Employers face rising criticism regarding their use of credit histories in hiring decisions. Civil rights advocates raise concerns that use of credit histories unfairly disadvantages certain segments of the population. Advocates for low-income individuals are concerned about the “Catch-22” for job applicants: One cannot re-establish credit without a job, and one cannot get a job with bad credit.

All levels of government have taken notice. As a result, an employer’s use of credit histories in hiring decisions could be risky. This advisory explains the current state of the law and presents a number of precautions to protect from a future lawsuit or agency complaint.

Legislation

Currently, five states—Washington, Oregon, Hawaii, Illinois, and Maryland—severely restrict employers’ use of credit information regarding job applicants and employees. All five states require that employers may only obtain applicant credit histories where the information in the credit report is related to the individual’s job. In Washington and Oregon, for example, an employer can only obtain a credit report when it is substantially related to the individual’s current or potential job or required by law. Washington requires that the employer disclose to the applicant in writing its reasons for the use of the credit information. Oregon’s statute exempts federally insured banks and law enforcement employers, confirming that they may always obtain credit checks.

In Hawaii, Illinois, and Maryland an employer may only use a credit check in hiring decisions where the information relates to a bona fide occupational qualification. All three states exempt certain financial institutions from the requirements. The Illinois statute provides only seven possible “bona fide occupational requirements” that will satisfy the law. These include positions that involve: bonding or security; unsupervised access to more than $2,500; signatory power over businesses assets of more than $100; management and control of the business; access to personal, financial or confidential information, trade secrets, or state or national security information; or considerations as otherwise allowed by state or federal law.

Legislation is pending in 18 additional states, including California (Assembly Bill 22), that will provide similar restrictions on employers’ use of credit checks.