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Potential Nationwide Ban on Most Employment Credit Checks

In the past, hiring managers, human resources departments, and business owners in all states have utilized employment credit checks on applicants and it has proved to be relatively controversial, even when used appropriately. Fast forward to 2020 and a growing number of states and local governments have passed laws limiting the use of employment credit checks to make employment-related decisions e.g., hiring, promotion, or termination. Further, the U.S. House of Representatives has passed legislation that would completely ban the use of employment credit checks to make employment-related decisions, with a few exceptions. Lawmakers are motivated by a number of concerns to include: credit history is not relevant to employment, employment credit checks create barriers to opportunity and upward mobility, they may exacerbate racial discrimination, and they may lead to an invasion of privacy. First, let’s explore the definition of an employment credit check and further explore why employment credit check bans may become the new normal.

Simply put, an employment credit check is a report that employers have available in their “background check toolbox” that allows their organization to engage with a third-party vendor to research an applicant’s credit report, which contains items such as: mortgage debt; data on student loans; amounts of car payments; details on revolving credit card accounts including balances, credit limits, and monthly payments due; bankruptcy records; bills, including medical debts, that are in collection; and tax liens. Of course, employers must receive prior written permission from the individual whose credit report will be reviewed. Further, employers must also administer adverse action notices in the event that information within the report causes them to take an adverse employment action, such as choosing not to hire the applicant, or no longer considering a current employee for a promotion based upon the content of the information contained in the employment credit check report. Employers must also provide a copy of the report and include the document titled “A Summary of Your Rights under the Fair Credit Reporting Act (FCRA)” to all individuals for whom the they do not hire or promote due to the information contained in the employment credit check report.

Despite many employers’ positive opinions on utilizing employment credit check reports as a tool to make employment-related decisions, the Equal Employment Opportunity Commission (EEOC) has taken a different stance with the belief that employment credit checks create a disparate impact on certain minority groups. (EEOC Enforcement Guide Number 915.002, issued April 25, 2012, entitled, “Consideration of Arrest and Conviction Records in Employment Decision under Title VII”) The states and local governments that have already placed restrictions on the use of credit history for employment-related decisions have largely based the legislation on the premise that credit generally is not a relevant factor in making employment-related decisions. Thus, these restrictions typically prevent the use of an employment credit check report in the context of employment when the report is not sufficiently related to the nature of the job. Employers’ guidelines for utilizing employment credit checks should reflect that employment credit checks will only be conducted on applicants and current employees that are required to handle money in the course of their jobs.

Currently, the following states and local governments have enacted the following restrictions:

  • Banks and financial institutions in Chicago, Colorado, Connecticut, Washington D.C., Hawaii, Maryland, Oregon, Philadelphia, and Vermont;
  • Managerial positions which are defined in each particular state/local government’s legislation in California, Colorado, Hawaii, Illinois, and Philadelphia;
  • Positions with access to specified personal information, other than routine transactions and as defined by the specific state legislation in California and Maryland;
  • Positions with access to confidential/proprietary information, security data, or trade secrets in California, Connecticut, Illinois, Maryland, New York City, Philadelphia, and Vermont;
  • Positions in law enforcement in California, Washington D.C., 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 in California, Connecticut, Illinois, Maryland, New York City, Philadelphia, and Vermont;
  • Positions with regular access to more than a certain amount in cash in California – $10,000 and Illinois – $2,500; and
  • Positions with access to expense accounts or corporate cards in Connecticut and Maryland.

More importantly, no state or local government prohibits the use of employment credit check 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.

To further support the EEOC’s outlook on the use of employment credit check reports, on January 29, 2020, the U.S. House of Representatives passed legislation to amend the Fair Credit Reporting Act (FCRA) titled the “Comprehensive CREDIT Act of 2020”  that would prohibit all employers from using employment credit check reports to make employment-related decisions, except when required by law or for a national security clearance. The portion of the act titled “Title VI – Restrictions on Credit Checks for Employment Decisions, Sec. 601” in short, states that organizations “may not furnish a consumer report for employment purposes, including for the purpose of denying employment, with respect to any consumer in which any information contained in the report bears on the consumer’s creditworthiness, credit standing, or credit capacity only if the person is required to obtain the report by a federal, state, or local law or regulation; the information contained in the report is being used with respect to a national security investigation; or the report is necessary for a background check or related investigation of financial information that is required by a federal, state, or local law or regulation.” (H.R.3621 – Comprehensive CREDIT Act of 2020)

The House approved the Act over sharp criticism from organizations such as the U.S. Chamber of Commerce. The legislation now awaits consideration by the Senate, whom many expect to ignore the legislation all together. Regardless, organizations who conduct background checks, more specifically employment credit check reports, should consider this legislation a preview of what background checks and employment credit check reports may look like in the future.

For additional information on employment credit check bans, please contact us at www.newfocushr.com.

Written By: Patrick McKenna, SHRM-CP

  HR Consultant





New Focus HR is a human resources consulting and training company that services all organizations. Our expert team collaborates with businesses to attract, motivate, retrain and retain their biggest assets, employees. While engaged with an organization, our focus is to find solutions that improve the company’s internal HR-related practices while increasing results at the same time! Our focus. Your results.