Credit Checks for Employees and Applicants: Are They Worth It?


Credit Checks

Is a prospective employee’s credit history a relevant factor in making a hiring decision?  More and more, the answer from state legislatures is a resounding “no.”

“States have become much more active in this area,” said Jill Rosenberg, a partner in Orrick, Herrington & Sutcliffe LLP’s New York City office.  In her recent presentation at the National Employment Law Institute’s 41st Annual Employment Law Update in Washington, D.C., Rosenberg discussed credit check laws as one of a number of recent trends in state and local employment law.

Several states and cities have passed laws in the last five years aimed at curbing the use of credit history information when it comes to making employment decisions, causing employers to start questioning the wisdom of conducting credit checks on applicants and employees.

State Laws Restricting Credit Checks

The upswing in laws limiting the use of credit checks for employment purposes may be attributable to studies suggesting that credit history is often irrelevant to job performance and employment decisions based on credit history may have a discriminatory effect on certain protected groups, Rosenberg explained.  The EEOC “has been very vocal in this area,” she said, “based upon studies that blacks and Hispanics, as well as women, may be disparately impacted by credit checking as a screening tool.”

The EEOC and the Federal Trade Commission have published joint guidance documents for both employers and applicants/employees, outlining rights and requirements under the Fair Credit Reporting Act.  However, credit checks are “not really regulated by federal law unless there’s discrimination,” Rosenberg explained, causing some jurisdictions to adopt requirements that are more strict than the FCRA.

Approximately a dozen states have passed laws limiting employers’ ability to use credit checks, according to Rosenberg.  A handful of other states allow for credit checks generally, but impose certain requirements on employers that utilize them.  States such as Colorado and Illinois generally prohibit employers from conducting credit checks, subject to a few exceptions.  States such as Massachusetts and New Hampshire, on the other hand, allow employers to conduct credit checks on employees and prospective employees, but require employers to make certain disclosures to those for whom the checks are being conducted and limit the information that can be included in credit reports.  Notably, while the state laws vary in this regard, none of them bar credit checks in their entirety.

Relevance of Credit Information to the Job

Typically, jurisdictions that restrict employers’ use of credit checks do so on the basis of the occupation in question.  Laws in Colorado, Connecticut, Illinois, and Vermont, for example, have “very broad exceptions for financial institutions.”  New York City’s administrative code, on the other hand, only allows credit checks on individuals that hold certain positions within financial institutions, where credit checks are required by law or by industry rules and regulations.  “So not every financial institution is exempt” under New York City’s law, Rosenberg said.  “You can credit check your stockbroker, but not [his or her] assistant.”

In certain states, the permissibility of a credit check depends on where a position falls within the hierarchy of an organization.  California prohibits the use of credit checks in making employment decisions subject to a handful of exceptions, one exception being whether a position is “managerial.”  Likewise, Connecticut employers can’t use credit information subject to certain exceptions, including managerial positions that involve “setting the direction or control of employers' business, divisions, units or agencies.”

The length of time that has passed since an employee’s or applicant’s bankruptcy, tax lien, or other adverse credit event is also an important factor for employers to consider.  Several states limit the information that can be included in credit history reports based on the number of years that have elapsed since the event in question.  California, for example, prohibits consumer reporting agencies from reporting bankruptcies that are over ten years old.  While these requirements are directed toward consumer reporting agencies and not employers per se, Rosenberg advised employers to be aware of the limitations that they impose.

For employers that are able to conduct lawful credit checks given all of these restrictions, documenting why a credit check is warranted for a specified class of employees is particularly important, Rosenberg said.  Creating a record as to why credit history would be relevant to a particular position may save a lot of headaches if the employee or applicant challenges the credit check at a later date.

Requirements for Obtaining Credit Information

Procedural requirements for conducting credit checks must be considered as well.  Like the FCRA, state laws tend to have “very clear notice requirements,” Rosenberg observed.  Employers in most states that have credit check laws must notify the employee or applicant that a credit check will be conducted and must obtain the employee’s or applicant’s written consent.  Notice is also typically required before taking an adverse employment action on the basis of information gleaned from a credit report.

For the purposes of some state laws, like Maryland’s, the credit check must not be performed until after a conditional offer of employment is extended.  “Some states may allow [credit checks] post-interview, but typically, it’s post-offer,” Rosenberg said.  In Hawaii, another state that generally requires credit checks to be made post-offer, job offers can be withdrawn if information in an applicant’s credit report directly relates to a “bona fide occupational qualification.”

Weighing the Risks Against the Benefits

In many cases, even if credit checks are legally permissible, they may not be advisable.  Most states allow individuals to bring private causes of action and/or administrative proceedings against their employers or would-be employers for alleged violations of their credit check laws, which could be costly to resolve.

Employers may wish to look prospectively at potential changes in the legal landscape in the jurisdictions they operate in and consider whether their credit check policies would need to be revised accordingly—bills have been introduced in both the Massachusetts Senate and the Pennsylvania Senate, for example, that would prohibit employers from considering credit history information in most circumstances.  And, as Rosenberg pointed out, employers rarely conduct credit checks after an employee is hired, limiting their usefulness because “two days after they become your employee, their financial situation may change.”

Given the varying federal, state, and local credit check requirements, employers need to be “really careful . . . about what is accepted” and should consider the relevance of the information they would obtain.  “In many instances,” Rosenberg said, a credit check “doesn’t have a whole lot of relevance to the work that somebody is doing.”  Employers should ask themselves whether a credit check is actually “worth the effort and, potentially, the risk that comes with it.”

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