Recent economic data suggest the job market is thawing. With high unemployment persisting, many employers will have several candidates applying for each new job opening.

Companies evaluate competing applicants via different methods. A credit report is one such tool. They are mandatory in some industries, but the majority of employers conduct credit checks voluntarily. Businesses argue the checks are essential, particularly in jobs requiring financial integrity, cash handling, and protection of inventory. Even where cash handling is not part of the job, employers may assert financial responsibility is a harbinger of honesty or conscientiousness.

The economic crisis has taken a toll on a huge segment of the population. Many otherwise qualified employees may have lost a home in the mortgage crisis, or defaulted on a credit card or loan because of extended unemployment. These events naturally adversely affect credit ratings.

Both federal and state laws govern employers’ use of credit reports in making employment decisions. Before an employer may obtain a credit check concerning an applicant or employee, the federal Fair Credit Reporting Act requires employers to secure consent and make specific disclosures. They must also follow certain procedures if basing a decision on information in the credit report. In addition, applicants have the right to dispute findings and inspect credit records. California and other states have similar laws in place, some requiring different disclosures.

The Fair Credit Reporting Act and some states’ laws long have controlled the procedures by which employers may obtain credit reports. Now, some states have passed, or are considering, legislation that severely curtails or eliminates employers’ reliance on credit checks. Other states, including California, are considering similar limitations.

Privacy advocates object to employers’ reliance on credit reports as unnecessary intrusions into applicants’ out of work conduct. There are some who argue that credit standing is not sufficiently predictive of work performance to justify the invasion of privacy.

Using “good credit” as a hiring criterion also may result in employment discrimination claims. The Equal Employment Opportunity Commission’s Office of Legal Counsel issued a private “opinion letter” on this topic, dated March 9, 2010. The letter, which has no legal force, responds to a complaint about the use of credit checks. The author explains that the use of credit checks could result in a “disparate impact” discrimination if credit checks disproportionately screen out applicants based on race, sex, or other criteria covered by Title VII of the Civil Rights Act of 1964 and are insufficiently job related and justified by business necessity. See Dianna B. Johnston, Esq. Title VII: Employer Use of Credit Checks, Office of Legal Counsel, Equal Employment Opportunity Commission (Mar. 9, 2010) (available at www.eeoc.gov/eeoc/foia/letters/2010/titlevii-employer-creditck.html (visited May 8, 2010)).

The opinion letter does not break new ground. See Howard v. Continental Ill. Natl. Bank & Trust Co. , 1983 U.S. Dist. LEXIS 11923 (N.D. Ill. Nov. 7, 1983) (“upon a proper showing, the plaintiff could establish that the use of credit ratings in hiring decisions has an unlawful disparate impact on minority job applicants”). The EEOC’s decision to post this letter on its Web site may be an example of the increased attention this issue is garnering.

In 2009, Hawaii passed a measure making it illegal for any employer to “refuse to hire or employ or to bar or discharge from employment, or otherwise to discriminate against any individual…because of the individual’s credit history or credit report, unless the information…directly relates to a bona fide occupational qualification.” See Hawaii Revised Statutes Section 378-2. The law exempts businesses required to conduct credit checks, certain financial institutions, and managers and supervisors. Washington amended its state credit report law in 2007 to prohibit credit checks for employment purposes unless they are required by law or substantially job-related. See Revised Code of Washington Section 19.182.020(2).

Oregon is the latest state to pass a law restricting the use of credit checks. Like Washington, Oregon equates reliance on creditworthiness to unlawful discrimination, but exempts credit checks required by law and those that are substantially job-related. See Oregon Revised Statutes Chapter 659A.

The term “substantially job-related” in these laws is undefined, but is borrowed from discrimination law. Employers in Oregon and other states limiting credit checks may look forward to litigation challenging their decisions to run credit checks. Retail employees, hotel and restaurant workers, and other workers who handle expensive goods or funds could be candidates for job-related credit checks. Time will tell.

The trend is decidedly anti-credit report. Connecticut, Georgia, Illinois, Indiana, Louisiana, Maryland, Michigan and other states are considering legislation limiting employers’ use of credit reports. The District of Columbia is considering an outright ban on employers’ reliance on credit history.

The California Legislature is considering AB 482 (Mendoza), which would prohibit employers, with the exception of certain financial institutions, from obtaining a credit report unless the information is substantially job-related, or if the applicant seeks employment in the Department of Justice, law enforcement positions, a managerial job, or a position for which the information contained in the report is required to be disclosed by law or to be obtained by the employer. “Substantially job-related” means the employee would have access to money, assets or confidential information. The governor vetoed a similar bill in the last session.

Congress is considering legislation that would moot the states’ efforts. HR 3149, in the initial stages of consideration, would amend the federal Fair Credit Reporting Act to prohibit credit checks, except when the consumer applies for, or currently holds, employment that requires national security or FDIC clearance; when the consumer applies for, or currently holds, employment with a state or local government agency which otherwise requires use of a consumer report; and when the consumer applies for, or currently holds, a supervisory, managerial, professional, or executive position at a financial institution. If this bill is passed as drafted, it would exempt managers, but not jewelry salespersons, cashiers, or any other positions that could be “job-related” to credit checks.

In addition to credit history, the law is trending against employers’ use of criminal background checks, and even surfing applicants’ activities on the Internet. As laws make it more difficult for employers to survey an applicant’s credit history, Internet use, and the like, employers must refine lawful methods of evaluating potential hires.

The application form and job interview remain primary sources of information about applicants. Although there are well-established limits on what employers may ask on applications and during interviews, employers should not take these methods for granted.

It is a mistake to accept a resume in lieu of the employment application or to ignore completed applications during the hiring process. Careful employers may glean from the application everything from reading comprehension to diligence in completing a task. Applications also should contain work history, the reasons for leaving prior employment, career progression, and experience working in similar industries or for respected organizations.

Poorly handled interviews devolve into chats, usually marked by the interviewer doing most of the talking and rarely uncovering job skills or red flags. Well-conducted, focused interviews may reveal more important information about an applicant than a credit check ever could. The good interview may expose details about prior work history, intangibles like motivation and zeal, inconsistencies with the application or resume, verbal communication skills, the applicant’s ability to answer questions spontaneously, and a wealth of additional information. However, employers must train interviewers how to ask proper, lawful, and probing questions.

Employment references remain lawful. In fact, the law protects employers from liability for negative references, even if inaccurate, provided they are furnished without “malice.” Employers seeking to avoid “name, rank and serial number” neutral references may wish to try requiring employees to affirmatively consent to substantive references.

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