Employee Credit Checks: 2010 Trends in Federal and State Legislation

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A candidate’s credit history can be a meaningful tool for screening candidates that are applying for a position that involves financial transactions or the handling of sensitive information. Employers that are trying to reduce the risk of fraud or theft frequently use credit reports for positions involving billing functions or access to cash, merchandise or personal property, as these reports can help identify applicants who may potentially be pre-dispositioned to mismanagement of company funds

However, several pieces of pending state and federal legislation directly affect those employers that use credit checks as part of their pre-employment screening process. By limiting credit checks to certain “high-risk” positions, these regulations are meant to protect job applicants by preventing inappropriate uses of credit checks. During times of high unemployment, state and federal agencies can be especially sensitive to any screening that may unnecessarily disqualify applicants from employment.

Below we’ll review current and pending laws at the federal and state level involving credit checks for employment and provide insight into the direction of future legislation.

Federal Regulations
Current federal law restricts employers’ use of credit checks under the Fair Credit Reporting Act (FCRA) and federal bankruptcy laws.

• The FCRA mandates that an employer obtain written permission from the job candidate as a pre-condition to conducting pre-employment background screening including credit checks.
• Federal bankruptcy statutes limit employers from using bankruptcy information to take any employment actions against current employees. However, this does not restrict the use of bankruptcy information in a hiring decision.

At the time of this article’s publication, the Subcommittee on Financial Institutions and Consumer Credit is reviewing a resolution (U.S. House Resolution 3149—“The Equal Employment for All Act”) that would further restrict the use of credit reports by employers. If passed, this bill will amend the FCRA and restrict companies from performing credit checks for employment purposes except for certain positions in financial organizations, government agencies, or positions requiring national security clearance. This bill seems less likely to pass now that control of the House of Representatives has shifted, but indicates a trend toward more regulation of employment credit checks.

Another indication of future regulation is evident by the Equal Employment Opportunity Commission’s (EEOC) recent public meeting on employer use of credit history as an employment screening tool.  It is anticipated that the EEOC will eventually release regulations around when and how employers may use credit checks.

Varying State-Level Restrictions
In 2010, several states introduced legislation to limit the use of credit history during hiring. At the time of this blog article, four states—Washington, Hawaii, Illinois, and Oregon—have passed laws regulating employment credit checks.

To understand the varying degree of legislation being passed at the state level, employers should review the laws passed in Oregon and Illinois. Oregon’s legislation is considered to be the most restrictive and is currently in effect. Oregon only allows employment credit checks for banks and credit unions, public safety officers, and any organizations that are required to check credit by law. Oregon does permit other types of employers to use credit checks, but only if the position at issue meets a stringent set of requirements.

Going into effect on January 1, 2011, Illinois’ new legislation is much less restrictive than Oregon. Illinois employers can use credit reports during hiring if a job involves custody or unsupervised access to more than $2,500 dollars, signatory powers over business assets of $100 or more per transaction, managerial positions, positions with access to sensitive information, or if credit history is required by law.

Employers should be aware of the varying degrees of restrictions at the state level and consider how similar types of legislation in their state would affect the background screening process.

4 Takeaways for Employers
Current and pending state and federal legislation indicate a trend toward restricting an employer’s right to access a candidate’s credit history during pre-employment screening.

It’s likely there will be additional legislation passed at both the state and federal level in the coming years. Here are four key takeaways for employers to stay apprised of new regulations and remain in compliance with existing laws:

• Set up Google news alerts for “employer credit history,” and similar phrases, to be aware of the pending bill in Congress as well as new EEOC regulations or laws being introduced in your home state.
• Carefully consider which positions involve duties for which credit history is a valid, job-related indicator.
• If you do conduct credit history checks, limit the potential identify theft and privacy risks to job candidates by only requesting credit history at the end of the hiring process for job finalists.
• Assign more experienced HR representatives to review candidate credit reports. This adds an extra layer of protection for the candidate’s financial identity and personal privacy.

Are you keeping up with today’s screening trends? Discover the most common background screening processes of your peers, including the use of credit history by downloading a complimentary copy of the 2010 HireRight Employment Screening Benchmarking Report

Free Report: Credit Checks: Best Practice Recommendations for Mitigating Risk
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HireRight is a leading provider of on-demand employment background checks, drug and health screening, and electronic Form I-9 and E-Verify solutions that help employers automate, manage and control background screening and related programs.

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The HireRight Blog is provided for informational purposes only. It is not intended to be comprehensive, and is not a substitute for and should not be construed as legal advice. HireRight does not warrant any statements in the HireRight Blog. Any statutes or laws cited herein should be read in their entirety. You should direct to your own experienced legal counsel questions involving your organization’s compliance with or interpretation or application of laws or regulations and any additional legal requirements that may apply.