cochran court determined that Labor Code section 2802 included an employer’s obligation to reimburse an employee whenever the employee uses his/her cell phone for work related duties.  The consequences to the employer for violations are severe, including penalties, interest and attorney’s fees (subsections (b), (c) and (d).)

Moreover, the employee has a relatively easy burden to successfully make a liability claim against his/her employer on this issue.  Per the Cochran court: 

“If an employee is required to make work-related calls on a personal cell phone, then he or she is incurring an expense for purposes of section 2802. It does not matter whether the phone bill is paid for by a third person, or at all. In other words, it is no concern to the employer that the employee may pass on the expense to a family member or friend, or to a carrier that has to then write off a loss. It is irrelevant whether the employee changed plans to accommodate work-related cell phone usage. Also, the details of the employee's cell phone plan do not factor into the liability analysis. Not only does our interpretation prevent employers from passing on operating expenses, it also prevents them from digging into the private lives of their employees to unearth how they handle their finances vis-à-vis family, friends and creditors. To show liability under section 2802, an employee need only show that he or she was required to use a personal cell phone to make work-related calls, and he or she was not reimbursed. Damages, of course, raise issues that are more complicated.“ (Id. at pp. 1144-1145.)

 In sum, employers must reimburse California employees (without distinction) for cell phone use when employees are required to use their personal cell phones for business purposes. Reimbursement is required even if the employee does not actually incur extra expenses as a result of his or her use. However, what is not well understood (or developed in the law) is how much must be reimbursed.

1. The Reimbursement Amount Is A Reasonable Percentage Of The Employee’s Phone Bill.

In the Cochran  case mentioned above, the court of appeals held that employers must reimburse a “reasonable percentage” of their employees’ cell phone bills. However, the court did not provide guidance as to what is meant by “reasonable percentage.” Does it mean 20 percent? 75 percent? More? Unfortunately, in the years after Cochran was decided, employers still don’t have a good answer because the courts and government agencies have not provided specific guidance. Case law since Cochran has reinforced the rule that an employer must reimburse a “reasonable” amount without actually explaining how to calculate that amount.   

The Cochran court did note that the employer can engage in some calculations: 

“In calculating the reimbursement amount due under section 2802, the employer may consider not only the actual expenses that the employee incurred, but also whether each of those expenses was ‘necessary,’ which in turn depends on the reasonableness of the employee's choices.“ (Id. at p. 1144.)

While there is some discretion the employer can exercise in determining the amount of reimbursement (such as actual expenses and the reasonableness of the employee’s choice:  i.e., was the employee “required” to use their own phone), the following language by the court shows the standard is still reasonable reimbursement (which means if the issue went to court a judge or jury would determine reasonableness, which means an employer should be careful in this area).  Also, the court noted that even though some employees have plans which do not result in any additional cost for work use, the employer is still required to reimburse:

“The threshold question in this case is this: Does an employer always have to reimburse an employee for the reasonable expense of the mandatory use of a personal cell phone, or is the reimbursement obligation limited to the situation in which the employee incurred an extra expense that he or she would not have otherwise incurred absent the job? The answer is that reimbursement is always required. Otherwise, the employer would receive a windfall because it would be passing its operating expenses on to the employee. Thus, to be in compliance with section 2802, the employer must pay some reasonable percentage of the employee's cell phone bill. Because of the differences in cell phone plans and work-related scenarios, the calculation of reimbursement must be left to the trial court and parties in each particular case.“ (Id. at p. 1144.) 

1. A Recommendation On Policy.

So, what to do?  Some say the safest approach is to pay the entire cost of an employee’s phone.  Another approach is to purchase company cell phones for employees.  We do not necessarily advocate those approaches.    

We think a more palatable and reasonable approach is for the employer to pay a flat monthly stipend (e.g., $10 - $100 or some estimated percentage like 10-50%:  the reimbursement number is a business decision based on history of usage). Put this policy in writing and expressly state that employees may submit expense reimbursement requests each month to the extent that the flat rate does not cover the total expenses for the usage that month. Distribute the policy to employees, and remember to inform new employees when they are hired. 

When developing and implementing a policy, employees need to be treated equally in that they all need to be reimbursed for work related phone use.  But work usage may vary depending on the position.  Differences in reimbursement can be justified based on position (and amount of usage).  E.g., One employee whose job depends on the phone, may be reimbursed 100%; in office staff, on the other hand, with less frequent use could get a stipend of $25 (or $50 or $100) or a lower percentage than others (e.g., 10%).  Again, the key is that employees are reimbursed a “reasonable percentage” of their phone bill.  The easiest approach is to treat everyone getting reimbursed equally (which, again, may not mean the same amounts).   

Until more guidance is provided from the courts or a government agency, the employer should carefully monitor its practice and make sure it has a policy of “reasonable” reimbursement and fully address any employees grumbling about fair reimbursement.  Even if they don’t “grumble,” all employees using their personal phones for work must be reimbursed (that should be the first biggest and clearest takeaway from this article; the second, and less clear takeaway, is the amount of reimbursement, but hopefully we have given you some tools to create a policy). 

Disclaimer

This entry does not give specific legal advice about your specific legal problem. No text or graphic contained in this entry is to be or should be used or relied upon as legal advice. This entry does not create an attorney-client relationship. If you want specific legal advice about your particular legal issues, or if you want to create an attorney-client relationship, you need to retain the Law Offices of Ron A. Stormoen by a signed written retainer agreement.