Credit reports for employment purposes are modified versions of full credit reports that are used by creditors. While credit reports for employment purposes show financial information such as a prospective employee’s creditors, available credit, payment history, and present account statuses, there are some stark differences compared to a full credit report. For example, credit reports for employment purposes do not include any account numbers or credit scores, nor does it affect the subject’s credit score.
Many employers utilize a credit report to assess whether a prospective employee is suitable to fill a particular job position. In doing so, employers typically weigh the information within the credit report to determine whether the credit history shows a pattern of the individual being financially responsible which could point to dependability in the position for which they applied. Alternatively, the credit history could indicate that they are in a financial strain which may cause the employer to question their reliability for the position for which they applied, or even cause the employer to conclude that the individual could potentially pose a risk of theft for the employer. Though the aforementioned line of thinking may seem reasonable, employers still need to be aware of the risks associated with employer credit checks.
What are the risks associated with employer credit checks?
While credit reports for employment purposes can be a helpful product to evaluate certain prospective employees for employment, there are two common risks associated with relying on employment credit reports that need to be considered.
First, the Equal Employment Opportunity Commission (“EEOC”) has released at least two publications, “Pre-employment Inquiries and Financial Information” and “Background Checks: What Employers Need to Know,” which shed light on the EEOC’s position as it relates to an employer’s use of credit reports. The EEOC guidance asserts that although federal law does not prevent employers from asking about a prospective employee’s financial information, an employer’s use of financial information contained in a credit report can result in illegal discrimination. The EEOC warns that an employer’s neutral policy, such as excluding prospective employees from employment based on certain financial records found in credit reports, may disproportionately impact some individuals protected under Title VII of the Civil Rights Act, and could violate the law if the policy is not job-related and consistent with business necessity. It follows that an employer must not have credit report requirements if they do not help the employer to accurately identify responsible and reliable employees, and if, at the same time, the requirement significantly disadvantages people of a particular race, color, national origin, religion, or sex. Accordingly, if an employer is going to exclude prospective employees from employment based on credit report information, they must ensure that they can effectively link the credit report information and its unacceptable risks to a particular job position in a way that shows that there is a compelling need to maintain the policy. It is for this reason that many employers prudently choose to only conduct employment credit checks when the candidate will be working in a position that includes duties related to handling assets, money, or confidential information such as credit card information.
Second, there are currently at least 14 state and local jurisdictions that restrict the use of credit reports for employment purposes under the theory that credit report information is largely not indicative of a prospective employee’s ability to perform job-related duties and thus should not be considered when making an employment decision. These jurisdictions generally prohibit credit reports for employment purposes absent specific exceptions. The exceptions to the general prohibitions vary greatly from jurisdiction to jurisdiction. Be that as it may, none of the jurisdictions prohibits an employer from using a credit report when it is required by law.
The jurisdictions that restrict the use of credit reports for employment purposes include:
- California
- Colorado
- Connecticut
- District of Columbia
- Hawaii
- Illinois
- Illinois (Chicago)
- Maryland
- New York (New York City)
- Nevada
- Oregon
- Pennsylvania (Philadelphia)
- Vermont
- Washington
Are there any other credit check ban laws that could become effective in the near future?
Most likely.
The Massachusetts House of Representatives passed An Act Reducing Barriers To Employment Through Credit Discrimination (“Act”). The Act regulates the use of background check reports that bear on an individual’s creditworthiness, credit standing, or credit capacity, so the focus here is on credit reports. Specifically, the Act would prohibit employers from (i) using a credit report in connection with or as a criterion for an employment purpose (i.e., when used to evaluate an individual for employment, reassignment, or retention as an employee); (ii) requesting or procuring a credit report for employment purposes; and (iii) requiring an employee or applicant to answer a question about the contents of a credit report.
Unlike other credit check ban laws which provide numerous exceptions, the Act only lists narrow exceptions to the above prohibitions, which include the following two circumstances: (i) when an employer is required by federal or state law or regulation or the rules of a self-regulatory organization, to use a credit report for employment purposes, or (ii) when the employee or applicant applies for or holds a position that requires a national security clearance. The Act has not yet been passed by the Senate.
What are some best practices employers can implement?
Credit checks can be a helpful product for employers. Still, employers must be cognizant of the risks associated with credit checks. Employers may find it beneficial to identify job positions with essential job requirements for which credit report information may demonstrate unfitness and make certain that screening procedures only require credit reports for such job positions. Additionally, employers should consult with their legal counsel to become familiar with applicable jurisdictions that contain credit check ban laws and understand all the prohibitions and exceptions under such laws.
How can InCheck help?
InCheck has created the guide, “Employer Credit Report Restrictions White Paper,” which includes a survey of the credit check ban laws. InCheck will continue to monitor the evolving credit check ban laws and publish content if a new credit check ban law is on the horizon, which is very likely as the continued spread of credit check ban laws is expected.