Legal Clinic

Checking on Credit Checks

Question: I am an employer located in New York City, and I've heard that there are some recent developments in the use of credit checks by employers. My company's policy is to run credit checks as part of the background-check process on all applicants who receive a conditional offer of employment. Can we continue to run these credit checks without any restrictions? 

Thursday, November 19, 2015
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Answer: While pre-employment credit checks were generally permitted, a recent amendment to New York City's Human Rights Law places significant restriction on an employer's ability to use credit checks for employment purposes, albeit with some exceptions. The amendment prohibits most employers with four or more employees from requesting or using an applicant's or employee's "credit history" for employment purposes. The new law, which will take effect on Sept. 3, 2015, affords aggrieved applicants and employees the ability to sue their prospective employer and provides for generous remedies in the event of a violation.

The New Law on Pre-Employment Credit Checks

The new law's definition of credit history is broad. It defines "credit history" to include (1) consumer credit reports, (2) credit scores and (3) information directly obtained from the applicant or employee regarding his or her (i) prior bankruptcies, judgments or liens, or (ii) number of credit accounts, late or missed payments, charged-off debts, items in collections, credit limit or prior credit report inquiries. A large majority of New York City employers are covered by the new law and may not inquire about the information outlined above. In the words of one of the bill's lead sponsors, Council Member Brad Lander, the law covers "the vast majority of jobs, certainly over 95 percent of jobs in New York City's employment are covered under this very strong [law]."

Nonetheless, there are some notable exceptions that allow certain types of employers, hiring certain types of employees, to continue to use credit checks. Because the new law was only recently passed, and is not yet in effect, these exceptions have not been litigated, nor have they been fully interpreted yet. The language of the new law itself, however, provides some guidance as to the scope of these exceptions.

Exceptions to the New Law

Perhaps the most notable exception applies to employers hiring employees in the financial services industry. The exception applies to employers that, pursuant to state or federal regulations or a self-regulatory organization (such as the Financial Industry Regulatory Authority ("FINRA")), are required "to use an individual's consumer credit history for employment purposes."  In other words, if an employer must inquire about a prospective employee's credit history before making an offer of employment under the law, or under applicable regulations, the exception applies. This will require that employers undertake a detailed analysis to determine whether they in fact have an obligation to inquire about credit information before hiring an individual. If they do have such an obligation, then the new law would not prohibit them from obtaining a credit check in accordance with their federal, state or local legal requirements.

The new law contains other exceptions that employers should be aware of. For instance, there is an exception when hiring an employee who will have: (1) "signatory authority over third party funds or assets valued at $10,000 or more" or (2) a "fiduciary relationship" with the employer and "the authority to enter financial agreements valued at $10,000 or more on behalf of the employer." Accordingly, when hiring an individual with signatory authority over third-party funds in the amount of $10,000 or more, or someone in a fiduciary relationship with the company who has the authority to commit at least $10,000 of the company's funds, the employer can inquire into the prospective employee's credit history.

Other exceptions to the new law apply when hiring:

*         High-level information-systems and technology personnel, such as IT or cyber-security staff;

*         Non-clerical workers with regular access to trade secrets or national security/intelligence information, or workers requiring security clearances under federal or state law, who, because of their critical positions, must be subjected to more rigorous background checks than the great majority of employees;

*         Hiring police officers or peace officers; and

*         Hiring bonded employees, those employees for which a fidelity insurance company must issue a bond because of that employee's ability to access large amounts of funds.

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Developments outside New York

This is a developing area of the law in New York City and elsewhere. In passing its new law, New York City joined 10 states (including California, Connecticut and Vermont) and three municipalities (Chicago, Cook County, Ill., and Madison, Wis.) in passing similar laws.

California's law on this subject, passed in October 2011 and, in effect as of Jan. 1, 2012, is similar to New York's, but with some key distinctions. For one, rather than broadly prohibiting use of "credit history" as New York's law does, California's law only applies to "consumer credit reports" written by consumer credit reporting agencies, which are just one component of "credit history" under the New York law.

Additionally, while the California law contains similar exceptions to the New York law, it contains two particularly noteworthy additional exceptions: (1) applicants for exempt managerial positions as defined under California law may have their credit reviewed pre-employment and (2) applicants for "position[s] that involve[s] regular access, for any purpose other than the routine solicitation and processing of credit card applications in a retail establishment, to all of the following types of information of any one person: (A) Bank or credit card account information; (B) Social security number [and] (C) Date of birth may also have their credit reviewed pre-employment. Given these two exceptions, it is fair to say New York's law is more restrictive than California's law.

Similar to the California law, the law prohibiting the use of credit checks in Chicago also exempts employers hiring managerial employees from the prohibition on pre-employment credit checks. However, like New York and unlike California, Chicago's law applies to "credit history" and not merely credit reports, making the information employers are prohibited from requesting much broader. Interestingly, Chicago has also added "credit history" as a protected class under its Human Rights Ordinance, making it illegal to discriminate based on credit history (apart from the law's exceptions) or to retaliate following a complaint made about the improper utilization of credit history.

Regardless of location, employers should be aware of the laws in their jurisdictions governing the use of credit checks in the employment context. Employers in states and localities where these laws are in effect, or are soon to be in effect, should review the laws in their jurisdictions, including the exceptions, and consult counsel about the use of credit checks for employment purposes.

Evandro C. Gigante is a senior counsel in Proskauer's labor and employment department, and a resident in the firm's New York office. Proskauer Associate Matthew R. Engel, resident in Proskauer's Newark office, assisted with this article.


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