Many reading this will have heard of "ban the box" laws, which prohibit employers from asking applicants about criminal histories, but what about laws regarding pre-employment credit checks and credit reports?
In the not-too-distant past, the EEOC sued in an effort to demonstrate that an employer's use of credit reports had an adverse impact on a particular race of applicants (they ultimately lost the case). And, in 2018, one defendant entered into a class-action settlement that arose from an employer's performance of credit checks on applications, rejections based on credit history, and denial of employment opportunities to allegedly otherwise qualified job applications. The lead plaintiffs alleged this "screening policy" was neither job-related nor consistent with business necessity. The plaintiffs alleged "adverse impact" discrimination.
In addition to potential "adverse impact" claims such as these, employers, if not careful, can also run afoul of the Fair Credit Reporting Act (FCRA).
The FCRA governs the use of credit reports (also known as consumer reports) in employment decisions, and sets forth numerous steps that must be taken to obtain a credit report.
Before getting a credit report, the employer generally must:
- Notify the applicant or employee that they might use information in their report for employment-related decisions;
- Issue this notice in writing and in stand-alone format, as opposed to burying it in fine print on page 36 or in an employment application;
- Obtain the applicant's or employee's written permission to perform the background check;
- Certify to the company or vendor providing the credit report that the employer notified the applicant and got their permission to get a background report and will not discriminate against the applicant or employee, or otherwise misuse the information in violation of federal or state equal opportunity laws or regulations.
As far as the FCRA is concerned, an employer can reject a job applicant, deny a promotion, or fire an employee based on information in a credit report, but, before doing so, the employer must provide the applicant or employee a notice that includes a copy of the applicant/employee's consumer report and a copy of "A Summary of Your Rights Under the Fair Credit Reporting Act," which the vendor can provide.
It's good practice to provide at least five days (preferably more) between the notice and the adverse employment decision, as this, among other things, will give the applicant/employee an opportunity to fix any errors in their credit report.
If an employer decide to take adverse action based on information in a credit report, the employer must give the applicant or employee notice (orally, in writing, or electronically) that the adverse result occurred as a result of information in the report, the contact information for the vendor who sold the report, that the vendor did not make the employment decision and cannot give specific reasons, and that the applicant/employee has a right to dispute the accuracy or completeness of the report and get an additional free report within 60 days.
Not every applicant or employee will consent as required to obtain a credit report under the FCRA. As of a 1999 advisory opinion letter from the FTC, the FCRA is silent with respect to taking adverse employment action against an employee or applicant who refuses to consent to a credit report.
It is important to note that a violation of the FCRA can lead to actual damages and attorneys' fees for a negligent violation, and can include punitive damages for a willful violation.
But the FCRA is, at least in some jurisdictions, not the only game in town. California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington, all have laws in place regulating the use of credit reports in decision making. Other states have proposed such laws, but these bills never fully made their way through the legislative process. In addition to states, some cities, such as New York City and Washington, D.C., have laws restricting the use of credit reports in hiring. Some local laws prohibit the majority of employers from pulling credit at all, and others limit how employers can use the reports or limit credit employment decisions to certain professions.
Sometimes the FCRA preempts state or local law, but in other cases it does not. The FCRA contains a section on preemption, which depends, in large part, on the inconsistencies between the FCRA and local or state law. Sometimes a preemption argument works, but often times state and local governments know how to work within the FCRA's parameters.
The safest way to avoid liability in this area could be to just avoid obtaining credit reports with respect to employment decisions. Oregon, in considering their credit history bill, elicited testimony from an employee of one of the major credit reporting agencies, TransUnion, and learned that the agency did not have any evidence that an employee's credit history correlated with subsequent job performance, casting doubts on the validity of such a check. And, unlike criminal-history checks (irrespective of "check the box" legislation) which, if not done, could subject an employer to liability for negligent entrustment or negligent hiring later down the road, the risk of someone with a poor credit history engaging in some activity which puts the company at risk seems less clear.
But, some companies may decide that certain positions simply involve too much financial risk to the company to not perform a credit check before hiring the best candidate. For instance, a pre-employment credit check may make more sense for someone with access to the company checkbook and the ability to bankrupt the company. At least some of the state and local laws mentioned above have exceptions for applicants and employees who have access to "assets worth $2,500 or more" or for those whose job will provide them with a corporate expense account.
At the end of the day, there are the three questions one must ask when considering the use credit reports in employment practices: 1) are there state or local laws which apply? 2) what are the applicable exceptions?; and 3) does this practice follow the FCRA?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.