Procedures For Credit Checks During A Job Hiring Process

I know it sounds strange, but bad credit can actually hurt your chances of getting a job if a potential employer runs your credit report.  Job candidates with poor credit histories may be weeded out and rejected for the position.  It’s legal under Iowa law to reject an applicant based on that person’s credit history.

Any such credit check must comply with the Fair Credit Reporting Act though.  Labor and employment law issues under the Fair Credit Reporting Act can arise when employers conduct credit checks as part of the hiring process.  That likely won’t make your job rejection itself unlawful, but it may put a little extra money in your pocket if the potential employer doesn’t follow federally-required procedures for employment-related credit checks.

The Fair Credit Reporting Act’s requirements arise when an employer uses a third-party credit reporting agency (CRA) to conduct background checks, also called consumer reports.  The most common contents of a consumer report include prior employment verifications, credit checks, conviction record checks, and driving record checks.   Be aware though that it is becoming increasingly common for employers to simply “Google” applicants for positions, especially in small businesses. Background checks or consumer reports conducted in an informal manner such as this, without using the services of a third-party background check company, are not subject to the Fair Credit Reporting Act.

Before an employer can conduct a background check through a third-party CRA, it must provide a “clear and conspicuous” notice to the applicant.  This notice must be provided in writing, and the employer must receive signed authorization from the applicant. This means that the notice and authorization should be provided on its own, separate piece of paper.  The Fair Credit Reporting Act also requires employers to verify they provided notice and authorization to the applicant and and will continue to comply with the law.  Employers must also verify they will not discriminate against the applicant based on the report’s contents or otherwise misuse the information.

If, upon reviewing the consumer report, the employer decides to take an “adverse action,” in this scenario refusing to hire the applicant, the employer must first provide the applicant with notice of its intent to take an adverse action, a copy of the consumer report it reviewed in reaching that decision, and a copy of a document titled “Summary of Your Rights Under the Fair Credit Reporting Act.”  This gives the applicant an opportunity to review the report and object to any inaccuracies in the report, in an attempt to prevent the adverse action from happening.

After the adverse action is taken, here the rejection of the applicant, the employer must provide the applicant with:

  • A notice of the adverse action; the contact information (name, address, telephone number and web address) of the CRA that provided the report
  • A statement that the CRA did not make the decision to take the adverse action and cannot explain to the applicant why the adverse action was taken
  • A notice that the applicant has the right to dispute the information contained in the report
  • A notice that the applicant has the right to obtain a free copy of the report from the CRA for 60 days

Once finished with using the consumer report, the employer must securely dispose of it.

Please feel free to contact me if you have a labor or employment law question regarding the use of your credit history during an employment hiring process.

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