What laws govern pre-employment credit checks?

Running credit checks as part of a pre-employment background check is a legal pre-employment practice. However, there are various state and federal laws to be complied with when doing so.

Fair Credit Reporting Act. One such law is the federal Fair Credit Reporting Act (FCRA). If an employer uses a third party vendor to conduct a credit check, the employer needs to comply with FCRA. Prior to conducting a credit check, FCRA requires that the employer:

1.  Notify the applicant/employee that it may be obtaining such a credit report for the purpose of evaluating the applicant/employee's fitness for employment;

2.  Obtain the applicant/employee's written authorization prior to receiving the report; and

3.  Certify to the third party vendor that it has complied with the proper procedures (i.e. that the company has notified the applicant/employee about the background check, that it has obtained his or her authorization and that the report will be used for employment purposes only).

In instances where an employer takes an adverse action against an applicant/employee based on the results of the credit check, the employer, prior to taking any action, must first provide the applicant with:

• A notice of intent to take adverse action;
• A copy of the report upon which the employment decision was based; and
• A copy of the “Summary of Your Rights Under the Fair Credit Reporting Act,” a document prepared by the Federal Trade Commission summarizing the employee's/applicant's rights under FCRA.

These notice requirements are intended to give an applicant/employee a full and fair opportunity to dispute or explain any inaccurate information contained in the background report. The Federal Trade Commission has indicated that a five-day period between the pre-adverse action disclosure and the adverse action will generally suffice. Once the employer takes the adverse action, it must provide the individual with an adverse action notice informing the individual of the adverse action. This notice must include:

1.  notice of the action taken;

2.  the name, address and phone number of the credit bureau from which the report was obtained;

3.  a statement that the credit bureau did not make the decision to take the adverse action and cannot provide specific reasons why it was taken;

4.  notice of the individual's rights to obtain a free copy of his or her credit report from the credit bureau within 60 days; and

5.  notice of the individual's right to dispute the accuracy of the information in his or her credit report with a credit bureau.

U.S. Bankruptcy Code. The U.S. Bankruptcy Code prohibits employers from terminating the employment of, or discriminating with respect to employment against an individual solely because he or she is bankrupt, is a debtor in bankruptcy or has been associated with such bankruptcy or debtor. According to Mike Casey, managing partner in the Miami office of Epstein, Becker & Green, P.C., it is unclear whether the Bankruptcy Code applies to hiring decisions.

Anti-discrimination laws. Although the denial of employment based solely on credit status is not per se unlawful, an employer may run the risk of a discrimination claim if it rejects a minority employee or applicant because of his or her credit history. Title VII of the Civil Rights Act of 1964 prohibits an employer from considering credit information in connection with a person's employment if it causes a disparate impact on his or her protected class (e.g., Blacks, Hispanics) and is not “job related” and “consistent with business necessity.” Therefore, to avoid claims of discrimination, an employer must have a business reason for declining to hire an applicant as a result of credit check findings.