Seyfarth Synopsis: Over the past few years, restrictions regarding the use of credit checks by employers on applicants and employees have been passed at various state and municipal levels, and the federal government has indicated its own concerns of potential discriminatory impact of the use of credit checks. The nuanced differences in obligations and requirements that may govern in any particular jurisdiction have created a legal mine-field for employers who utilize credit checks.

Jurisdictions Limiting Use of Employment Credit Checks

In recent years, ten states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington), the District of Columbia, and the cities of Chicago, New York City and Philadelphia have passed laws restricting the use of credit reports used by employers for employment purposes, with several more jurisdictions poised to join the trend. In addition, Representative Maxine Waters (D-CA) and Senator Elizabeth Warren (D-MA) have proposed bills in both the U.S. House of Representatives and the Senate that would restrict the ways in which consumer credit information could be used for employment purposes.

The Benefit—and Risks—of Credit Checking

“Credit checks are useful to employers generally because they provide a variety of information not able to be confirmed by other sources and because they are viewed as a valid indicator of a person’s judgment and potential risk to the company . . . the vast majority of employers . . . use credit reports for a very limited number of positions such as jobs dealing with company finances, positions in accounting departments, high level executives or positions dealing with sensitive personal data of customers or employees.” Statement of Pamela Quiqley Devata, Esq., Seyfarth Shaw LLP, before the Equal Employment Opportunity Commission (“EEOC”), October 20, 2010, “Employer Use of Credit History as a Screening Tool.” The EEOC, on the other hand, has taken on greater scrutiny of background checks in employment decisions because of their potential adverse impact on classes of applicants under Title VII of the Civil Rights Act (“Title VII”).

The EEOC has taken issue with employers who utilize criminal history screening in their hiring decisions, and also has broadened their scrutiny to include credit checks for the same reason: the belief that credit checks create a disparate impact on certain minority groups. See for instance EEOC Enforcement Guidance, Number 915.002, issued April 25, 2012, entitled, “Consideration of Arrest and Conviction Records in Employment Decision under Title VII. See also EEOC v. BMW Manufacturing Co., 2015 WL 5719928 (Verdict and Settlement Summary) (Sept. 8, 2015) (EEOC claimed that automobile manufacturer excluded black logistic workers from employment at a disproportionate rate after BMW implemented a criminal background check policy, which had statistically disparate impact on black employees; the case settled for $1,600,000). EEOC v. Kaplan Higher Learning Educ. Corp., 2014 WL 1378197 (N.D. Ohio 2014) (EEOC failed to demonstrate that Kaplan’s use of credit reports had an adverse impact on African American applicants where “race rating” methodology was discredited).

Federal and State Laws Also Govern the Use of Credit Reports

The Fair Credit Reporting Act (“FCRA”) does not expressly preclude employers from using credit reports when making employment decisions, but other applicable laws may impact an employer’s use of credit reports of its applicants or employees. The FCRA disclosure form must expressly state that a credit check will be procured, however, it is illegal in certain jurisdictions to refer to credit at all if there is no lawful reason for the credit check. See Stop Credit Discrimination in Employment Act, N.Y.C. §§ 8-102(29), 8-107(9)(d), (24) (2015); D.C. “Fair Credit in Employment Amendment Act of 2016,” Act 21-673 (2016).

The jurisdictions that have enacted laws prohibiting the use of credit history for employment decisions have largely based the legislation on the premise that credit generally is not a relevant factor in employment decision-making. Thus, these prohibitions typically prevent use of a credit report in the context of employment when the report is not sufficiently related to the nature of the position.

These prohibitions, however, are only subject to certain narrow exceptions. For example:

• Banks and financial institutions (Chicago, Colorado, Connecticut, DC, Hawaii, Maryland, Oregon, Philadelphia, and Vermont);
• Managerial positions (as defined by the particular state/city legislation) (California, Colorado, Hawaii, Illinois, and Philadelphia)
• Positions with access to specified personal information (other than routine transactions and as defined by the particular state legislation) (California and Maryland)
• Positions with access to confidential/proprietary information, security data, or trade secrets (California, Connecticut, Illinois, Maryland, New York City, Philadelphia, and Vermont)
• Positions in law enforcement (California, DC, New York City, Oregon, Philadelphia, and Vermont)
• Positions involving access to assets of above a certain amount or with signatory authority to enter transactions on behalf of the employer (California, Connecticut, Illinois, Maryland, New York City, Philadelphia, and Vermont)
• Positions with regular access to more than a certain amount in cash (California – $10,000 and Illinois – $2,500)
• Positions with access to expense accounts or corporate cards (Connecticut and Maryland)

Importantly, no state or city prohibits use of credit report information when such use is specifically permissible under federal or state law.

Penalties range from $100 per day to $250,000, depending upon the jurisdiction.

Overall Trends

Given the increase in state and local laws passing credit check laws, as well as the EEOC’s stance on the use of credit checks (namely, that credit checks create a disparate impact on certain minority groups), there appears to be a trend of all employers decreasing the number of credit checks that they conduct. Given the potential exposure, even financial organizations are no longer running credit checks on all of their workforce unless they are either specifically required to do so by law or those employees are in positions of trust—specifically, those positions with signatory authority over third party assets of $10,000 or more, and positions that have a fiduciary responsibility to enter financial agreements on the employer’s behalf.

Employer Outlook

Given the incredible breadth, and potential damages of the numerous (and growing) credit report laws and the recent upsurge of private litigation on this issue, employers should not directly or indirectly request credit information and/or conduct credit checks unless required to do so under state or federal law or unless an exemption is met. Employers who seek credit information for positions that fall into jurisdictional exemptions also should review the requirements for compliance and additional process guidance. Most significantly, employers should review their applications, FCRA forms, and other employment-related documents to ensure that there are no references to the procurement and/or use of credit information. Employers in multi-state jurisdictions should also ensure compliance with the laws of all other applicable jurisdictions that regulate employers’ use of credit information.