Many employers review information contained in applicants' or employees' credit reports when making hiring decisions and performing post-employment background checks. The use of credit reports is regulated in some respects by the federal Fair Credit Reporting Act (FCRA), and a handful of states have passed laws imposing tighter restrictions on the use of credit histories by employers. In addition, legislation has been introduced in Congress to amend the FCRA to prohibit most employers from conducting consumer credit checks on prospective and current employees. The use of credit reports by employers has also long been on the radar screen of the Equal Employment Opportunity Commission (EEOC), which only on October, 20, 2010, held a public meeting on the issue, based on the concern that credit history reviews might tend to screen out protected groups such as women and minority group members at a disproportionate rate.

Many employers value credit reports as a useful source of information on whether an individual should be hired or retained, particularly for positions where the prospective employee will have access to customers' money, confidential information or other sensitive data. Employers who use credit information as a screening tool should be prepared to justify that the information is relevant to the job the employee holds or is seeking.

The FCRA permits an employer to request a credit report only for use for "employment purposes." A report is for employment purposes if it is used to evaluate a prospective employee in hiring, promotion, reassignment or retention. The FCRA further requires that an applicant give written consent before an employer can request a credit report, and that the applicant be given notice that a report may be requested. If any adverse action (such as elimination from consideration for an applied-for position) may be taken based in whole or part on the credit report, the applicant must be given written notice that such an action may be taken and notified if the adverse action is actually taken.

Hawaii, Illinois, Oregon and Washington have all passed laws placing tighter restrictions on the use of credit reports by employers. Many states are considering similar legislation. The federal Equal Employment for All Act, H.R. 3149, which is currently in the committee review process, could make stricter prohibitions the law of the land. The Act includes exceptions for managerial positions at financial institutions, job applicants subject to national security clearance and people applying for government positions that require a credit check. The main argument militating in favor of these restrictions is that the use of credit histories by employers disadvantages women and minority group members at a disproportionate rate. At the public meeting held by the EEOC on October 20, 2010, several civil rights groups presented data from studies showing that racial minorities and women tend to have relatively lower credit scores and argued that the use of credit histories by employers for employment could constitute discrimination based on race or sex under Title VII of the Civil Rights Act of 1964. Though the EEOC has stated it plans no immediate action, the issue is clearly drawing attention.

The Bottom Line

Employers must be sure that they are complying with federal and state law before conducting credit checks on prospective or current employees. Recent and upcoming changes in the law should also be closely monitored. Should you require more information about the law on conducting credit checks, contact legal counsel.