Employers choosing to utilize the consumer report or “credit report” as a method of evaluating potential employees face a myriad of legal pitfalls. Both the Fair Credit Reporting Act and Title VII of the Civil Rights Act of 1964 provide guidelines employers should follow to avoid potential legal liability.

The usage of consumer reports as a pre-employment tool is disfavored. While the practice itself is legal, the Equal Employment Opportunity Commission (EEOC) is of the opinion that the practice of inquiring into the assets, liabilities, or credit score of a potential employee tends to impact more adversely on minorities and females.

The EEOC’s position is that the usage of consumer reports in the pre-employment context is permissible only if the employer can show that such information is essential to the particular job in question. In other words, the test must be related to the job the employee will perform and must be consistent with a business necessity.

The FCRA and Title VII

The Fair Credit Reporting Act (FCRA) protects the privacy and accuracy of personal information in an individual’s credit report. Enforced by the Federal Trade Commission (FTC), the FCRA provides specific rights to job applicants as well as responsibilities of employers when using consumer reports in the employment process.

Title VII of the Civil Rights Act of 1964 prohibits employment discrimination due to race, color, sex, religion or national origin. Enforced by the EEOC, Title VII prohibits the discrimination against potential and current employees who are members of a protected class.

Complying with Title VII

To comply with Title VII, the employer should ensure that the consumer report is necessary for the position and serves a business need. For example, requiring a credit report for an employee who handles cash transactions or an employee who makes the daily bank deposit for the business would probably be acceptable. Requiring a credit report for a remote technical support employee who has no access to any financial data or currency may be problematic.

Additionally, sufficient documentation is necessary to protect the employer against EEOC challenges. Employers should create and follow a policy regarding the consumer report requirements for potential employees. At a minimum, a policy should include:

• A statement of the purpose for pre-employment consumer reports
• Identification of the positions that require consumer reports and provide the reason why a consumer report is required for such position
• Specification of the procedures to be followed when obtaining consumer reports

Complying with the FCRA

The FCRA contains specific steps that must be followed by employers utilizing pre-employment consumer reports.

Before obtaining a credit report, the employer must:

• Inform the applicant that information used in the credit report may be used for decisions related to their employment. This notice must be in writing and in a stand-alone format.
• Obtain written permission from the applicant.
• Certify compliance to the company that provides the credit report. The employer must certify that it: (1) notified the applicant and obtained permission, (2) complied with all FCRA requirements, and (3) will not misuse the information.

If after receiving the report, the employer determines the applicant will not be hired based on information in the credit report, before taking the adverse action the employer must:

• Inform the applicant that the adverse action was taken because of information in the credit report. This can be done orally, in writing, or electronically.
• Provide an adverse action notice to the applicant which provides the applicant with notice of his or her right to see and correct the adverse information reported against them.
• Provide the employee with a notice that includes a copy of the credit report used to make the decision.
• Provide a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act”.

After use, consumer reports should be destroyed.

Conclusion

While legally permissible, the practice of utilizing pre-employment consumer reports is disfavored. Employers who choose to utilize consumer reports in the hiring process must ensure compliance with the FCRA and Title VII through documentation, proper training of employees who interview candidates, and proper notification and authorization from job candidates.