Understanding When Pre-Employment Credit Checks May Be Restricted
Pre-employment credit background checks can play a vital role in helping employers minimize risk when hiring for certain positions, especially those that require access to financial assets or involve monetary decision-making responsibilities. In some jurisdictions, credit checks are even mandatory to finalize the hiring process.
While these checks use consumer credit reports similar to those reviewed by lenders or credit card companies, they do not disclose a candidate’s credit score. However, a credit report may still contain essential information that can be useful for assessing a candidate’s financial reliability, such as:
- Public records like bankruptcies, accounts in collections, or tax liens
- Credit-to-debt ratios
- Outstanding balances on various accounts
When used appropriately, credit checks can serve as a valuable screening tool for many roles, especially those tied to financial trustworthiness. In some cases, credit checks may even be legally required. However, employers must navigate complex laws governing the use of such background checks, ensuring that they comply with both federal and local regulations.
Credit Check Restrictions in the Hiring Process
Under the Fair Credit Reporting Act (FCRA), employers must adhere to strict guidelines when using credit histories in the hiring process. Generally, employers are not allowed to perform a pre-employment credit check unless the role in question meets one of the following criteria:
Involves managing or handling large sums of money
Is a managerial role with significant responsibilities
Provides access to company trade secrets or proprietary information
Grants access to personal financial information of customers or employees
Legally requires a credit check, such as certain positions in the financial services industry
In addition to the FCRA, individual states and cities may have their own laws regulating the use of pre-employment credit checks. These local laws can differ significantly from the FCRA, and it is crucial for employers to consult with their legal team to ensure compliance with all applicable regulations. Businesses should also establish best practices that align with their legal obligations and operational needs.
State and Local Regulations on Credit Checks
Currently, 11 states, Puerto Rico, and four municipalities have specific restrictions regarding the use of credit information in hiring decisions. Violations of these regulations can result in substantial civil and fiscal penalties. Below is an overview of some key state and local laws that employers need to be aware of:
California: Employers are generally prohibited from using credit checks in hiring decisions, unless the position falls under one or more specific exemptions. These include:
Managerial positions
Jobs with the state Department of Justice
Law enforcement and peace officer positions
Positions where a credit check is legally required (e.g., certain roles in the financial services or securities industries)
Roles with regular access to personal data such as date of birth, Social Security numbers, and credit or bank account numbers
Positions involving the authority to sign off on financial transactions or manage the employer's funds
Jobs with access to trade secrets or other confidential information
Roles involving access to $10,000 or more in the course of a workday
Before conducting a credit check, employers must notify the applicant in writing and provide the specific reason under Labor Code section 1024.5 for the credit check.
Colorado: Employers may only use credit checks in the hiring process if the position meets one of two conditions:
Disclosure of credit information is legally required by law.
The employer can demonstrate that credit and financial responsibility are substantially related to the job at hand and explain this relevance to the applicant.
Connecticut: The use of credit reports in hiring decisions is prohibited unless one of the following conditions applies:
The credit check is required by law.
The employer is a financial institution.
The employer reasonably believes that the employee is engaged in illegal activities.
The credit check is substantially related to the job’s responsibilities.
The position is managerial, meaning it involves directing the business, handling financial information, or having a fiduciary duty to the employer.
Delaware: Pre-employment credit checks are forbidden until after the first interview is completed.
Hawaii: Credit checks are allowed only after a job offer has been made, unless the position requires a check under federal or state law or is for a managerial or financial role.
Illinois: Employers are generally prohibited from using credit checks unless the job involves unsupervised access to cash, confidential financial information, or is legally required to have a credit check (e.g., certain financial roles).
Nevada: Employers cannot deny employment or promotions based on an applicant’s refusal to consent to a credit check unless it is legally required or substantially related to the job.
New York City: Credit checks are generally prohibited, except for positions involving financial responsibilities, such as those with access to trade secrets, security information, or significant monetary assets.
Oregon: Credit checks are restricted unless they are substantially related to the job and advance written notice is given to the applicant. Exemptions exist for roles at federally insured financial institutions and public safety positions.
Vermont: Employers cannot request a credit report for most positions, unless it is required by law, involves fiduciary responsibility, or is relevant to the position’s duties.
Washington, D.C.: Employers cannot request credit reports unless it is required by law or necessary for specific roles such as law enforcement or financial positions.
Puerto Rico: Employers may not reject an applicant or dismiss an employee based on their credit report unless the position requires access to financial or personal information, trade secrets, or involves substantial fiduciary responsibility.
Each state and municipality may have unique requirements and exemptions, so employers operating in multiple locations should pay special attention to the laws in each jurisdiction to ensure compliance.
Best Practices for Employers
Employers who intend to use credit checks in the hiring process should adopt the following best practices to ensure compliance with applicable laws and regulations:
Understand the Legal Landscape: Review federal, state, and local regulations that govern the use of credit checks. The FCRA provides a national framework, but state and municipal laws may impose additional restrictions.
Notify and Obtain Consent: Before conducting a credit check, provide written notice to the candidate or employee and obtain their written authorization. This is required under the FCRA and many state laws.
Limit the Scope: Only use credit checks when they are necessary for the role in question. For instance, a credit check might be relevant for a position that involves financial oversight, but may not be appropriate for an entry-level retail job.
Follow Adverse Action Procedures: If an adverse hiring decision is made based on information found in the credit report, employers must follow the procedures outlined in the FCRA and state laws. This includes providing the candidate with a pre-adverse action notice, a copy of the credit report, and an opportunity to dispute the findings.
Consult Legal Counsel: To navigate the complexities of credit check regulations, employers should work with legal counsel to develop policies that comply with both federal and local laws.
How KENTECH Can Support Your Compliance Needs
At KENTECH, we understand the challenges businesses face when conducting pre-employment background checks, including credit checks. Our comprehensive background screening solutions help streamline this process while ensuring full compliance with federal, state, and local laws. From managing consent forms to providing guidance on adverse action procedures, KENTECH’s platform is designed to simplify background screening and reduce the risk of non-compliance.
Our platform automatically filters out non-reportable information, helping you maintain a legally compliant hiring process. We stay up-to-date on the latest legislative changes, ensuring that your business is always aligned with the current legal landscape.
Disclaimer
The content provided here is intended for informational purposes only and should not be considered legal advice. Employers are encouraged to consult their own legal counsel to ensure compliance with the FCRA and other applicable state and local laws. KENTECH disclaims any liability for damages or penalties that may result from the use of this information.
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Log in to your KENTECH account to add pre-employment credit checks to your background screening process, or contact us today to learn more about how we can help ensure compliant and efficient hiring practices.
