Curtailing Credit Checks

A bill being considered by the D.C. Council Judiciary Committee would largely prohibit employers in the nation's capital from checking job applicants' credit histories. Experts predict we'll see similar legislation in other cities, but no movement at the federal level.

By Mark McGraw

Using job candidates' credit histories as a factor in hiring decisions can be risky business.

Some argue that information uncovered in a credit check could offer clues as to an applicant's likelihood to, say, commit embezzlement or theft. Others contend that performing credit checks unduly affects certain job seekers -- which, in turn, put the company at legal risk as well.

Many employers have acknowledged this dilemma, and some have begun to shy away from performing credit checks as part of the hiring process.

Washington, D.C. recently joined a growing number of cities to pass or at least consider legislation that would prohibit this practice, with a few exceptions.

Passed by the D.C. Council Judiciary Committee, the Fair Credit in Employment Amendment Act would make credit information a protected trait covered by the D.C. Human Rights Act of 1977. The new bill would, however, permit an employer to check a candidate's credit history if the company had a "credible reason" for doing so, or if local or federal law obligated the employer to perform a credit check.

California, Colorado, Maryland, Nevada and Vermont are among the 11 states (along with the cities of New York and Chicago) to have already passed legislation that curtails the use of credit checks in hiring decisions.

Jeffrey Tanenbaum, a San Francisco-based member of Nixon Peabody's labor and employment practice, has "no doubt" that we'll see that list get longer.

"While there are no hard data studies, it seems likely that credit checks disproportionately impact the ability of lower-income applicants and employees to obtain and keep jobs," says Tanenbaum. "And proponents of such laws can provide powerful individual stories where employment was denied based on a credit check."

Such anecdotal evidence can drive legislation and regulation, he says, http://www.hreonline.com/DATA/servlet/DataServlet?fname=ThinkstockPhotos-488002597curtailingcreditchecksL.jpg"especially in . . . states and cities where there is an emphasis on protecting applicant and employee access to jobs and privacy."

All that said, don't expect to see any such movement at the federal level anytime soon, says Tanenbaum.

"I don't believe there is any way we will see such law or regulation at the federal level in the near future," he says, "given the [incoming] Trump administration and the current make-up of Congress."

Aaron Warshaw, attorney in the New York office of Ogletree Deakins, agrees.

"A national credit check law is very unlikely," says Warshaw, adding that employers running background checks are typically subject to the Fair Credit Reporting Act, which contains detailed disclosure requirements, and "is a particular hotbed for litigation."

Still, useful, job-related information can in some cases be gained by looking into candidates' credit histories, he says.

"Employers might want to run a credit check where credit worthiness is related to a current or potential job," says Warshaw. "For instance, when an employee is personally responsible for company funds or valuable property, the employer might want to obtain a credit check to help prevent potential theft or embezzlement."

And, some sectors -- the highly regulated financial industry, for example -- are required by law to perform credit checks on applicants.

While most state and local laws permit credit checks to be used for these purposes, legislatures adopting these credit-check related laws "have stated that they are attempting to prevent perceived overreach, such as . . . [tying] an employee's credit worthiness to his or her character," says Warshaw.

Organizations and HR managers opting to enter credit checks into the hiring equation have other possible pitfalls to consider.

Nancy Puleo, a Boston-based partner in Posternak Blankstein & Lund's employment law and healthcare practice groups, sees two primary concerns.

The first, she says, is compliance with FCRA, which, as Puleo notes, requires employers to obtain written authorization to run credit reports and provide employees or job applicants with the results -- thus enabling them to dispute information they believe is incorrect.

"Often, employers are unaware that they must comply with FCRA when performing a credit check on an employee or candidate for employment," says Puleo. "FCRA is a federal law that includes a fairly onerous procedure for employers performing credit checks on employees or job candidates."

Privacy, in terms of limiting access to information obtained from credit reports within the organization, is a potential issue as well, she continues.

"Employers must ensure that only those with a business-related need to know have access to credit report information concerning employees or applicants."

A failure to comply with credit check-related regulations could come with a hefty cost, adds Warshaw, noting that laws such as the one proposed in D.C. typically provide for some form of statutory penalties ranging from $1,000 to $10,000 per violation, while California's credit-checks laws also provide for an award of attorneys' fees.

"The best thing that an HR professional can do is stay abreast of the current patchwork of laws and regulations," says Warshaw. "This is a constantly evolving area for both compliance and litigation. It is far better to know the laws upfront and to adopt a more conservative approach to using credit history information than to learn the hard way when a state or local agency investigation, or a lawsuit, lands on your desk."

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Jan 9, 2017
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