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| Credit and Financial Checks
June 13 2018

Can credit histories still be use in employment decisions?

The Equal Employment Opportunity Commission (EEOC) is now scrutinizing companies' use of credit checks to make employment decisions, in the same way that other background checks have been given limits.

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. 

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.” Pamela Quiqley Devata, Esq (EEOC).

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. In the case 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.

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. 

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
  • Managerial positions 
  • Positions with access to specified personal information 
  • Positions with access to confidential/proprietary information, security data, or trade secrets 
  • Positions in law enforcement 
  • Positions involving access to assets of above a certain amount or with signatory authority to enter transactions on behalf of the employer 
  • Positions with regular access to more than a certain amount in cash 
  • Positions with access to expense accounts or corporate cards 

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.