As explained by Law.com, the Equal Employment Opportunity Commission (EEOC) contends that an employer violates Title VII of the Civil Rights Act of 1964 if it makes employment decisions based on an individual’s credit history, because doing so has an adverse impact on various minority groups. An employer’s use of credit history information when making employment decisions may also violate other federal and state statutes.
Employers may run afoul of the federal Fair Credit Reporting Act (FCRA) (15 USC §§1681-1681x) if they use a third-party consumer reporting agency to conduct background checks, which typically include credit history information. Employers cannot make adverse employment decisions based on such information unless they first comply with the FCRA’s strict notice, authorization, and disclosure requirements. The FCRA applies when an employer obtains a background check from a “consumer reporting agency” on an applicant when the background information sought by the employer is either a “consumer report” or an “investigative consumer report.”
In addition, California employers who wish to use the services of a consumer reporting agency to conduct background checks (in California) on prospective employees must comply with the California Consumer Credit Reporting Agencies Act (CC §§1785.1-1785.35), and the California Investigative Consumer Reporting Agencies Act (CC §§1786-1786.56). These California statutes contain requirements that are not contained in the federal law.
To make things a bit trickier, some of the requirements in the California statutes are ambiguous and have not yet been interpreted by the courts. Additionally, the California requirements differ depending on whether the employer seeks only credit information on an applicant or whether the employer seeks information from other sources.
What this means is that employers should carefully examine any practices that entail obtaining or using credit related information in making employment decisions. Employers should only continue practices that comply with applicable federal and state laws, and use any information obtained only for decisions in which the employer can articulate a job-related rationale consistent with business necessity for consulting credit information, e.g., the position provides access to finances or to sensitive financial information about the company, its customers, or its employees.
This potentially risky area is clearly explained and defined in CEB’s Advising California Employers and Employees, chap 1.
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