The adage you "have to have credit to get credit", or "you have to have experience to get experience", is playing out in the job market as well. The Society for Human Resources Management (SHRM) conducted a survey in 2012 and concluded that 47% of employers required credit checks for at least some of its open positions. Checking an applicant’s credit is part of the “background” search for new employees or those seeking a promotion. While federal laws allow companies to discriminate based on credit history, many states are questioning whether this practice puts protected classes at a disadvantage, and are taking steps to prevent credit checks from being used across the board.
As of the end of 2015, 11 states have restrictions in place regarding when and if employment checks may include a review of the applicant’s credit report. Another 17 states have pending legislation that address credit checks for employment and promotions in the pipeline.
Background Checks for Employment
Background checks are standard procedure for most employers. Once the applicant is selected the background check is the last step before beginning work. Searches might include records for:
- Criminal Record
- Credit History
- Driving Record and Vehicle Registrations
- Educational Records
- Court Records or other Public Records
- Social Security Check
- Medical Records
- Military Record
- Employment History
- Drug Testing
- Social Media Activity
Connection Between Credit and The Job
Qualified employees are being denied work, even though there is little correlation between credit and worker performance, according to a Demos study completed in 2012. The study's focus was on middle and lower class jobs and concluded that action should be taken to limit employer access to credit reports for the purpose of choosing an applicant or making a decision regarding promotion. Poor credit was more likely to be linked to periods of unemployment, lack of health coverage and medical debt, rather than a reflection of the applicant’s ability to complete a particular job.
However, the challenge with credit as a measure of employment qualification is that those with the greatest need are hurt the most. When studies show there is no direct link to job performance, it may be difficult for employers to continue to justify using this criterion as part of the employment process.
Purpose of Credit Reports
Lenders were the target audience when credit reports were created, not employers. Credit reports were designed to assess the risk of a borrower and their ability to repay a loan. The use of credit has spread to other areas including insurance premiums, deposit requirements, and employment.
Is Credit Discrimination a Civil Rights Issue?
Maybe: The 2012 Demos study highlighted concerns that the practice of using credit reports disproportionately hurts minorities, causing many states to take a closer look at the practice and place restrictions on using credit checks beyond the protection Federal Laws provide.
States have taken one of two approaches to the credit question:
The first approach is prohibition. New laws may prohibit the use of credit across most occupations and job types except those specifically listed in the law.
The second approach is viewing credit discrimination as a civil rights issue claiming credit standards put minorities and other protected classes at a disadvantage, when used, even if every employee for a particular position receives the same treatment. This approach may lead to changes in the federal law, which stipulates that any employment screening practice that impacts a protected class as a whole is discriminatory.
Check Your State: Here Are the States with Laws Limiting Credit Checks for Employment Considerations:
States with Pending Legislation Include the Following:
Restriction Details for States with Existing Laws
State laws place restrictions on an employer or potential employer’s ability to use credit as a consideration for employment. Promotions, internal transfers, job continuation, and other after hire activity are also generally included in the state laws.
CALIFORNIA initially passed restrictions in 2011 and covers employers and prospective employers in every industry except certain financial service companies. There is, however, a full range of exceptions which include positions for management, those who handle $10,000 in cash or more on a regular basis, and positions with access to confidential or proprietary information. Retail workers with regular access to personal information, jobs where the employee would have access to the employer's financials including bank account information, ability to transfer funds or sign financial contracts on the employer’s behalf. Positions where background checks are required by law, with the state department, or law enforcement also made the list of exceptions.
COLORADO enacted a law that went into effect on July 1, 2013, which prevents employers from using credit as a factor for hiring unless it is directly related to the job. The employer must inform applicants if their credit is a consideration in the hiring decision, and a grievance procedure is in place which allows applicants to sue if a violation of rights occurs. The Department of Labor and Employment will enforce the law. Financial positions and those requiring a credit check by law, are exempt. Other exclusions include executive or management positions and those involving national security, the federal government, or intelligence.
CONNECTICUT law began on October 1, 2011, and limits the use of credit files for every business regardless of size. Financial institutions, where the law requires, and jobs substantially related are exempt. Positions include higher management, those involving personal, confidential, or financial information for employees, the employer, or customers. Jobs with fiduciary responsibility and anyone with an expense account or company credit card. In 2015, a new bill passed expanding when companies could require a credit check to include those working with drugs or collections without a dollar value limitation and now only includes these two categories.
DELAWARE began restricting background checks with employment applications in 2013 and has already amended the bill twice. Currently both credit history and credit scores cannot be obtained for purposes of employment for all public employees before the first interview. After the applicant has been determined to be qualified and offered a position, a contingency may include passing a background check, including a credit history. State and federal jobs that require a credit check are the only exclusions prior to a job offer.
HAWAII was one of the first states to restrict the use of credit and passed its first law regarding the matter effective July 1 2009, making the use of credit a discriminatory practice, unless directly related to qualifications needed for the job or among listed exceptions. Even when a credit report may be obtained it must be after an offer of employment has been extended. Financial institutions, when required by law, and managerial/supervisory positions are the only exceptions.
ILLINIOS restricted credit history access for employment consideration in 2011 under the Employee Credit Privacy Act. Exclusions were made for management positions, those with unsupervised access to over $2,500, anyone who must be bonded, when state or federal laws require it, and those with access to over $100 of the businesses assets. Anyone working with personal, financial or confidential information, trade secrets or national security are also excluded.
MARYLAND passed the Job Applicant Fairness Act covering applicants as of October 1, 2011. Credit checks may not be considered until after an offer of employment is extended and must be related to the job. Job related position approved include management positions that control the direction of the business or department. Anyone with access to personal information of customers, employees, or the employer, or anyone with fiduciary responsibility to the employer. Access to assets, trade secrets, or anyone with an expense account/company credit card may also require a credit check. The law specifically states that credit cannot be used for denying an applicant, discharge, pay considerations, or other conditions of employment. Financial institutions and jobs requiring a background credit check under federal are state law are excluded from the restrictions.
NEVADA joined the ranks of states restricting the use of credit by enacting a bill that went into effect on October 1, 2013, restricting employer’s ability to require credit as part of the application process. Areas still permitted to consider credit include those authorized by law or by showing the credit is a job related consideration. Employers may also check credit of applying and existing employees if they reasonably believe there has been activity that is not consistent with state or federal laws. In 2015 Nevada revised the rules for a credit review for employment with certain gaming licensees regarding disclosures and what information could be obtained by a reporting agency.
OREGON enacted restrictions on the use of credit in 2010 effectively prohibiting the use of credit for most applicants. Credit can no longer be used for hiring, firing, promotion or pay considerations. Exceptions include financial institutions, public safety positions, when federal or state laws requires a credit history, and job related positions. If a specific exception is not listed, the employer must be able to show the credit report is related to the job and disclosure given to the employee or potential employee in writing.
VERMONT introduced its credit protection law beginning July 1, 2012. The law restricts most employers from considering credit for applicants and in job related decisions and specifically addresses credit discrimination. The law also includes information gathered through a third party along with the credit report specifically. Exceptions include positions requiring credit history for state or federal positions and any position with access to financial information that would be considered confidential. Financial institutions, law enforcement, medical staff and firefighters are exempt positions. Jobs involving fiduciary responsibilities for the employer or customers, anyone with access to payroll information, and positions showing credit history as a valid predictor of performance, may also require a credit check. Even where exceptions exist, it may not be the sole factor of consideration.
WASHINGTON state was the first to address credit history as part of the hiring process and enacted their bill in 2007. The position must be substantially related in order to require a credit check and reasons for using credit must be presented to the applicant in writing. The only other exception is for positions that require a credit history by law.
Restriction Details for States with Pending Laws
GEORGIA signed a law regarding credit checks in 2015 which requires employers who use credit history as a job qualification to notify the applicant. Legislation prohibiting the use of credit checks is pending.
INDIANA has two bills pending, one from each house of congress. Both bills will restrict credit use for employment purposes with limited exceptions, and will provide civil penalties for non-compliance. The attorney general will have power to enforce the standards through either Class A or Class B infractions.
MAINE is debating an act to restrict employers from considering credit as a factor in the hiring process, restricting both credit reports and other financial checks like bank history through Chex Systems or credit capacity. Exceptions would include those working with the finances of either the employer or customers, those in the financial industry, or when required by law.
MASSACHUSETTS has a house and senate bill pending which will regulate the use credit and when such information would be restricted during the hiring process. Exceptions would be for positions required by law. It is addresses the issue as credit discrimination and putting a dispute process in place.
MICHIGAN has a law up for debate which will prevent employers and prospective employers from using credit as part of the hiring decision for certain jobs. It would include both obtaining a credit report and inquiring about credit or financial matters in the application. Exceptions and a dispute procedure are included.
MISSOURI is discussing a bill to restrict employers or employment agencies from requiring credit screening as part of the pre-employment process. Information regarding the report, credit score, credit balances, and payment history will be included in the restrictions. The bill also extends to more general financial information like financial status, checking, and savings account balances as a condition of employment. Exceptions will include those who work in financial services and when required by law.
NEW HAMPSHIRE failed to pass house bill 365 on 3/12/15.
NEW JERSEY has five bills pending which will restrict the use of both credit history and financial status in an effort to eliminate job discrimination. Credit history and financial history are being added as a protected class barring companies from making decisions based on an applicant’s finances. One focuses on job discrimination, two on the practice of requiring credit background checks as a condition of employment, and two prohibiting or requiring credit during the pre-employment process.
NEW MEXICO has a bill which passed in the Senate on 3/12/15 and will restrict the use of credit for employment decisions. The law prohibits employers from refusing to recruit or interview a prospective job applicant based on credit information. It includes credit worthiness, credit capacity and the credit standing of an applicant. Employers who wish to use this information prior to an interview must prove that the credit information is an occupational requirement for the position in question. Banks and financial services positions, jobs requiring US security clearance, and those with fiduciary responsibility are the only exceptions.
NEW YORK has five bills working their way through the state congress. One will limit employer access to an employees or perspective employee’s information. Two will prevent the use of credit as a criterion in the hiring process and two prohibit credit checks and status of student loans to be considered for employment, except where the law currently requires.
NORTH CARLOLINA has a pending bill prohibiting employment discrimination on the basis of credit history or the credit rating of a job applicant or current employee. Credit histories may only be a factor for consideration if credit worthiness was directly related to the person’s ability to perform essential functions of the job.
OHIO introduced an amendment as part of the Ohio Civil Right Law which will consider credit history to be a form of discrimination. Taking this step places credit discrimination with other protected classes such as sex, national origin, or religion.
PENNSYLVANIA has a house bill and a senate bill prohibiting the use of credit reports in hiring decision with certain exceptions and enforcement procedures. The house bill is focused on the discrimination aspect of credit history, where the senate bill focuses more on prohibition during the hiring process. Included would be credit histories and personal financial information.
TEXAS is considering two bills. One covers when employers may use credit as a factor in employment decisions, the second relates to the use of credit for veteran applications.
UTAH passed a bill on 3/20/15 which permits background checks and credit histories to be obtained for public employees applying for positions where public funds are involved.
Cities with CURRENT Regulations
In addition to state regulations a few cities are taking aim at the practice of pre-employment credit checks and are creating laws that govern how companies within that city hire. Most notably New York City passed a new law in 2015 limiting credit checks to those with fiduciary duty to the employer, public service positions, high level workers, cyber security, and positions regulated by law. Restrictions apply to both current workers and new applicants.
The Federal Law and Your Consumer Rights
The EEOC (Equal Employment Opportunity Commission) and The FTC (Federal Trade Commission) are the two federal agencies which oversee employment processes and procedures. Employers on the federal level have the right to check credit for any applicant as long as the following is true:
- The same standards must apply to all applicants for a posted job position. The employer must use the exact same procedure during the hiring process in order to avoid potential discrimination. For example: the employer could not decide to conduct checks only for a certain race or sex, but must have the same background checks for everyone who applies.
- Background checks cannot be discriminatory among a protected class.
- Must be related to the position and as a business necessity.
- Before taking adverse action the employer must notify the applicant that the credit history was part of the decision and include the credit report and a summary of rights, in advance of a final decision.
- Applicants then have the right to review, and correct any information on the report.
There is a movement among states to restrict companies from using credit as part of the hiring decision. This will likely limit its use for jobs that do not involve fiduciary duties, handling client funds, or jobs that require clearances.