New York City’s Prohibition Against Employment-Related Credit Checks – Are You in Compliance?

Written by Robert G. Brody and Katherine M. Bogard on January 18, 2017

We have previously reported that several states (California, Connecticut, Hawaii, Illinois, Maryland, Oregon, and Washington) have laws prohibiting employers from checking credit reports unless permitted under certain limited circumstances. New York City joined this trend over a year ago.  On September 3, 2015, the Stop Credit Discrimination in Employment Act (“SCDEA”) went into effect, amending The New York City Human Rights Law (“NYCHRL”).  This law made it unlawful for employers to request or use the consumer credit history of an applicant or employee for the purposes of making any employment decisions, including hiring, compensation, and other terms and conditions of employment with eight (8) limited exemptions.  On the same day the Act went into effect, the NYC Commission on Human Rights issued Legal Enforcement Guidance detailing its interpretation of the Act.  Now, over 15 months later, we ask if you are in compliance.  If you are wrong, New York City continues to threaten you with the strongest penalties of its kind.  If you want to be sure you understand this law, keep reading.

The Act is intended to stop employers from using consumer credit history when making employment decisions and is self-professed to “be the strongest bill of its type in the country prohibiting discriminatory employment credit checks.”

Under SCDEA, consumer credit history is defined as: an individual’s “credit worthiness, credit standing, credit capacity, or payment history, as indicated by:

    (a)  A consumer credit report

    (b) Credit score; or

    (c) Information an employer obtains directly from the individual regarding

  1. Details about credit accounts, including the individual’s number of credit accounts, late or missed payments, charged-off debts, items in collections, credit limit, prior credit report inquires; or
  2. Bankruptcies, judgments, or liens.”

            The Commission Interprets the 8 Exemptions Narrowly

At the onset, the Commission made it clear in the Guidance that no exemption applies to an entire employer or industry and all the exemptions are to be construed narrowly. Exemptions apply to positions or roles, not individual employees or applicants and the employer claiming an exemption has the burden of proof, by a preponderance of the evidence. SCDEA provides for eight (8) exemptions:

  1. Employers required by state or federal law or regulation or by the Financial Industry Regulatory Authority (“FINRA”) to use an individual’s consumer credit history for employment purposes;
  2. Police officers, peace officers, or positions with a law enforcement or investigative function at the Department of Investigation (“DOI”);
  3.  Positions subject to a DOI background investigation;
  4.  Positions requiring bonding under federal, state, or City law or regulation;
  5.  Positions requiring security clearance under federal or state law;
  6.  Non-clerical positions having regular access to trade secrets, intelligence, information, or national security information;
  7.  Positions involving responsibility for funds or assets worth $10,000 or more;

     8.   Positions involving digital security systems.

While most private employers may take solace in the non-clerical positions having regular access to trade secrets exemption, employers should think twice before applying this exemption. SCDEA excludes “general proprietary company information such as handbooks and policies” and “access to or the use of client, customer, or mailing lists” from the definition of trade secrets. Thus, employers cannot use this exemption for rank and file employees by giving them access to the company handbook. Trade secrets also does NOT include information such as recipes, formulas, customer lists, processes and other information regularly collected in the course of business or regularly used by entry-level and non-salaried employees and supervisors or managers of such employees. Instead, a trade secret is defined as “information that:

     (a)   Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use;

     (b)   Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and

     (c)   Can reasonably be said to be the end product of significant innovation.

Therefore, this exemption, while on its face sounds broad, is extremely limited and should be used with extreme caution.

The exemption applying to positions involving responsibility for funds or assets worth $10,000 or more excludes staff in a finance department and instead is intended to cover high ranking positions such as the Chief Financial Officer and Chief Operations Officer.

As for the exemption for positions involving digital security systems, the Commission specifically states in the Guidance that such exemption does not include any person who may access a computer system or network available to employee, nor does it include all staff in an information technology department. Therefore, employers are unable to utilize this exemption by simply arguing they gave employees access to their computer network. This exemption instead only includes positions at the executive level, including but not limited to, the Chief Technology Officer or a senior information technology executive who controls access to all parts of a company’s computer system.

            Five Year Record Keeping Requirement

Employers claiming an exemption should inform applicants or employees of the claimed exemption being utilized when requesting a credit check. The Commission requires that the employer keep a record of their use of an exemption, for a period of five (5) years from the date an exemption is used, in an exemption log.  The exemption log should include the following:

  1. The claimed exemption;
  2. Why the claimed exemption covers the exempted position;
  3. The name and contact information of all applicants or employees considered for the exempted position;
  4. The job duties of the exempted position;
  5. The qualifications necessary to perform the exempted position;
  6. A copy of the applicant’s credit history that was obtained pursuant to the claimed exemption;
  7. How the credit history was obtained; and
  8. How the credit history led to the employment action.

The Commission may require employers to share their exemption log and a prompt response to any inquiries may help avoid a Commission initiated investigation. However, employers should take note that such a log can also serve as a “smoking gun” if the employer incorrectly applies the exemption and therefore should contact Counsel before initially utilizing an exemption.

            A Violation May Occur Even Without an Adverse Employment Action

The Commission considers the following to be separate chargeable violations of the NYCHRL:

 1. Requesting consumer credit history from job applicants or potential or current employees,    either orally or in writing;

2. Requesting or obtaining consumer credit history of a job applicant or potential or current employee from a consumer reporting agency; and

3. Using consumer credit history in an employment decision or when considering an employment action.

Employers should take note that all of the above are unlawful discriminatory practices, even if such practice does not lead to an adverse employment action. Thus, even if, for example, the employer chooses to hire an applicant for whom they unlawfully obtained credit history, the employer is still liable for violating the Act. At most, this fact may be relevant to the damage or penalty determination but is not relevant to liability.

Penalties

The Commission will impose civil penalties up to $125,000 for violations of the Act and up to $250,000 for violations that are the result of willful, wanton, or malicious conduct. These penalties are in addition to other remedies available for violations of the NYCHRL such as back and front pay, compensatory, punitive damages, and attorneys’ fees.

       What Does this Mean for Employers?

As we go into a new federal administration, state and local agencies may significantly increase their level of scrutiny on various employment practices of concern to the locale. Credit checks in the employment arena is just such an instance in New York City.  Employers should review their existing background check policies and procedures to determine which employees, if any, should be subject to credit checks.  While there are eight exemptions under the Act, in light of the Commission’s narrow view of the Act, employers in New York City should take great caution and contact Counsel before exercising an exemption.  Failure to do so can lead to costly penalties as well as damages owed to the claimant.  When employers choose to continue to conduct background checks, they must also remain cognizant of the disclosure and authorization requirements under the New York State and Federal Fair Credit Reporting Acts as well as SCDEA.

Brody and Associates regularly provides counseling on employment law issues, including background check laws and regulations. If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.454.0560.

 

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About the Authors

Robert G. Brody is the founding member of Brody and Associates, LLC. He has been quoted and published in national publications and appears as a guest T.V. commentator on contemporary Labor and Employment issues. Learn More

Kate Bogard is an Associate with Brody and Associates, LLC. She works on both Labor and Employment Law matters. Learn More