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States Outlaw Employer Demands for Credit Checks

Posted June 13, 2013 in Labor and Employment by

Credit score and magnifying glass

iStockphoto/Thinkstock

Last month Nevada joined a growing number of states and cities that are forbidding companies from using credit checks to make employment decisions. But the practice is still legal under federal law.

 

Nevada Joins Growing Number of States 

Under Nevada’s new law, SB 127, employers cannot require prospective employees to submit credit reports as a condition of employment. It provides for a private cause of action: affected employees can sue the employer and force it to hire them, as well as demand lost wages and benefits. The law goes into effect in October.

With the new law, Nevada joins California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Oregon, Vermont, Washington which also forbid the practice, according to a client alert published by Proskauer Rose. One city – Chicago – has passed a similar law, and New York City is considering doing the same.

 

Hardest Hit, Hit Harder

Credit checks are keeping more people from getting jobs, according to a recent report by Demos, a public policy organization in New York. This hits people who are out of work and seeking a job even harder: unemployment can cause money problems that lower credit scores even further.

“Credit reports were not designed as an employment screening tool,” according to the Demos report. But federal law allows them to be used that way, and employers have increasingly taken advantage of the information.

The report cites a statistic from the Society for Human Resources Management: 47 percent of employers conduct credit checks on some or all job applicants. But that number is probably on the low side, according to Demos, which adds that one of four, or 25 percent, of unemployed workers say they’ve been screened with a credit check by potential employers.

The first percentage measures employers and refers to applicants. The second is a percentage of workers, and only the unemployed ones. Taken together the numbers indicate that the practice is widespread and affects both currently employed and unemployed job seekers.

 

Fair Game under Federal Law

The Fair Credit Reporting Act (FCRA) allows the practice, according to Charles A. Lamberton, a workplace rights and employment discrimination attorney based in Pittsburgh. “Although employers must request permission before obtaining a credit report, the FCRA does not prevent them from denying a job or a promotion, or even terminating an existing employee, on the basis of a negative credit report.” 

Charles Lamberton headshot

Charles Lamberton

“In addition, under federal law, an employer can fire an employee simply for refusing to give the employer permission to view her credit report,” Lamberton says.

It’s an unfortunate and actually irrelevant practice, since credit reports show employers “very little that is legitimate,” he says. “Some employers believe that creditworthiness is somehow an indicator of whether the applicant or employee will be reliable and perform well.”

Employers also argue that requiring credit checks is not based on race or gender; thus it can’t be discriminatory, “so regulators shouldn’t care whether they check credit reports,” explains Lamberton.

The Demos report, however, shows clearly that people of certain races and income levels are disproportionately affected by being credit checked for employment. “The racially discriminatory potential of employment credit checks is the key reason that civil rights organizations . . . have publicly opposed the use of employment credit checks,” says Demos.

 

State Laws Offer Protection

Lamberton says that the legislative activity in states and cities offers hope and represents an effort to help workers get back on their feet following the Great Recession of 2008–2009.

“If employers are allowed to use poor credit reports to deny employment opportunities, high unemployment rates can ‘lock-in’ and slow or even prevent an economic recovery,” Lamberton explains.

“As long as unemployment rates are above optimal levels,” he adds, “we will see more laws like this.” 

If you are faced with an employer’s demand for your credit report, first find out if you are in a state that protects it. If so, Lamberton says you can “[o]ppose the demand as an unlawful, discriminatory employment practice and file a charge of discrimination with the state’s Fair Employment Practices Agency.”

But if you’re not, proceed with caution. “Think carefully before saying no,” he advises.

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