No more employee credit checks

Effective July 1, most Oregon businesses will no longer be able to review applicants’ credit history before deciding whether to hire them. The Oregon Legislature last month passed a new law, billed as a means to help out-of-work Oregonians find jobs more easily, that will greatly restrict employers’ ability to perform credit checks on applicants and employees. Once signed into law by the governor (which is fully expected), Oregon will become the third state in the country – joining Washington and Hawaii – to prohibit this common practice.

The new rules

Presently, as long as a business provides appropriate notices and disclosures, it may check the credit and other background information of job applicants and even current employees. After the “Job Applicant Fairness Act” takes effect in July, however, it will be illegal for most employers to obtain or use information in a credit report to make a decision about hiring an applicant or as part of any decision involving a current employee. The new law will not affect an employer’s ability to conduct criminal or other types of background checks.

Like most laws, there are exceptions. Excluded from the new prohibition on credit checks are federally insured banks and credit unions, businesses required by law to consider employee credit history, and police and other public employers hiring for law enforcement and airport security. In addition to these clear exclusions, there is an important but somewhat vague exception: any employer may obtain or use a credit report if the information is “substantially job-related.” In order to take advantage of this exception, the employer’s reasons for the use of such information must be disclosed to the employee or prospective applicant in writing.

While some businesses conduct credit checks as a matter of course to assess an applicant’s level of responsibility, this alone will likely not constitute a “substantially job-related” reason. The goal of the law was to limit employers’ ability to conduct credit checks, and allow them only when tied to some aspect of the specific job in question. Those employees in cash-handling positions, or who have access and responsibility involving financial data of either the company or its customers, should be squarely included in the exception. Ultimately, however, what is considered “substantially job-related” will need to be defined by regulations or the courts before employers can feel confident in applying the new rules. Oregon’s Bureau of Labor and Industries will be asked to promulgate regulations defining the term, but if and when that process begins, it likely will take several months to complete.

The new consequences

Violations of the credit check restrictions can result in an administrative complaint from the Oregon Bureau of Labor and Industries or a private lawsuit. Individuals who sue and win can recover, among other things, lost wages and attorney fees. As a result, seemingly small violations can result in steep penalties.

What to do now

Businesses that presently perform credit checks for Oregon employees as part of their hiring processes should plan to discontinue that practice, unless they fall under the four exceptions to the general prohibition. Before attempting to use the “substantially job-related” exception, a firm should carefully examine the reasons for conducting the check and consult with legal counsel. If the exception is applied for any reason, ensure that the reasons for the credit check are disclosed to applicants or employees in writing. Given the present uncertainty in how this standard will be interpreted, caution should be considered before proceeding.