States continue to place additional restrictions on employers, with new laws in Colorado and Delaware focusing on limiting the use of credit checks and criminal background reviews.

Effective July 1, employers in Colorado may only require an employee to consent to a background check for three enumerated reasons: (1) the employer is a bank or financial institution; (2) the report is required by law; or (3) the report is “substantially related to the employee’s current or potential job,” the employer has a bona fide purpose, and it is disclosed in writing to the employee.

The phrase “substantially related to the employee’s current or potential job” means the information contained in the credit report is related to the position because it involves executive or management personnel or the professional staff for such positions. In addition, the position must involve at least one of the following factors: setting the direction or control of a business, division, unit, or an agency of the business; a fiduciary responsibility to the employer; access to customers’, employees’, or the employer’s personal or financial information, other than information customarily provided in a retail transaction; the authority to issue payments, collect debts, or enter into contracts; or contracts with defense, intelligence, national security, or space agencies of the federal government.

Further protections for employees are provided under the statute if the employer chooses to obtain and use credit information. Employers may provide the individual with the opportunity to explain any eyebrow-raising circumstances found in his or her credit report that “may not reflect money management skills” but instead, an issue outside of an individual’s control like an error in credit information or an act of identity theft. And if the employer does decide to rely upon information in the report and takes an adverse employment action, the employer must disclose this fact to the individual and also the specific data upon which the employer relied, in writing.

Individuals alleging a violation of the law can file a complaint with the Colorado Division of Labor. Penalties of up to $2,500 can be awarded against the employer.

In Delaware, lawmakers have proposed similar limits on employers with the introduction of a bill that would prevent public employers from conducting a check of both criminal and credit records until a conditional offer of employment has been made. In addition, felony convictions more than 10 years old and misdemeanor convictions more than 5 years old would be excluded from consideration.

The preamble to the legislation notes that the incarceration rate in the United States has tripled since 1980 and “it is in the interest of the entire community that persons reentering society after incarceration become productive members of society, and the ability of these persons to obtain employment is key to their productivity.”

If a public employer chooses to rescind the employment offer based on the information uncovered, the proposed law would require consideration of multiple factors, like the nature of the crime and its relationship to the duties of the position; evidence of rehabilitation, whether the prospective job offers an opportunity for the commission of a similar offense, the likelihood of recurrence; and how much time has elapsed since the offense(s).

Exemptions from the law include police departments, the Department of Corrections, and other positions where state or federal law requires a background check.

To read Colorado’s new law, click here.

To read Delaware’s proposed legislation, click here.

Why it matters: The legislative efforts in both states reflect a growing national trend. With its restrictions on credit checks, Colorado joins eight other states with similar laws: California, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont, and Washington. And Delaware would join nine other states (California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, and New Mexico) if it passes its limitations on criminal and credit record checks.