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Starting Sept. 3, many employers in New York City will no longer be able to run credit checks on job applicants or employees. An amendment to the New York City Human Rights Law signed by Mayor Bill DeBlasio in early May prohibits most private employers from inquiring into or otherwise considering credit history in hiring and other employment decisions.1 While 10 states2—California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington—and at least three localities3—Chicago, Cook County (IL), and Madison (WI)—have laws limiting credit checks, New York City’s new ban arguably is, as one councilman put it, “the strongest bill of its type in the country.”4

While NYC’s ban does exclude several public positions—police officers, peace officers and positions with a law enforcement or investigative function at the Department of Investigation, as well as “an appointed position in which a high degree of public trust … has been reposed”—the law covers nearly all private employers in the city with few exceptions.

Those narrow exceptions only apply where the employer is required to consider credit history for employment purposes by state or federal laws, regulations, or the rules of a self-regulatory organization as defined by the Securities Exchange Act of 1934 (such as the Financial Industry Regulatory Authority), or where the position: (i) involves signatory authority over third-party funds or assets valued at $10,000 or more; (ii) carries a fiduciary responsibility to the employer with authority to enter into financial agreements valued at $10,000 or more on behalf of the employer; (iii) includes regular duties allowing an employee to modify digital security systems designed to prevent the unauthorized use of the employer’s or client’s networks or databases; (iv) allows regular (non-clerical) access to trade secrets or national security/intelligence information; (v) requires bonding under federal, state, or city law (e.g., certain positions in finance); or (vi) requires security clearance under federal or any state law.

The few exceptions available to private employers under the New York City law are consistent with the City Council’s intent in imposing the ban. One of the lead sponsors of the legislation, Councilman Brad S. Lander, touted the law as being free from “big broad loopholes or carve-outs of other states around the country.”5 The city’s credit check ban is indeed an outlier in that regard. Recognizing the particular need for credit checks in the financial services industry, for instance, nine of the 10 states limiting credit checks—California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, and Vermont—have provided sweeping exemptions for financial institutions.

Many other credit check laws also offer exceptions for a broader range of positions than the city’s ban. For example, under Illinois law, employers may run credit checks for positions with signatory power over business assets of only $100 or more per transaction, or with general managerial responsibility for setting the direction or control of the business. Colorado allows credit checks on executive and management personnel (as well as their professional staff) with authority to issue payments, collect debts, or enter into contracts, regardless of the amount. Nevada’s version permits credit checks whenever the position entails the handling of any amount of money, and Vermont’s law allows credit checks whenever the position involves access to company payroll information.

Hawaii allows credit checks for managers and supervisors without qualification. Connecticut and Maryland permit credit checks for any position that provides an expense account or corporate debit or credit card. And, even in California, the credit check law includes broad exceptions (i) for managers; (ii) for positions that allow regular access to bank or credit card account information, social security numbers, and dates of birth; or (iii) where the person is, or would be, (a) a named signatory on the bank or credit card account of the company; (b) authorized to transfer money on behalf of the company; or (c) authorized to enter into financial contracts on behalf of the company, regardless of the amount.

Not only are there few exceptions under the New York City legislation, but the law also broadly defines what constitutes a “credit check.” Under the law, the term “consumer credit history” encompasses not only a credit report or score, but information “directly obtained” from an applicant or employee regarding prior bankruptcies, judgments or liens, as well as the number of credit accounts, late or missed payments, charged-off debts, items in collections, credit limit, or prior credit report inquiries. Other laws limiting credit checks do not have such expansive definitions.

Reliably Proven Predictor

The passage of the controversial New York City law comes at a time when courts have been rejecting challenges to credit checks in the employment context. A recent campaign against the practice led by the Equal Employment Opportunity Commission (EEOC) has been openly criticized by federal courts. In EEOC v. Kaplan Higher Education Corporation6 and EEOC v. Freeman,7 the U.S. Courts of Appeals for the Sixth and Fourth Circuits respectively affirmed awards of summary judgment against the EEOC in its suits alleging that the use of credit checks had a “disparate impact” on black job applicants in violation of Title VII of the Civil Rights Act of 1964.

Though the dismissals turned on the EEOC’s failure to muster the expert testimony necessary to meet its evidentiary burden in a disparate impact case, the courts made broader criticisms of the agency’s initiative against credit checks. For instance, the Sixth Circuit pointed out the EEOC’s hypocrisy in suing Kaplan “for using the same type of background check that the EEOC itself uses,” observing that the EEOC’s own personnel handbook requires credit checks on several positions because “overdue just debts increase temptation to commit illegal or unethical acts as a means of gaining funds to meet financial obligations.”

The council has exhibited that same hypocrisy, as the otherwise stringent New York City ban does not apply to several public positions for which the city reserves the right to run credit checks. Yet, in maintaining the law’s narrow exceptions for private employers, the council gave short shrift to studies demonstrating the utility of credit checks. For instance, in arguing that credit checks help “a prospective employer to determine an applicant’s suitability to hold a position of trust or confidence,”8 the New York Metropolitan Retail Association pointed to a recent study by the Association of Certified Fraud Examiners showing that the major perpetrators of occupational fraud and abuse were “living beyond their means” or “experiencing financial difficulties.”9

The Consumer Data Industry Association also cited studies showing that “credit reports for employment purposes are reliably proven predictors of risk” and that “those who have high levels of personal financial wellness reported better performance ratings, less absenteeism, and less work time used for personal financial matters.”10

Above all, New York City’s new law is unnecessary. For decades, the federal Fair Credit Reporting Act11 has imposed strict guidelines on the use of credit checks. That law requires employers to disclose to applicants and employees when they intend to have a consumer reporting agency run a credit check, and to obtain consent before running the check. Moreover, before the employer can take an adverse action on the basis of the applicant’s or employee’s credit history, the employer must advise the individual of its intention and afford him or her time to contest the results and provide any additional mitigating information or information to correct errors in the report. Only then may the employer take an adverse action against the applicant or employee. In addition to the federal law, New York State has adopted its own version of the Fair Credit Reporting Act that extends further protections to applicants and employees within the state.12

Thus, the City Council has glossed over existing laws regulating credit checks, overlooked court decisions, and plainly disregarded the serious concerns raised by business groups in opposition to the measure. Handicapped by New York City’s one-size-fits-all ban, businesses in New York City are losing an important tool for assessing candidates and employees. The great irony is that the city, like the EEOC before it, seeks to preserve credit checks for a number of its own employees while denying nearly all private employers the same discretion.

Endnotes:

1. N.Y. City Admin. Code §§8-102(29), 8-107(24) (effective Sept. 3, 2015).

2. Cal. Lab. Code §1024.5; Colo. Rev. Stat. Ann. §8-2-126; Conn. Gen. Stat. Ann. §31-51tt; Haw. Rev. Stat. §§378-2, -7; 820 Ill. Comp. Stat. Ann. 70/1-70/30; Md. Code Ann., Lab. & Empl. §3-711; Nev. Rev. Stat. Ann. §613.520-.600; Or. Rev. Stat. Ann. §§659A.320, .885; Vt. Stat. Ann. tit. 21, §495I; Wash. Rev. Code §19.182.

3. Chi., Ill., Code of Ordinances Ch. 2-160 §053; Cook Cnty., Ill., Code of Ordinances Ch. 42, §42-30; Madison, Wisc., Equal Opportunities Ordinance Ch. 39, §39.03.

4. Minutes of the Comm. On Civil Rights Before the City Council 4:13-14 (N.Y. April 14, 2015) (Statement by Council Member Lander).

5. Id. at 8:3-4.

6. 748 F.3d 749 (6th Cir. 2014).

7. 778 F.3d 463 (4th Cir. 2015).

8. Prohibiting Discrimination Based on One’s Consumer Credit History: Hearing Before Comm. on Civil Rights, N.Y. City Council (2014) (Testimony of Lawrence A. Mandelker on behalf of the N.Y. Metro. Retail Association).

9. Id.

10. Prohibiting Discrimination Based on One’s Consumer Credit History: Hearing Before Comm. on Civil Rights, N.Y. City Council (2014) (Testimony of Eric J. Ellman, Consumer Data Industry Association).

11. 15 U.S.C. §1681.

12. N.Y. Gen. Bus. Law §380.