Protecting the Unemployed from Abusive Credit Inquiries

As the economic downturn progresses, American workers are facing a disturbing rise in employers using credit ratings to determine job worthiness.  According to a 2006 survey by the Society for Human Resource Management, the number of firms using credit histories to screen applicants rose from 25% in 1998 to 43% despite such inquiries often being discriminatory and even illegal.  Even if they disclose a credit search request, companies often bury it within lengthy applications so applicants might not even be aware that they are authorizing a credit check.  This downwards spiral makes it increasingly hard for job seekers to become employed and pay off debt.

Increased State Regulation of Credit Inquiries:  In some states lawmakers have stepped up to protect workers.  Washington state's HB 1546 mandates that searches of a candidate's credit history must be directly pertinent to the job.  This year Hawaii legislators enacted HB 31 over the Governor's veto to prevent employers from discriminating in hiring or firing based on an individual's credit history or credit report, unless the position is a managerial or supervisory position, or it directly relates to an occupational requirement or the employer is an FDIC-insured financial institution.  Moreover, a credit inquiry may only be made after a conditional job offer.  Last year, California Governor Schwarzenegger vetoed a similar law (AB 2918), although it has been reintroduced for this session.

In 2009, chambers in Indiana (H 1250) and Ohio (SB 91) considered broad anti-discrimination in the workplace bills that would have prohibited credit inquiries, while the Connecticut House passed HB 5521 which would have put the burden on the employer to prove the necessity of a credit check for hiring.  New York and Missouri both sought to limit the use of credit scores in job decisions.  Texas tried to pass a version that simply pertained to state employees.  Legislators in Michigan (HB 4578) have also introduced bills prohibiting companies from using credit history in making employment decisions.

“In my opinion, it’s discrimination,” said Representative Jon Switalski, the Democrat who proposed legislation in Michigan.  “If you miss a few payments or you have medical debt, your skills as a pipe fitter or an electrician don’t diminish.” 

Employers Violating the Law:  Highlighting the relevance of these state laws, employee credit checks could violate federal law, as EEOC commissioners have testified, yet enforcement has been weak at the federal level.  The Fair Credit Reporting Act (FRCA) requires an employee or applicant's written permission any time an employer hires a third party to conduct a background check.  If an employer uses credit information to deny an applicant a job, fire a current employee, rescind a job offer or cancel a promotion, the FCRA requires the employer to provide the worker with a copy of their report and if the report influenced a hiring decision.

Unfortunately, too many companies do not comply with the law and simply provide an alternate excuse.  Additionally, because credit histories tend to be fraught with discriminatory and inaccurate information to begin with, applicants from communities of color or low-income communities are at a disadvantage.  According to a report by the National Consumer Law Center, even the Consumer Data Industry Association, the trade association of credit bureaus, testified that 22% of the 57.4 million consumers who ordered their own credit reports filed a dispute.  And in the amount of time it takes to contest a report's accuracy and repair a credit rating, companies may have already hired others.  Recently, Congress introduced US HR 3149 to prohibit the use of consumer credit checks by employers as part of the hiring or firing process, unless the job is at a financial services institution or involves national security or FDIC clearance. The bill is supported by labor unions, civil rights groups, fair housing advocates, and advocacy organizations for consumers, students, and women.

Historically, states have been at the forefront of tightening regulations and enforcement of fair credit reporting, but amendments made in 2003 removed certain preemption provisions.  Ultimately, workers facing spiraling bill payments and one of the worst job markets in recent history should not be doubly burdened by invasive and discriminatory credit checks.

Federal Trade Commission - The Fair Credit Reporting Act
Electronic Privacy Information Center -The Fair Credit Reporting Act (FCRA) and the Privacy of Your Credit Report
USA Today - 5 states challenge employer credit checks