Using Workers’ Credit Information Increasingly Prohibited

By Rosemarie Lally Jul 28, 2015
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Employers’ use of credit information in making hiring and other employment decisions is coming under increasing fire in many states, with employee advocates charging that credit checks often disproportionately disadvantage minority and low-income job seekers and employees.

At least 40 percent of employers use credit information in the hiring process, according to the Lawyers’ Committee for Civil Rights Under Law, despite a lack of evidence that this information is an accurate predictor of successful job performance. Further complicating the matter is the fact that credit reports often include erroneous information that may be relied upon to exclude a job applicant from consideration.

Eleven states currently limit employers' use of credit information in employment—California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington—and it seems many more are ready to join them. Twenty-eight bills addressing restrictions on the use of credit information in employment decisions are pending in 17 states thus far in the 2015 legislative session.

Details of existing state laws restricting the use of credit information are below.

California: Employers or prospective employers, with the exception of certain financial institutions, are prohibited from obtaining a consumer credit report for employment purposes. Exceptions are made for persons applying for or working in: a position in the state Department of Justice; a managerial position; a law enforcement position; a position for which the information contained in the report is required by law to be disclosed or obtained; a position that involves regular access to specified personal information for purposes other than the processing of credit card applications; a position in which the person would be a named signatory on the employer's financial accounts, or authorized to transfer money or enter into financial contracts on the employer's behalf; a position that involves access to confidential or proprietary information; or a position that involves regular access to $10,000 or more in cash.

Employers seeking a consumer credit report must inform the individual of the specific reason in writing.

Colorado: Employers are prohibited from using consumer credit information for employment purposes unless the information is substantially related to the job. An employer must disclose when adverse action is taken against an employee or job applicant based on obtained credit information, as well as the particular information on which the employer relied. State and local law enforcement agencies are exempt from the law.

Connecticut: Employers, except for financial institutions, cannot require an applicant or employee to allow the employer to obtain a credit score, credit account balances, payment history, savings or checking account balances, or savings or checking account numbers. Exceptions to the law for nonfinancial institution employers are made if: the report is required by law; an employer reasonably believes that an employee has engaged in employment-related activity that violates the law; a credit report is "substantially related" to the employee’s current or potential job; or the employer has a bona fide, job-related purpose for requesting credit information and has disclosed it in writing to the employee or applicant.

Delaware: Public employers cannot inquire into a job applicant’s credit history prior to making a conditional offer to the applicant. Police forces, the Department of Corrections and other public positions with a statutory mandate for background checks are excluded from these provisions. State contractors are required to employ similar policies where not in conflict with other state or federal requirements.

Hawaii: Employers may not use an individual’s credit history in hiring and termination decisions unless the credit information directly relates to a bona fide occupational qualification under the state’s Fair Employment Practices Act. Exempt from this prohibition are employers that are expressly permitted or required to check credit history under federal or state law, federally insured financial institutions, and employers hiring or managing managerial or supervisory employees.

Illinois: Employers are prohibited from checking a job applicant’s or employee’s credit report, inquiring about credit history, or discriminating with respect to hiring, compensation, or the terms, conditions, or privileges of employment based on consumer credit history. An employer may require an applicant or employee to have a satisfactory credit history if federal or state law requires bonding for the position; the position requires custody of, or unsupervised access to, at least $2,500 in cash or marketable assets; job duties include signatory power for business assets of at least $100 or more per transaction; the position is managerial; the position requires access to personal or confidential information, trade secrets, financial information, or state or national security information; the position meets any other criteria set forth in federal or state regulations for which credit information is a bona fide occupational qualification; or the person’s credit history is required under federal or state law. Certain types of employers, including financial institutions, insurance companies, debt collectors and law enforcement agencies, may consider credit information without violating the law.

Maryland: Employers are prohibited from using a job applicant’s or employee’s credit information as a factor in any employment decision unless it serves a “bona fide purpose that is substantially job-related.” For example, employers may use credit information for employees in a managerial position whose duties involve: setting direction or control of the business; access to confidential information, financial information or trade secrets; or having a corporate credit card. Financial institutions and those required to conduct a credit check under federal or state regulations are exempt from the law.

Nevada: Employers cannot obtain or use a job applicant’s or employee’s credit information for employment-related purposes. Exceptions to this prohibition include: if the employer is required or authorized under state or federal law to use a consumer credit report, if the employer reasonably believes that the applicant or employee has violated state or federal law, or the information contained in the consumer credit report or other credit information is “job-related.”

Oregon: Employers may not obtain or use an applicant’s or employee’s credit history for the purpose of making employment decisions. Exceptions to this prohibition include: employers that are federally insured banks or credit unions, employers that are required by state or federal law to use credit history for employment purposes, and the employment of certain public safety officers. The law also provides a broader exclusion that allows employers to check or use credit information if it is substantially related to the job and the employer notifies the applicant or employee in writing of its reasons for using the information.

Vermont: Employers cannot require job applicants to supply their credit history or use credit history as a factor in hiring or firing unless the job in question offers access to others’ personal financial information. An employer may use credit information, however, if: the information is required by state or federal law or regulation; the job involves access to confidential financial information; the employer is a financial institution or a credit union; the job is that of a law enforcement officer, emergency medical personnel or firefighter; the job requires a financial fiduciary responsibility to the employer or a client of the employer; the employer can demonstrate that the information is a valid and reliable predictor of employee performance in the specific position of employment; or the job involves access to an employer’s payroll information.

Washington: Employers cannot obtain a credit report 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 the credit information is required by law.

In addition, at least four localities—Chicago; Cook County, Ill.; Madison, Wis.; and New York City—have taken similar action. New York City’s law, enacted May 6, 2015, is considered by many employment lawyers to be the most stringent of all such laws passed to date. The Stop Credit Discrimination in Employment Act makes it an unlawful discriminatory practice to request or use an applicant’s consumer credit history in making employment decisions. The city’s law goes further than most, defining “consumer credit history” as including written and other information obtained through credit reports, credit scores, or other information obtained directly from the applicant or employee about that individual’s creditworthiness, credit standing, credit capacity, or payment history.

New York City’s law provides no broad exemptions for the financial sector but allows employers to request consumer credit information in certain limited circumstances including when hiring for: positions for which an employer is required by state or federal law or regulations to use an individual's consumer credit history for employment purposes; police officer or public safety positions, or appointed positions in which a high degree of public trust is placed; positions in which an employee is required to be bonded; positions in which an employee is required to possess security clearance; nonclerical positions that entail regular access to trade secrets, intelligence information or national security information; positions having signatory authority over third-party funds or assets valued at $10,000 or more; positions carrying a fiduciary responsibility to the employer with the authority to enter financial agreements valued at $10,000 or more; or positions with regular duties that allow the employee to modify digital security systems established to prevent the unauthorized use of the employer’s networks or databases.

Employer Considerations

Noting that some state and local laws include “broadly worded” exceptions while others define terms more narrowly, Daniel Saperstein, co-chair of Proskauer’s hiring and background checks group, cautioned multistate employers to carefully review the exceptions in each law. For example, employers should not necessarily assume that they are allowed to run credit checks on applicants for all financial positions as some state exceptions are more narrowly drawn than others.

Saperstein also urged employers to be certain where their particular company fits within the increasingly complicated framework of laws that determine whether they are required to run a credit check on an applicant or employee, as may be the case with certain positions within the financial industry for instance, or are prohibited from doing so. “The language in the various laws is nuanced and it’s important to know which side of the line you fall on,” he noted.

Christina Stoneburner, a partner at Fox Rothschild LLP, agreed, saying that employers should exercise care when taking advantage of an exception to a state law’s prohibition on employer credit checks. “You don’t want to be the test case of what is or isn’t a legitimate credit check under the law.”

“Think long and hard about whether you even need a credit check,” Stoneburner said, adding that employers aren’t always equipped to evaluate credit report findings, such as the risk posed by an applicant or employee’s debt. She suggested that employers carefully look at each specific position and re-evaluate the need for a credit check. “If you’ve got limited need upon closer examination, maybe you shouldn’t pursue it.”

In addition to keeping abreast of the growing patchwork of state and local laws, “employers must remember that the Equal Employment Opportunity Commission (EEOC) has been active in bringing Title VII [of the Civil Rights Act of 1964] suits against employers using credit checks for employment purposes on the grounds that such checks may have a disparate impact on minorities,” Saperstein said. “So even if your state doesn’t have a law limiting the use of credit information, be aware of the EEOC’s actions and make sure your decisions are ‘job-related and consistent with business necessity.’ ”

Saperstein also reminded employers to keep in mind that using a third-party vendor known as a consumer reporting agency (CRA) to conduct a credit check triggers responsibilities under the Fair Credit Reporting Act (FCRA). Where a CRA is used, employers must take the following steps:

  • Disclose to the applicant that a consumer report is being requested and obtain signed consent.
  • Provide a signed certification to the CRA that the employer is in compliance with FCRA requirements.
  • If information in the report causes the employer to consider taking adverse action, notify the applicant or employee and provide a summary of consumer rights and a copy of the report.

*If adverse action is actually taken, give the applicant or employee an adverse action notice that provides information about the CRA, tell the individual that a free copy of the report may be obtained if requested within 60 days, and inform the individual of his or her right to dispute the accuracy of the report with the CRA.

Stoneburner warned employers to keep an eye out for further developments on the state and local level, suggesting that the movement toward limiting employer use of credit checks “will pick up a groundswell of support” similar to that seen for “banning the box” on job applications regarding applicants’ criminal conviction history and delaying background checks until later in the hiring process.

Rosemarie Lally, J.D., is a freelance legal writer and editor based in Washington, D.C.

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