Caveat Emptor: Credit Checks for Employment Screening 4 Mar 2017

Employment credit checks are legal under federal law. The Fair Credit Reporting Act (FCRA) permits employers to request a credit history report on job applicants and existing employees. Employers must first obtain written permission from the individual, and are also required to notify them before they take “adverse action” (in this case, failing to hire, promote or retain an employee) based in whole or in part on any information in the credit report.

The employer is required to offer a copy of the credit report and a written summary of the consumer’s rights along with this notification. After providing job applicants with a short period of time to identify and begin disputing any errors in their credit report, (typically three to five business days) employers may then take action based on the report and must once again notify the job applicant.

But That’s Federal Law…What About States?

The Society for Human Resources Management (SHRM) reports that 47 percent of employers conduct credit checks on some or all job applicants. So if nearly half of employers are using the practice, they had best check whether there are legal limits on it in states where they operate.

Following the 2008 financial crisis and the Great Recession which followed, several states passed laws restricting or prohibiting an employer from considering credit history in making job decisions. Their rationale was that it’s neither fair nor sensible to punish people for past credit mistakes, especially if the penalty affects their ability to earn money in the future.

Currently, eleven states limit the use of credit checks for employment screening purposes.

Bills were introduced in 18 more states during the 2015 legislative sessions, but none were enacted.

Cities Might Be Getting into the Act.

New York City banned the practice in 2015, though the legislation does permit employers to use credit checks in certain cases such as police departments, and when considering candidates for jobs that involve cybersecurity or fiduciary duties.

Many of the states’ credit check laws include broad exemptions for employees handling cash or goods, for employees with access to financial information, for management positions, and for law enforcement positions. Read on for summaries of each state’s laws.

State By State: Who Prohibits What

California prohibits employers or prospective employers – with the exception of certain financial institutions – from obtaining a consumer credit reports for employment purposes except with regard to positions that are managerial, in law enforcement, those with fiduciary roles or who handle payrolls, bank accounts, or have regular access to $10,000 or more in cash. When an employer elects to check an applicant’s credit for one of these exempt reasons, they must provide written notice to the applicant of the inquiry and their specific reason for obtaining the report.

Colorado prohibits an employer’s use of consumer credit information for employment purposes if the information is unrelated to the job. It also requires an employer to disclose to an employee or applicant when the employer uses the employee’s consumer credit information to take adverse action against him or her, and the particular credit information upon which the employer relied. It also authorizes employees or applicants to sue if they believe their rights have been violated, and provides for enforcement by the State Department of Labor.

Connecticut prohibits use of credit checks by employers except in cases where credit status may be “substantially related to the employee’s current or potential job.” This means if the position Is in a managerial or fiduciary role, involves access to personal or financial information of customers, employees or the employer, other than information customarily provided in a retail transaction, provides access to an expense account or corporate debit or credit card, or involves access to the employer’s nonfinancial assets valued at $2,500 or more.

Delaware’s law is fairly simple, and applies only to public employers. They make it unlawful to check any applicant’s credit during the initial application process, up to and including the first interview. A public employer may, however, inquire into or consider an applicant’s credit history or credit score after it has determined that the applicant is otherwise qualified and has conditionally offered the applicant the position.

In Hawaii, an employer may inquire into the credit history or credit report on a prospective employee only after there has been a conditional job offer, and only if the information is directly related to a bona fide occupational qualification.

Illinois allows employers to check credit employers to access credit checks under limited circumstances, including positions that involve management and control of a business, bonding or security; unsupervised access to more than $2,500; signatory power over business assets of more than $100; or access to personal, financial or confidential information, trade secrets, or state or national security information.

Maryland’s law says that an employer may request or use an applicant’s or employee’s credit report or credit history only once the applicant has received an offer of employment, and if the employer has a bona fide purpose for requesting or using information in the credit report or credit history that is substantially job-related; and disclosed in writing to the employee or applicant.

Nevada prohibits employers from conditioning employment on a consumer credit report or other credit information with few exceptions, including the catch-all category for when the needed information is “job related” or reasonably related to the position for which the employee or prospective employee is being evaluated for employment, promotion, reassignment or retention as an employee.

Oregon prohibits the use of credit checks for employment unless the employer is a bank or public safety institution, or can demonstrate that the information in a credit report is substantially job-related AND the employer’s reasons for the use of such information are disclosed to the employee or prospective employee in writing.

Vermont goes even a little farther, prohibiting any looks at “credit history” — that includes credit information obtained from any third party, not only information contained in a credit report. It does provide a number of exceptions for banks, public safety institutions, fiduciaries, payroll staffs, or if “the employer can demonstrate that the information is a valid and reliable predictor of employee performance in the specific position of employment.”

Washington takes a straightforward approach. Under the amended Washington law, employers cannot obtain a credit report as part of a background check unless the information is “substantially job related and the employer’s reasons for the use of such information are disclosed to the consumer in writing;” or otherwise required by law.

No Matter Where You’re Located – Best Practices to Avoid Problems with Credit Checks

The most prudent thing you can do is to have policies and procedures in place which ensure that any use of credit checks is both relevant and fair.

Ask if there’s a sound business reason to do a credit check on a prospective employee. If it’s not directly job related, running a credit check might be considered discriminatory and risk running afoul of the EEOC, or leave you vulnerable to lawsuits where civil actions have been authorized.

Conversely, hiring a person with fiduciary responsibilities without running a credit check could be grounds for allegations of negligent hiring.

Another step is to assess collateral materials such as employment applications, consent forms, interview guidelines, etc. so you can ensure that only those credit checks allowed by EEOC guidelines and state laws are conducted, and that no illegal questions are asked.

Disclaimer: These summaries are the latest information available on use of credit information in employment for 2017, based on legislative enactments in all 50 states as of the last full session year (2015). It is not intended as legal advice, only as a general guide. If you have questions regarding the applicability of these laws to your situation in the state where you operate, you should contact your state department of labor.