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Update on Recent Court Decisions: Background Checks, Call-in Pay, and Payroll Company Liability
Feb 26, 2019

Update on Recent Court Decisions: Background Checks, Call-in Pay, and Payroll Company Liability

Topics: Court Decisions, Wage & Hour Issues

California courts have been busy since the start of the new year issuing decisions that affect employers with California employees.  Here’s an update on the most significant of these decisions and how they impact employers and their policies and practices.

Background Checks

The most significant new case is one by the employee-friendly Ninth Circuit on the issue of background check disclosure and consent forms.  It is of course well-known that employers who use a third party to run background checks on applicants or employees must comply with the Fair Credit Reporting Act’s (FCRA) requirements.  Some states, notably including California, have their own mini-FCRA laws, and employers running background checks on employees in those states must comply with those state laws as well.  Generally speaking, these fair credit reporting laws require, among other things, that prior to conducting a background check, an employer must disclose, in writing, its intention to conduct the background check to the applicant/employee and obtain the applicant’s/employee’s consent to do so.  These laws also generally require that the disclosure and consent be “clear and conspicuous” and  be set forth in a standalone document containing only the information required by law without any additional “extraneous” information.  A couple of years ago, the Ninth Circuit issued a decision in Syed v. M-1, LLC, holding that an employer’s disclosure and consent form violated the FCRA because it included a provision stating that the employee released the employer from any liability stemming from the background check (e.g. if the check produced inaccurate results, etc).  The Ninth Circuit held that a liability waiver was “extraneous” information that was not permitted to be included in the disclosure and consent form.  That decision led to an onslaught of FCRA class actions against employers in states within the jurisdiction of the Ninth Circuit. 

Well, now the Ninth Circuit has managed to make things even worse for California employers with another decision interpreting FCRA disclosure and consent form requirements in a hyper-technical and very impractical way.  In Gilberg v. California Check Cashing Stores, LLC, the court held that the employer’s disclosure and consent form violated the FCRA’s requirement that it be a standalone document because the form included not only the required FCRA disclosures but also the related disclosures required by California’s mini-FCRA (the California Investigative Consumer Reporting Agencies Act (“ICRAA”)).  In other words, the employer combined the information required under the overlapping federal and state laws in one document (a practical and common sense approach to avoid having to give the applicant/employee multiple forms covering the same subject [the background check] rather than just one form).  In an opinion that unduly elevates form over substance and invites more victimless class action litigation against California employers, the Ninth Circuit held that the practice of combining state and federal disclosures into one document violates both the FCRA and the California ICRAA (translation – the employer can be sued for penalties under both laws, even though it provided its applicants and employees with all disclosures contemplated by both laws prior to securing background checks).  This holding does not serve the purpose of either law.  The laws’ “standalone” disclosure requirements are intended to ensure that applicants/employees know what they are consenting to when they sign the consent form.  This is accomplished by requiring that the disclosure and consent be a free-standing document (rather than one combined with a lengthy employment application or other policy document).  In my view, the fact that the disclosure and consent form references both the FCRA and state law in no way interferes with putting applicants/employees on clear notice that a background check will be run, and the practice of combining the disclosures required under the FCRA and ICRAA into one document should satisfy both laws.  Unfortunately, the Ninth Circuit does not agree and instead has interpreted both laws’ requirements in a hyper-technical way that disallows combining state and federal disclosures into one document.

The Ninth Circuit did not stop with just that holding, however.  The Ninth Circuit also held that the employer’s disclosure and consent form violated the FCRA’s and ICRAA’s requirement that the form be “clear and conspicuous.”  Given that the form was a standalone document, the Ninth Circuit agreed that it was “conspicuous,” but nonetheless held that it was not “clear” enough to comply with the FCRA/ICRAA.  The court’s holding in this regard was based on (1) the combining of state and federal disclosures, which the court reasoned could confuse applicants/employees about their rights; and (2) the court’s view that certain provisions in the form were not worded as clearly as they could have been.  (If this is the new standard for employers, can someone please enact a law holding the legislature to the same standard?  Note that neither the FCRA nor the ICRAA define the term “clear and conspicuous” in order to put employers on clear notice of what is required of them in order to avoid being sued for not being perfect.)  Here’s the provision in the employer’s disclosure and consent form that the Ninth Circuit found fatally unclear:

“The scope of this notice and authorization is all-encompassing; however, allowing CheckSmart Financial, LLC to obtain from any outside organization all manner of consumer reports and investigative consumer reports now and, if you are hired, throughout the course of your employment to the extent permitted by law.”

I understand this provision to mean that an applicant is being told that by signing the consent form, he/she is authorizing a background check not only as a condition of hiring but also during the subsequent course of employment.  However, the Ninth Circuit held that it was too “unclear,” reasoning:

“The beginning of this sentence does not explain how the authorization is all-encompassing and how that would affect an applicant’s rights. The second half of the sentence, following the semicolon, lacks a subject and is incomplete. It suggests that there may be some limits on the all-encompassing nature of the authorization, but it does not identify what those limits might be.”

Bottom line:  You better have your legal counsel and an English teacher (I’m kidding, sort of) review your disclosure and consent forms to ensure they are grammatically correct and “clear,” and that they do not contain any “extraneous information.”  Employers in states with mini-FCRA laws, including California, will need to have separate state and federal disclosure and consent forms and have applicants/employees sign both sets of forms.  In case you are curious about the penalty for non-compliance, under the FCRA alone, it is somewhere between $100-$1,000 per affected employee, going back at least two years, and to make things more fun, there’s no statutory guidance on how a court is supposed to determine whether the penalty is $100, $1,000, or somewhere in between.  Apparently, it’s okay for Congress to be unclear. 

Call-in Reporting Pay

California has a relatively unique wage/hour law that requires employees to be paid “reporting time pay” on certain occasions where they are required to report to work but are sent home without being given at least half of their scheduled day’s work.  In these circumstances, the employee must be paid for half of their usual or scheduled day’s work, but in no event less than two hours or more than four hours.  A new California Court of Appeal decision addresses the issue of whether reporting time pay is owed when employees are required to call in two hours before their scheduled shift to see whether or not they are needed to report to work and the answer is no, so the employees end up not having to work.  Does the fact that the employee had to call in two hours prior to shift entitle them to two hours of “reporting time” pay?  According to the court in Ward v. Tilly’s, Inc., the answer is yes.  The court reasoned that if an employee is required to be available to work a scheduled shift on two hours’ notice, they cannot reasonably schedule other activities for the day, e.g. attending school, working other jobs, etc., and must have day care arranged, if applicable.  Because of these burdens and limitations on employees’ use of their personal time, the court concluded that having to call in two hours before a scheduled shift is a form of “reporting” for purposes of California’s reporting time pay requirement, and that the requirement is not limited to situations where an employee “physically” reports to work. 

Employers should note that this decision conflicts with some recent California district court interpretations of the same issue (Casas v. Victoria’s Secret, C.D. Cal. 2014, and Culley v. Lincare, E.D. Cal. 2017).  In those cases, the courts held that the reporting time pay requirement is triggered only when an employee physically reports to work but is not put to work or is sent home early.  However, the California Court of Appeal decision in Tilly’s is binding on all California trial courts.  As such, employers who utilize this type of call-in scheduling practice (a practice that typically is limited to retail and service industries) should review and modify their practices to ensure compliance with California’s reporting time pay requirement.

Liability of Payroll Services Provider for Employee Claims of Wage/Hour Violations?

Many companies contract with third party payroll services providers to handle their employee payroll.  These companies generally hold themselves out as have expertise in the area of payroll and ensuring compliance with applicable laws.  As such, companies get some peace of mind in having a payroll company provide this service for them.  Unfortunately, there are many cases where employees sue their employers in California, alleging non-compliance with various wage/hour obligations (e.g. improper calculation of the regular rate for overtime purposes, failure to provide all required information on wage statements, etc.)  In some instances, the payroll company (rather than the employer) is the entity that caused the alleged error.  A recent case before the California Supreme Court addresses the issue of whether an employee can directly sue the payroll service company for the violations.  In Goonewardene v. ADP, LLC, the Court held that the answer is no.  The Court reasoned that the payroll service company is not the employees’ employer and that the employees cannot sue the payroll company on a theory that they are third party beneficiaries of the payroll services contract between the employer and the payroll company.  This holding is not all that surprising, and it in no way limits employees’ ability to sue the employer directly for the alleged wage/hour violations (regardless of whether the alleged violations were the fault of the employer or the employer’s payroll company).  The holding also does not resolve the issue of whether or not an employer who is sued for wage/hour violations may have a valid cross-claim for indemnity against its payroll service provider.  That is a separate issue, the resolution of which likely depends on the terms of the contract between the payroll company and the employer.

About CDF

For over 25 years, CDF has distinguished itself as one of the top employment, labor and immigration firms in California, representing employers in single-plaintiff and class action lawsuits and advising employers on related legal compliance and risk avoidance. We cover the state, with five locations from Sacramento to San Diego.

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About the Editor

Robin Largent has a regular presence in California state and federal courts and has been lead defense counsel and appellate counsel for large and small California employers in litigation (and arbitration) ranging from individual discrimination and harassment claims to complex wage and hour representative and class actions. She also leads the firm’s appellate practice, having substantial experience and success handling appeals, writ petitions, and amicus briefs in both state and federal court on issues such as class certification (particularly in the wage and hour arena), manageability and due process concerns associated with class action trials, exempt/non-exempt misclassification issues, meal and rest break compliance, trade secret/unfair competition matters, and the scope of federal court jurisdiction under the Class Action Fairness Act.
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