In recent years, several U.S. states have passed laws regulating the use of employment credit reports of job applicants and current employees that have impacted the way employers conduct background checks. Seven states – California, Connecticut, Hawaii, Illinois, Maryland, Oregon, and Washington – currently have laws that limit the use of credit report checks by employers for employment purposes, with the most recent law, California Assembly Bill 22 (CA AB 22), taking effect January 1, 2012. Other states, and the U.S. Equal Employment Opportunity Commission (EEOC), are considering further restrictions on credit checks by employers. This is Trend Number 2 of the fifth annual ‘Employment Screening Resources (ESR) Top 10 Trends in Background Checks’ for 2012. To view the list of trends, visit http://www.esrcheck.com/ESR-Top-10-Trends-in-Background-Checks-for-2012.php.
The U.S. Equal Employment Opportunity Commission (EEOC) held a public meeting in October of 2010 on the ‘Employer Use of Credit History as a Screening Tool’ that explored the growing use of credit histories of job applicants as selection criteria during employment background screening to see if the practice was discriminatory. The EEOC – the agency of the United States Government that enforces the federal employment discrimination laws – heard testimony from representatives of various groups to help the Commission ensure that the workplace is made free of all barriers to equal opportunity.
As a result of high unemployment forcing more people into the job market, an increasing number of job applicants are exposed to employment background screening tools such as credit checks that could unfairly exclude them from job opportunities. Critics of using credit histories for employment purposes said the practice can have a disparate and discriminatory impact on protected groups, including people of color, women, and the disabled. They can also be inaccurate and are not valid predictors of job performance.
Another concern expressed was that the use of credit histories creates a “Catch-22” situation for job applicants during the current period of high unemployment and high foreclosures, both of which have negative impacts on credit. Many job seekers are caught in a classic ‘Catch-22’ situation where they cannot pay their bills because they do not have a job but cannot get a job because of bad credit since they cannot pay their bills.
Representatives from the business community told the EEOC that the use of credit histories is permissible by law, limited in scope, predictive in certain situations of reliability, and credit histories were only utilized by a few companies for every job opening. Some of the testimony tried to clear up common misperceptions about employment credit reports, including the falsehood that these types of credit reports include a credit score. They do not. The statements of October 2010 meeting can be found on the EEOC website at http://www.eeoc.gov/eeoc/meetings/10-20-10/index.cfm.
Credit checks of job applicants by employers have become more common recently. According to 2010 survey from the Society for Human Resource Management (SHRM), ‘Background Checking: Conducting Credit Background Checks,’ 60 percent of employers polled conducted credit checks on some or all job applicants. Specifically:
- 47 percent of employers surveyed conducted credit checks on job candidates for selected jobs.
- 13 percent of employers surveyed conducted credit checks on all job candidates.
- 40 percent of employers surveyed did not conduct any credit checks on job candidates.
When asked in the SHRM survey which categories of job candidates their organization conducted credit background checks on:
- 91 percent of employers surveyed said job candidates with fiduciary or financial responsibility (handling money, banking, accounting, technology, etc.).
- 46 percent of employers surveyed said job candidates for senior executive positions (CEO, CFO, etc.).
- 34 percent of employers surveyed said job candidates with access to highly confidential employee information (salary, benefits, medical information, etc.).
- 30 percent of employers surveyed said job candidates with access to company/other property (information technology, administrative services, etc.).
As for the primary reason organizations conducted credit background checks on job candidates, the SHRM survey found:
- 54 percent of employers surveyed said to reduce or prevent theft, embezzlement, and other criminal activity.
- 27 percent of employers surveyed said to reduce legal liability for negligent hiring.
In addition, almost 2 out of 3 organizations polled in the SHRM survey – 65 percent – said they would allow job candidates, in certain circumstances, the opportunity to explain the results of their consumer report that might have an adverse effect on an employment decision after the credit report check but before the decision to hire or not hire was made.
The SHRM Poll ‘Background Checking: Conducting Credit Background Checks’ is available at:
A November 2010 news story on the Society for Human Resource Management (SHRM) website, “Credit Checks Are Legitimate Screening Tool,” reported how a representative for SHRM – the world’s largest association devoted to human resource management – told the EEOC during the October 2010 public hearing on the use of credit reports for employment purposes that the federal government should not eliminate an employer’s use of credit histories to help make decisions about job candidates.
The representative said that “SHRM believes there is a compelling public interest in enabling our nation’s employers – whether that employer is in the government or the private sector – to assess the skills, abilities, and work habits of potential hires.” In addition, the representative said credit history is one of many factors – including education, experience and certifications – that employers use “to narrow that applicant pool to those who are most qualified.”
The SHRM representative also pointed out Human Resources typically conducts a background check on the job finalist or group of finalists before making a job offer, and that background check might include checking personal references, criminal history, and credit history depending on the employer and the position to be filled. Citing the Fair Credit Reporting Act (FCRA) of 1970 and the Civil Rights Act of 1964, the representative said SHRM believes “employees already have significant federal protection for the misuse of background checks.”
The article “SHRM: Credit Checks Are Legitimate Screening Tool” is available at:
Signed into law by Governor Jerry Brown in October of 2011, California Assembly Bill 22 (AB 22) amended Section 1785.20.5 of the Civil Code and added Chapter 3.6 (commencing with Section 1024.5) to Part 2 of Division 2 of the Labor Code, relating to employment. AB 22 prohibits most employers and prospective employers in the state – with the exception of certain financial institutions – from obtaining consumer credit reports for employment purposes unless the position of the person for whom the report is sought is one of the following:
- A managerial position;
- A position in the state Department of Justice;
- A sworn peace officer or other law enforcement position;
- A position for which the information contained in the report is required by law to be disclosed or obtained;
- A position that involves regular access to specified personal information for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment;
- A position in which the person is or would be a named signatory on the employer’s bank or credit card account, or authorized to transfer money or enter into financial contracts on the employer’s behalf;
- A position that involves access to confidential or proprietary information; or
- A position that involves regular access to $10,000 or more of cash.
In addition, CA AB 22 also requires the written notice informing the person for whom a consumer credit report is sought for employment purposes to also inform that person of the specific reason for obtaining the report.
However, the new California credit report check law restricting the use of credit report checks by employers for employment purposes is unnecessary and confusing for employers since the law essentially standardizes best practices for background checks that employers across the country should be following already.
The problem with the new California law is that the categories that were created are a little bit ambiguous and it is unclear who falls into what category. The law should have simply stated that the employer has to state a good reason to run a check. CA AB 22 really standardizes or establishes what already many of us consider to be a best practice, which is credit reports ought to be used sparingly, and only in those situations where there is a nexus or a correlation to the job.
To read California Assembly Bill 22 (CA AB 22), visit: http://leginfo.ca.gov/pub/11-12/bill/asm/ab_0001-0050/ab_22_bill_20110920_enrolled.pdf.
A new law in Connecticut – Senate Bill No. 361 (S.B. 361) – prohibiting certain employers from using credit reports in making hiring and employment decisions regarding existing employees or job applicants took effect in October 1, 2011. The law applies to all employers in Connecticut with at least one employee.
Exceptions to S.B. 361 are employers that are financial institutions as defined under law, credit reports required to be obtained by employers by law, and credit reports “substantially related to the employee’s current or potential job.” These “substantially related” reports are allowable if the position:
- Is a managerial position that involves setting the direction or control of a business, division, unit or an agency of a business;
- Involves access to personal or financial information of customers, employees or the employer, other than information customarily provided in a retail transaction;
- Involves a fiduciary responsibility to the employer, as defined under the law;
- Provides an expense account or corporate debit or credit card;
- Provides access to certain confidential or proprietary business information, as defined under the law; or
- Involves access to the employer’s nonfinancial assets valued at $2,005 or more, including, but not limited to, museum and library collections and to prescription drugs and other pharmaceuticals.
The full text of Connecticut Senate Bill 361 (CT SB 361) is available at: http://www.cga.ct.gov/2011/ACT/PA/2011PA-00223-R00SB-00361-PA.htm.
The Hawaiian legislature – over the Governor’s veto – passed a law that took effect on July 1, 2009 that put limits on the use of employment credit history or credit reports unless it “directly related to a bona fide occupations qualification” or falls under another exception. Hawaii House Bill 31 SD1 CD1 amended the Hawaiian Fair Employment Practices Act by making it an unlawful discriminatory practice for any employer to refuse to hire or employ, continue employment or to bar or discharge from employment, or otherwise to discriminate against any individual in compensation or in the terms, conditions, or privileges of employment of any individual because of the individual’s credit history or credit report, unless the information in the individual’s credit history or credit report directly relates to a bona fide occupational qualification.
The law also indicated that in terms of hiring in the first place, the employer can only inquire into the credit history or credit report on a prospective employee only after there has been a conditional job offer, and only if the information is directly related to a bona fide occupational qualification. The law makes exceptions for employers that are expressly permitted to inquire into credit history or a credit report by federal or state law, financial institutions that are insured by a federal agency or to managerial or supervisory employees. The law sets out a specific definition of what constitutes a “Managerial” or “Supervisory” employee.
The full text of Hawaii House Bill 31 SD1 CD1 is available at: http://www.capitol.hawaii.gov/session2009/bills/HB31_CD1_.pdf.
An Illinois law prohibiting pre-employment credit checks on most job applicants, Illinois House Bill 4658, was signed by Governor Pat Quinn and created the “Employee Credit Privacy Act” which prohibits employers in the state from discriminating based on the credit history of job seekers or employees. The new law took effect January 1, 2011 and prohibits employers from inquiring about or using an employee’s or prospective employee’s credit history as a basis for employment, recruitment, discharge, or compensation. Employers who violate the new law can be subject to civil liability for damages or injunctive relief.
However, under the new law, employers may access credit checks under limited circumstances, including positions that involve:
- Bonding or security per state or federal law;
- Unsupervised access to more than $2,500;
- Signatory power over businesses assets of more than $100;
- Management and control of the business; and
- Access to personal, financial or confidential information, trade secrets, or state or national security information.
To full text of the “Employee Credit Privacy Act” (House Bill 4658) is available at: http://e-lobbyist.com/gaits/text/21025.
Maryland is another U.S. state to place restrictions on the use of credit report checks by employers with the “Job Applicant Fairness Act” (House Bill 87), which took effect October 1, 2011 and enacted new legislation placing restrictions on credit checks by employers that use the credit report or credit history of job applicants or employees for employment decisions. Along with prohibiting an employer from using the credit report or credit history of an employee or job applicant for employment purposes, the Act specifically prohibits most employers from using credit checks to determine whether to:
- Deny employment to a job applicant;
- Discharge an employee;
- Decide compensation; or
- Evaluate other terms and conditions of employment.
While the Act applies to Maryland employers of any size, some employers are excluded from the Act’s prohibitions, including financial institutions and employers required under federal or state law to inquire into the credit history of job applicants or employees. In addition, the Act also allows exceptions for employers to request or use credit history information if the data is related to “a bona fide purpose that is substantially job–related,” an exception that generally applies to:
- Jobs such as managerial positions involving handling money or confidential duties;
- Employees with expense accounts or corporate credit cards; and
- Employees with access to confidential business information.
The Act also requires that employers wishing to request or use credit information of job applicants and employees for a bona fide purpose must disclose the intent to do so in writing to the job applicant or employee.
The full text of the Maryland “Job Applicant Fairness Act” (House Bill 87) is available at: http://mlis.state.md.us/2011rs/chapters_noln/Ch_29_hb0087T.pdf.
Oregon prohibited the use of credit history of job applicants for employment decisions by issuing new rules with Oregon Senate Bill 1045 (SB 1045) that was signed into law by Governor Ted Kulongoski in February 2010 and declared to be effective immediately. SB 1045 prohibits the use of credit histories of job applicants in making employment-related decisions including hiring, discharge, promotion, and compensation.
However, SB 1045 provides exceptions for financial institutions, public safety offices, and other employment if credit history is job-related and use is disclosed to applicant or employee. The exceptions to the law include the following circumstances:
- Employers that are federally insured banks or credit unions;
- Employers that are required by state or federal law to use Individual credit history for employment purposes;
- The employment of a public safety officer, or
- Employers that can demonstrate that the information in a credit report is substantially job-related AND the employer’s reasons for the use of such information are disclosed to the employee or prospective employee in writing.
To full text of Oregon Senate Bill 1045 is available at: http://www.leg.state.or.us/10ss1/measpdf/sb1000.dir/sb1045.a.pdf.
New restrictions were placed on the use of credit reports when Washington passed a law in 2007 stating employers could not obtain a credit report as part of a background check unless the information was substantially job related and the employer’s reasons for the use of such information were disclosed to the consumer in writing. Under the amended Revised Code of Washington (RCW), employers cannot obtain a credit report as part of a background check unless the information is:
- Substantially job related and the employer’s reasons for the use of such information are disclosed to the consumer in writing; or
- Required by law.
Employers in the state of Washington utilizing employment credit reports needed to change their forms, carefully review any job position where a credit report is requested, and communicate to job applicants the reason a credit report is substantially related to a particular job.
The full text of ‘Chapter 19.182 Revised Code of Washington (RCW) – Fair Credit Reporting Act” is available at: http://apps.leg.wa.gov/RCW/default.aspx?cite=19.182. The full text of “RCW 19.182.020 (Consumer report — Furnishing — Procuring)” is available at: http://apps.leg.wa.gov/rcw/default.aspx?cite=19.182.020.
To help job applicants better understand credit checks, a white paper co-written by Employment Screening Resources (ESR) titled ‘The Use of Credit Reports in Employment Background Screening – An Overview for Job Applicants’ shows the many protections applicants have when it comes to credit reports. The white paper also points out the fact that credit reports do NOT contain credit scores, and that they are only obtained at the very end of the hiring process so an employer can be assured they are not hiring a risky employee. Credit scores are not part of an employment credit report since credit bureaus, credit scoring companies, and background screening companies all recognize that there is no correlation between a credit score and job performance and is simply not provided to employers.
The white paper explains that a credit report viewed by an employer or volunteer agency is called an ‘Employment Credit Report’ and does not contain the same information as is found on a credit report available to lenders or even the credit report consumers get when they exercise their rights to view their own credit report from one of the three main credit bureaus – Equifax, Experian, and TransUnion. The employment credit report does provide information about credit and payment history, just like other versions of a credit report, but there are many things that are different in this version of a credit report:
- A credit score is NOT available to employers, since credit bureaus, credit scoring companies, and background screening companies recognize that a credit score has no relationship to job performance. Unlike the copy of the credit report available to consumers, employers cannot even pay extra to see a credit score.
- Account numbers are not listed on the Employment Credit Report. The source and type of credit is listed, such as the store name or loan holder, but the speciﬁc account numbers are not on the employment version of a credit report.
- The employment credit report does not list a job applicant’s age or year of birth.
The complimentary white paper, ‘The Use of Credit Reports in Employment Background Screening: An Overview for Job Applicants,’ available for download on the ESR website at http://www.esrcheck.com/Download/.
While credit report checks are one method employers may use to hire honest and trustworthy employees that also provide some legal cover if that employee turns out to be dishonest – and in some cases can be red flag that protects against embezzlement, identity theft, or other negative workplace issues – employers are not encouraged to perform routine credit checks on all candidates since credit checks often contain errors, may not be job related, can feel like an invasion of privacy, or may violate federal and state laws.
A professional and accredited background check provider such as Employment Screening Resources (ESR) has long taken the position that employers should proceed with extreme caution with using applicant and employee credit histories in the background screening process and not use employment credit reports unless they can articulate a clear “business justification,” which normally means that that the job applicants or current employees have or will hold “sensitive” positions in which they may handle money or have access to personal data. In fact, with many states recently passing laws limiting the use of credit checks for employment purposes, employers need to be careful when, to whom, and how they perform credit checks on prospective job applicants.
For more information on credit report checks, read ESR News blogs tagged ‘credit reports’ at: http://www.esrcheck.com/wordpress/tag/credit-reports/. For information on background checks, visit Employment Screening Resources (ESR) – a nationwide background check firm accredited by the National Association of Professional Background Screeners (NAPBS) – at http://www.esrcheck.com or call ESR toll free at 888.999.4474.
About Employment Screening Resources (ESR):
Founded in 1997 in the San Francisco, CA area, Employment Screening Resources (ESR) literally wrote the book on background screening with “The Safe Hiring Manual” by ESR Founder and CEO Lester Rosen. ESR streamlines the screening process and reduces administrative overhead though its proprietary technology solutions. ESR is accredited by The National Association of Professional Background Screeners (NAPBS®), a distinction held by less than two percent of all screening firms. This important recognition was achieved by successfully passing a third party audit demonstrating compliance with the NAPBS Background Screening Agency Accreditation Program. By choosing an accredited screening firm like ESR, employers know they have selected an agency that meets the highest industry standards. For more information about ESR, visit http://www.ESRcheck.com or call toll free 888.999.4474.
About ESR News:
The Employment Screening Resources (ESR) News blog – ESR News – provides employment screening information for employers, recruiters, and jobseekers on a variety of topics including credit reports, criminal records, data privacy, discrimination, E-Verify, jobs reports, legal updates, negligent hiring, workplace violence, and use of search engines and social network sites for background checks. For more information about ESR News or to send comments or questions, please email ESR News Editor Thomas Ahearn at firstname.lastname@example.org.