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The Perils of Using Credit Checks in Hiring

Hiring new employees can be difficult. As a business operator, you want to make sure that you're hiring someone who is trustworthy and has their act together. One way to measure a person's ability to manage their own personal affairs (and your business), would be to perform a credit check. A credit check would potentially show whether or not an employee is good with money and responsible. However, both federal and state laws limit the use of credit checks in hiring decisions. Those are discussed below.

First things first: a "Consumer credit report" means any written, oral, or other communication of any information by a consumer credit reporting agency bearing on a consumer's credit worthiness, credit standing, or credit capacity, which is used or is expected to be used, or collected in whole or in part, for the purpose of serving as a factor in establishing the consumer's eligibility for … employment." (Civ. Code, § 1785.3.)

As mentioned above, both federal and state law limit the use of credit checks in hiring decisions. In addition, case law raises the specter of a potential Title VII violation. Let's start with the federal issues.

The Fair Credit Reporting Act requires an employer to take a few steps before requesting a potential employee's credit history. First, the employer needs written consent from the employee. Second, the employee needs to be provided a warning if the employer plans to disqualify the applicant based on the credit history (and a copy of the report must be provided, if requested). Third, the employer needs to provide an official adverse action notice if the employer elects not to hire the applicant based on the credit report.

Now, the state issues: in 2011, California joined a group of other states and passed a law curtailing the use of credit checks in hiring. Pursuant to labor code § 1024.5, an employer can generally only use a consumer credit report when hiring for certain positions and certain responsibilities. For example, a credit check can be required for a managerial position or a position for which the information contained in the report is required by law to be disclosed or obtained. In addition, a credit check can be required for positions that involve regular access to consumer bank or credit card account information, social security numbers, and dates of birth. Other exceptions to the ban on credit report use in hiring are when the employee would be a signatory on a company credit card, authorized to transfer money for the employer, able to enter contracts on behalf of the employer, when the employee would have access to proprietary information, or when the employee has access to at least $10,000 cash.

There are a few more esoteric exceptions we haven't listed, but it should be clear that an employer needs to be aware of California law when requesting a credit report in hiring.

The last pitfall for employers wishing to use credit checks on employees or prospective employees is the potential for violating Title VII by engaging in discriminatory conduct. For example, inquiries into the applicant's financial history were found to violate Title VII where the investigation as a whole disqualified a disproportionate number of minority applicants and was not shown to be job-related. (U.S. v. City of Chicago (7th Cir. 1977) 549 F.2d 415, 420.) While the facts of this particular case are isolated, it is something to consider when assessing whether or not to make it company policy to require credit checks of employees.

We hope you find this article a useful guideline, but it is by no means an exhaustive view of using credit checks in hiring. Also, please keep in mind that credit reports are separate and distinct from background checks. We will address background checks in next month's article.

If you have business or employment related questions, please feel free to contact Jason Mauck at