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Published on March 31st, 2014 | by Millennium Magazine Staff

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Are Employer Credit Checks on the Way Out?

By Angela W. Abstance

A potential client walks into your office for a consultation. He is extremely upset. He tells you he has been out of work since his previous employer downsized, and he just had a very promising interview for a job that would have been perfect for him. The interview had gone extremely well, but a couple of days later, the company called him and told him he would not be hired because of information in his credit report.

“I know I’m behind on my bills,” the client tells you, “but that’s because I’ve been out of work. If I can get a job, I can catch up on my payments. How can I fix my credit report if no one will hire me because of my credit?  Can they do that?” You sigh, and give him the answer. “It depends.”

Background

In recent years, a large number of employers routinely conducted credit checks on job applicants, but the number of employers using credit checks in the hiring process seems to be declining. The Society of Human Resource Management reports that 53 percent of employers they surveyed in a 2012 report say they do not run credit checks on potential job applicants, which is up from 40 percent in 2010. This change reflects the growing concern regarding using credit reports to evaluate potential job applicants, as evidenced by pending federal legislation and by the number of state legislatures that have recently enacted laws restricting this practice.

Why do employers run credit checks?  According to the same study by the Society of Human Resource Management, employers conduct credit checks to guard against embezzlement or theft or to avoid “liability for negligent hiring.” However, research has not shown any relationship between a person’s credit report and his or her performance as an employee. In remarks before the Equal Employment Opportunity Commission on October 20, 2010, attorney Sarah Crawford, Senior Counsel with the Employment Discrimination Project of the Lawyers’ Committee for Civil Rights Under Law, testified that “credit information does not predict job performance” and cited studies to support her position. Ms. Crawford also pointed out that credit reports often contain errors that may be misleading. If all that is true, why do employers have the right to review this information at all when evaluating job applicants?

The Fair Credit Reporting Act allows employers to obtain credit reports for employment purposes.

The Fair Credit Reporting Act 15 U.S.C. § 1681 et seq. (FCRA) establishes procedures for the collection and distribution of data concerning consumer credit transactions. FCRA authorizes employers to obtain credit reports on potential employees and current employees who may be up for promotions. 15 U.S.C. § 1681(b) expressly authorizes the release of a consumer credit report for the purpose of determining eligibility for employment and sets forth the conditions that the employer must meet. It is worth noting that while the employer may receive the credit report, the report does not contain a consumer’s credit score.

Requirements for employers who request credit reports for employment purposes

Before a potential employer may request a credit report for a job applicant, FCRA requires the employer to provide a written disclosure to the applicant that states the credit report may be obtained for employment purposes. The potential employee must give written permission for the report to be obtained. According to the language of the statute, the disclosure by the employer must be given in a separate document and must be “clear and conspicuous.” Therefore, the disclosure cannot be a section on the form of the regular application for employment. However, this disclosure/authorization requirement could be viewed as a somewhat hollow right since nothing in the law prohibits employers from refusing to hire someone based solely on that person’s refusal to allow the employer to obtain a credit report.

If after reviewing a potential employee’s credit report the employer decides to take an adverse action against the employee based on information in the report, the employer must notify the potential employee before taking any adverse action. The employer must provide to the potential employee a notice of intended adverse action, a copy of the potential employee’s credit report, and a notice from the Federal Trade Commission that outlines the potential employee’s rights under FCRA. The employee may then review the report and attempt to correct or clarify any errors in it. If the employer then takes an adverse action (i.e., decides not to hire the applicant or promote the employee), the employer must provide the applicant with a written notice that it took the adverse action based upon information in the credit report.

The disclosure requirements of FCRA outlined above attempt to balance the employee’s need to know that the adverse action was based upon information in the credit report against the employer’s need to act quickly to fill the available job position. Unfortunately, the applicant remains at a disadvantage because the applicant will likely never know the Act was violated if the employer fails to comply voluntarily with the notice requirements. However, the Act does provide penalties for an employer’s failure to comply.

Penalties for non-compliance with conditions of FCRA

Although the Federal Trade Commission enforces FCRA, private causes of action remain available for those who have suffered adverse action by employers who have failed to follow the requirements of the law. If an employer fails to comply with the conditions of FCRA as outlined above, the employer may be subject to damages in a lawsuit brought by the potential employee. If the employer’s violation was willful, the employer can be held liable for actual damages, punitive damages and attorney fees. If the employer’s violation was negligent, the employer can be held liable for actual damages and attorney fees. The obvious problem here is that if the employer has failed to comply with the law’s notice requirements, the employee may never know that information in the credit report prevented the employee from obtaining the job and thus will not even know that FCRA applies. In addition to the injury suffered because of the employer’s failure to hire the employee, the potential employee may not take action to investigate his or her credit report to correct any misinformation it may contain, leading to a repeating problem when the individual applies for employment elsewhere. Further, the expense of filing a lawsuit in federal court could be prohibitive for individuals who already have credit problems.

States act to limit employers’ rights to use credit report information in hiring decisions

The high unemployment rates after the recession of 2008 suggest that more job applicants will have negative information in their credit reports. Concerned that the use of credit reports in the hiring process could hinder many of these applicants in their pursuit of employment, state legislatures began enacting laws to limit the use of credit reports in hiring decisions. According to the National Conference of State Legislatures, Washington was the first state to enact such legislation in 2007. Since then Hawaii, Oregon, Illinois, California, Connecticut, Maryland, Vermont, Colorado and Nevada have also restricted the use of credit information by potential employers. Most of these laws contain various exceptions that allow credit checks in some instances, such as in applications for law enforcement positions, positions in which the employee would regularly have access to large sums of money or to consumers’ personal information, or if the employee would be a signatory on the employer’s bank or credit card accounts, for example.

These states have taken a variety of approaches to solving the problem of credit information being used to deny employment. Unlike the federal law, which allows employers to refuse to hire an individual who will not allow the employer to obtain a credit report, Nevada’s recent legislation, SB 127, actually makes it unlawful for an employer to do so, unless certain exceptions apply. Nevada’s law even creates a private cause of action for the potential employee, who can seek legal or equitable relief, including employment or reinstatement/promotion as well as payment of lost wages or benefits. Not all of the states that have passed legislation restricting the use of credit reports in employment have created private causes of action for violations of the statutes. For example, Connecticut’s law provides that aggrieved employees or potential employees may file a complaint with the state’s labor commissioner, who may request the attorney general bring a lawsuit to recover civil penalties. While California’s law provides a private cause of action for violations, it includes a provision that protects employers from liability for damages if they can prove they had reasonable procedures to assure compliance with the law and that the procedures were maintained.

As of June 20, 2013, 25 states and the District of Columbia were considering legislation regarding the use of credit information in employment decisions. However, use of credit information in employment decisions by government entities remains extremely common.

Although the S.C. House of Representatives considered a bill restricting the use of credit scores in hiring in 2012, the bill was referred to the Committee on Labor, Commerce and Industry. At the time of this writing, no further action has been taken regarding the use of credit information in employment decisions in the South Carolina legislature.

Employers and potential employees should be aware of the growing trend among states to limit the use of credit information in the employment arena. Companies with offices in various states may have to reconsider company-wide policies to comply with local legislation.

Equal Employment Opportunity Commission and other groups express concern about the use of credit reporting information in employment decisions

The Equal Employment Opportunity Commission and other groups have expressed concern that the use of credit information in employment decisions could disproportionately affect minorities, thus violating Title VII of the Civil Rights Act of 1964. Although recent litigation concerning the potential disparate impact of pre-employment credit checks has been dismissed, the EEOC’s website contains this statement under the Prohibited Practices section:

Inquiry into an applicant’s current or past assets, liabilities, or credit rating, including bankruptcy or garnishment, refusal or cancellation of bonding, car ownership, rental or ownership of a house, length of residence at an address, charge accounts, furniture ownership, or bank accounts generally should be avoided because they tend to impact more adversely on minorities and females. Exceptions exist if the employer can show that such information is essential to the particular job in question.

Also available on the EEOC’s website are notes from an October 20, 2010, meeting concerning the use of credit history by employers in the evaluation of potential employees. The notes from that meeting include the remarks of Sarah Crawford, attorney for the Lawyers Committee for Civil Rights Under Law, in which she expressed concern that “credit background checks disproportionately impact communities of color.” Further evidence of interest in this issue at the federal level can be found. In 2010, in a case that resulted from a U.S. Labor Department investigation, an administrative law judge found Bank of America discriminated against African-Americans by using pre-employment credit checks to hire entry-level employees. This information indicates that officials at the EEOC are aware of the potential for employers to violate the Civil Rights Act by using credit checks to evaluate potential employees.

Other groups have expressed concern that households of color were significantly more likely to have lower credit scores and would be more often adversely affected by the use of credit reports in employment screening. For example, Demos, a public policy organization, published the report “Discredited: How Employment Credit Checks Keep Qualified Workers Out of a Job” on www.demos.org, opposing the practice. In 2010, the NationalConsumerLawCenter presented testimony before the U.S. House of Representatives Committee on Financial Services also opposing the use of credit reports in employment, in part because of the potential discriminatory effects upon minorities. If employers choose to conduct credit checks on potential hires, they should be aware of the potential for disparate impact upon minorities and should seek to develop policies and procedures that avoid the possibility of disproportionately affecting a protected class.

Pending federal legislation may restrict the use of credit checks by employers

Congress is currently considering legislation that would prohibit employers from using credit checks to make adverse employment decisions against potential and current employees. The Equal Employment for All Act, H.R. 3149, has been introduced by Rep. Steve Cohen from Tennessee. The bill would amend the Fair Credit Reporting Act to restrict how employers can use credit checks to evaluate potential employees. Employers should monitor the status of this bill to keep current on whether federal law will continue to allow credit checks for employment purposes.

Conclusion

As outlined above, laws regarding the ability of employers to perform credit checks on potential hires and current employees are rapidly changing, so attorneys must pay close attention to the developments in this area to properly advise their clients. Whether these new laws can help long-term unemployed people with credit problems remains to be seen, but at least in some states, a bad credit report will no longer be the stumbling block that prevents these job-seekers from gaining employment.

Angela W. Abstance is an attorney practicing in Denmark, SC.

Published in the November 2013 issue of the South Carolina Lawyer.

Copyright South Carolina Bar

Reprinted with Permission 

This article has not been updated since the November publication, and there may have been changes in the laws since that time.

[1] See Background Checking–The Use of Credit Background Checks in Hiring Decisions, SHRM.org (July 19, 2012), http://www.shrm.org/Research/SurveyFindings/Articles/Pages/CreditBackgroundChecks.aspx.

[1] Id.

[1] Sarah Crawford, Esq., Lawyers Committee for Civil Rights Under Law, EEOC.gov (Oct. 20, 2010), http://www.eeoc.gov/eeoc/meetings/10-20-10/crawford.cfm.

[1] 15 U.S.C. § 1681(b)(2)(A) (2012).

[1] 15 U.S.C. § 1681(b)(3) (2012).

[1] 15 U.S.C. § 1681(b)(3)(A) (2012).

[1] Use of Credit Information in Employment 2013 Legislation, NCSL.org, http://www.ncsl.org/issues-research/banking/use-of-credit-info-in-employ-2013-legis.aspx (last updated June 20, 2013).

[1] Id.

[1] Id.

[1] See EEOC v. Kaplan Higher Educ. Corp., No. 1:10-cv-02882, ECF 110 (Jan. 28, 2013).

[1] Pre-Employment Inquiries and Credit Rating or Economic Status, EEOC.gov, www.eeoc.gov/laws/practices/inquiries_credit.cfm (last visited Sept. 25, 2013).

[1] Sarah Crawford, Esq., Lawyers Committee for Civil Rights Under Law, EEOC.gov (Oct. 20, 2010), http://www.eeoc.gov/eeoc/meetings/10-20-10/crawford.cfm.

[1] U.S. Dep’t of Labor v. Bank of America, ALJ Case No. 1997-OFC-16 (Jan. 21, 2010).

[1] Use of Credit Information beyond Lending Issues and Reform Proposals, NCLC (May 12, 2010), http://www.nclc.org/images/pdf/credit_reports/testimony-credit-report-use-05-10.pdf.

 

 

 

 

 

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