Many U.S. states restrict credit checks in hiring, limiting when employers can use financial history in employment decisions. This article outlines state-specific credit check rules and exceptions for roles involving money handling, sensitive data, or legal access.
By Brad Nakase, Attorney
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To find out more about a candidate’s appropriateness, a hiring manager often has to look beyond criminal history. This includes verifying employment or education and checking references. Do credit checks as well. Employers may want to know that a candidate is financially responsible in their private affairs before hiring them for financial responsibility-related roles. Nonetheless, credit checks for job applications are prohibited in a number of states.
Numerous states in the USA have enacted or are in the process of enacting legislation governing the use of credit reports by businesses for purposes of hiring. The states (Connecticut, California, Hawaii, Maryland, Illinois, Vermont, Oregon, and Washington) that have limited the use of applicants’ and workers’ credit histories are listed below.
In addition to adding Chapter 3.6 (starting with Section 1024.5) to the second part of Division 2 (Labor Code), which deals with employment, California Assembly Bill 22 (AB 22) alters Section 1785.20.5 (Civil Code). Employers or potential employers are prohibited by AB 22 from obtaining credit reports on consumers for reasons of employment, with the possible exception of some financial institutions, unless the individual for whom the credit report is requested holds one of the following positions:
Furthermore, according to AB 22, the written notification that notifies the individual for whom a credit report is requested for employment purposes must explicitly specify the reason for requesting the report.
Among the states that ban credit checks for employment, California’s provisions are among the strictest, requiring employers to provide written reasons for obtaining such reports.
It’s one of the first states that banned credit checks for employment, broadly. Certain employers are prohibited from utilizing credit reports for making employment and hiring decisions on current employees or job candidates under Connecticut S.B. 361. All Connecticut employers with a minimum of one employee are subject to the law, which went into effect on 1st Oct 2011.
Employers that are financial institutions according to their definition by law, credit reports that are mandated to be collected by employers, and credit reports “significantly linked to the employee’s existing or potential work” are exempt from S.B. 361. These reports that are “substantially relevant” are permitted if the position:
Despite the governor’s veto, the Hawaiian assembly approved House Bill 31 SD1 CD1, which restricted the utilization of credit reports or job credit history unless they were “directly tied to a bona fide professional qualification” or fell under an additional exemption.
Hawaii was an early entrant among the states that ban credit checks for employment, emphasizing non-discriminatory hiring standards. The law, which went into effect on 1st Jul 2009, revised the Hawaiian Fair Employment Practices law to make it illegal for employers to discriminate against a worker based on their credit report or credit history, either by refusing to hire them, allowing them to stay in their current position, barring them from leaving their job, or otherwise affecting their pay, conditions, terms, or privileges of employment, unless the data is directly related to a legitimate occupational qualification.
The law further stated that an employer may only check a candidate’s credit report or credit history prior to hiring them if they have made a conditional job offer and if the data corresponds directly to a legitimate occupational qualification. Employers who are specifically allowed by state or federal law to check a worker’s credit history or credit report, financial institutions that are covered by a federal agency, and management or supervisory staff are exempt from the law. A precise definition of what makes an employee “supervisory” or “managerial” is provided by the law.
As one of the states that ban credit checks for employment, Maryland enforces detailed notification and consent requirements. Employers in the state are forbidden from discriminating against job seekers or current workers based on their credit history under the “Employee Credit Privacy Act”. The rule, which went into effect on 1st Jan 2011, forbids businesses from asking about or utilizing a candidate’s or current employee’s credit record as a factor in hiring, firing, or paying them. Employers that break the new law may face an injunction or civil liability for damages.
Nonetheless, the legislation permits employers to get credit reports in certain situations, such as jobs involving:
Employers who utilize job applicants’ or employees’ credit reports or credit histories to make hiring choices are prohibited from conducting so-called credit screenings by the “Job Applicant Fairness Act”, which went into effect on 1st Oct 2011. In addition to forbidding employers from using a worker’s or job applicant’s credit history or credit report for purposes related to employment, the Act expressly forbids the majority of employers from conducting credit checks to decide whether to:
Businesses of any type in Maryland are subject to the Act, but certain businesses are exempt from its restrictions. These include financial institutions and companies that are mandated by federal or state law to check the credit histories of potential hires or current employees. Additionally, if the information is connected to “a bona fide objective that is job–related,” the Act permits employers to get or make use of credit history data. This exception typically pertains to:
The Act also mandates that companies must notify job seekers and employees in writing of their intention to obtain or utilize their credit information for legitimate purposes.
Like other states that ban credit checks for employment, Oregon requires employers to notify applicants in writing about the use of credit information. Oregon Senate Bill 1045, which was signed into legislation in February 2010 and went into effect right away, forbids the utilization of job applicants’ credit histories when making choices about their employment, such as hiring, firing, promoting, and paying them.
Financial institutions, some government agencies, and other employment, however, are exempt under SB 1045 if the credit record is relevant to the job and is made known to the applicant or employee. The following situations are among the legal exceptions:
Vermont’s inclusion in the list of states that ban credit checks for employment reflects growing concern about privacy and equity. Vermont Act No. 154, which went into effect on 1st Jul 2012, forbids employers in the state—with a few exceptions—from using or researching job applicants’ or employees’ credit reports or histories in the course of hiring. It also forbids discrimination against people based on their financial information. Vermont joins Connecticut, California, Maryland, Hawaii, Illinois, Washington, and Oregon as the eighth state to limit the usage of credit reports by companies.
Vermont Act No. 154, which was signed into law by Peter Shumlin (Governor) on 17th May 2012, deals with “credit history” and encompasses not only data found in a credit report but also any credit information acquired from any outside source. The Act lays out exemptions according to the kind of businesses in question as well as the role or duties of candidates or workers. If an employer satisfies one or more of the following requirements, they are exempt and are permitted to receive and utilize credit information:
However, the Act forbids even exempted businesses from using a credit report and credit record as the only consideration when making an employment decision, even if they attempt to get or act on an applicant’s or employee’s credit information. The Act also mandates that employers have the applicant’s or employee’s written agreement before disclosing credit data, and they must explain in writing why they need access to the report.
As part of the states that ban credit checks for employment, Washington demands transparency and relevance in the use of credit data for employment purposes. The RCW (Revised Code of Washington) was amended by a law passed in 2007 that prohibited employers from obtaining a credit report in the course of a background investigation unless the data was significantly relevant to the position at hand and the employer provided notice to the consumer explaining why the information was being used.
A credit report can’t be obtained by employers as an element of a background investigation under the modified Washington statute unless the data provided is:
Employers using employment credit checks in the jurisdiction of Washington were required to update their forms, thoroughly examine any job posting for which a credit report was sought, and explain to job seekers why a credit report is significantly linked to a specific position.
Due diligence and vetting processes during the employment process frequently concentrate on factors like criminal background data. In certain situations, a bad credit history may raise just as many concerns as a felony conviction. That does not imply, however, that credit information is always pertinent. As we’ve seen, several states and towns have determined that more stringent rules regarding their use are required.
Employers in states where credit checks are prohibited for employment must make appropriate plans. If you think you’ll need to employ these reports, be aware of the exceptions. If not, you might have to remove them from your recruitment procedures. It might be prudent to restrict the application of credit data to roles where its applicability is obvious, even in states with no limits. Otherwise, you run the danger of coming out as prejudiced. Review your responsibilities and create guidelines with them at the forefront rather than taking that chance.
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